David Lerner Associates : How Grandparents Can Help Save For College
With the cost of college continuing to rise faster than the rate of inflation, getting a college degree has become increasingly difficult for many American families.
According to the College Board, the average net price paid by full‑time students enrolled in public two- and four-year colleges increased measurably in 2012‑13 for the third consecutive year. Also, the average net price for public two-year and private nonprofit four-year students increased in 2011‑12 and 2012‑13 after three years of decline.
The average cost of one year of tuition and fees at an in-state, four-year public college now tops $8,600, which is nearly 5 percent higher than it was for the 2011-2012 school year. In addition, room and board costs went up nearly 4 percent and now total more than $9,200, which accounts for more than half of total annual college expenses.
As a result, some families are turning to grandparents to help ease the college savings financial burden. “By helping finance their grandchildren’s college educations, grandparents can help relieve the financial pressure some graduates feel due to excessive student loan debt,” says David Lerner Associates Branch Manager John Koene. “Establishing and contributing to a college education fund for your grandchildren is one way you can help them get off to the best possible financial start in their lives.”
One Option: Section 529 Plans
One of the most popular college savings plans among many parents and grandparents is the Section 529 plan. Operated by states or educational institutions, 529 plans come in two forms: prepaid tuition plans and investment savings plans. “They allow tax-deferred growth and tax-free distributions if the funds are used for qualified education expenses,” says Koene.
About 14 percent of U.S. families with children under 18 years old are investing in 529 plans, according to a recent report from student loan lender Sallie Mae. These families are contributing an average of $1,770 per year to their 529 plans.
Koene notes that one of the advantages of 529 plans when compared to custodial accounts, another tool sometimes used by grandparents to help save for their grandchildren’s college educations, is that the 529 account owner maintains control over how the funds are ultimately used. With custodial accounts, the grandchild can use the money however he or she wants — “so Johnny or Suzie could decide to go vacationing in Europe or splurge on a new car instead of using the money for college,” says Koene.
Potential Estate Planning Benefits
Contributing to a 529 plan for their grandchild may also help wealthy grandparents reduce their taxable estate. The annual gift exclusion in 2013 is just $14,000, but grandparents can contribute up to $70,000 per year to a 529 plan, free of any gift tax liability. There may also be tax benefits associated with 529 plans, including deductions or credits offered by some states.
The biggest potential drawback to contributing to a 529 plan for your grandchildren is that the money must be used for qualified educational expenses. If your grandchild decides not to go to college, or receives scholarships and/or grants and doesn’t need the money in the 529 plan for college, the investment gains on contributions will be taxed at ordinary income tax rate upon withdrawal, and may also be subject to a 10 percent tax penalty.
Also keep in mind that 529 plan withdrawals that are made in a grandparent’s name are considered to be income in financial aid calculations, which could reduce the amount of financial aid the grandchild might receive. One way to potentially reduce this problem is for grandparents to contribute to a 529 plan opened by the parents.
Be sure to talk to a tax advisor about the estate and tax planning implications of 529 plan contributions on your particular situation.
529 Plans are offered by prospectus only. Investors should request a prospectus from the issuer or sponsor before investing. Read the prospectus carefully and consider the investment objectives, risks, charges, expenses and other information before investing.
Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities. Member FINRA & SIPC.
Founded in 1976, David Lerner Associates is a privately-held broker/dealer with headquarters in Syosset, New York and branch offices in Westport, CT; Boca Raton, FL; Teaneck and Princeton, NJ; and White Plains, NY. For more information contact David Lerner Associates 1 877 367 5960 http://www.davidlerner.com