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How Unwary Grandparents Can Wreck Your College Financial Aid

By Dan Caplinger Posted 5:00AM 03/07/13 Student Loans, Savings Experiment, College Savings Plans, 529 Plans, Financial Aid |
Grandparents helping with college aidThanks to the ever-rising cost of a college education and the stagnation of middle class incomes, fewer and fewer cash-strapped parents are able to shoulder the burden of college costs all by themselves. Often, that's where generous relatives come in.

Last month, the AARP teamed up with financial-services company TIAA-CREF to provide information about college savings plans, also known as 529 plans, to AARP members. As TIAA-CREF CEO Roger Ferguson Jr. said in a press release, when it comes to college savings, "getting the entire family involved -- parents, grandparents and children -- reinforces the importance of setting and achieving savings goals."

However, despite their best intentions, grandparents who answer the financial call can end up making it harder for their children and grandchildren. If a college savings plan isn't set up properly, those generous contributions can actually hurt the student's financial aid package.

Savings Experiment: College Tuition
On one hand, grandparents' assets are not counted at all when colleges determine eligibility for financial aid, and that includes money in 529 plans that they set up for their grandchildren. By contrast, the assets that students and their parents own are included, with schools expecting them to use certain percentages of those assets each year to pay tuition and other college expenses.

But before you try to use grandma and grandpa as a financial-aid shelter, be aware that when grandparents take money out of a 529 plan to spend on college expenses, students have to disclose the withdrawal as their own income.

That has a huge impact on financial aid: Current rules cut aid eligibility by as much as 50 cents for every dollar of student income.

2 Solutions for Grandparents

To avoid causing a big loss in financial aid, grandparents have a couple of options:
  • If grandparents give money to the student's parents to deposit in their 529 plan accounts for their child, the assets aren't treated as the student's income.
  • The other possibility is to wait to use grandparents' 529 plan money until after the student's final eligibility for financial aid has been determined. For instance, grandparents' 529 plan distributions used to pay for a student's senior year shouldn't affect eligibility, because the year in which the income will be reported (as income for the previous year) will also be the year in which the student graduates.
Financial aid rules can be complicated, but they're crucial in helping students make college affordable. Grandparents should make sure their attempts to help out their grandchildren don't end up being counterproductive.

Photo Credit: Alamy
Tagged: 529 plans, College Financing, college tuition, fafsa, Finance, Financial Aid, grandparents, Local, Roger W. Ferguson, Jr., savingsexperiment, starting college, student income, U.S.

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Startanew2

As a newer grandparent, I don't feel it's my responsibility to pay for the grandkids college. But the kids have more than everything they need, and instead of buying them more cheap plastic made in china "stuff", we opened a 529 for the kids. At their birthdays, we buy them a small gift, and make a contribution to the 529. It's not a lot of money, but hopefully it will earn interest and compound and be helpful when college time rolls around. The kids don't miss the junk they didn't get. When a toddler has a couple thousand already invested at no great sacrifice to the grandparents, or the child, how can it not be a good thing?

And as to the people saying the older generation got all the money, why do you think that is? Maybe because they weren't flocking to Walmart and the foreign car lots in droves to buy cheap imported crap. We bought the stuff our neighbors built and they bought the stuff we built, and we all did well. It's not brain surgery. The new gerneration could be doing the same but they seem more invested in getting all the can for themselves and don't care if thier neighbors have a job or not. But their neighbors feel the same way, so nobody has good jobs here anymore. But nobody wants to sacrifice and have less "stuff" and a good job, so this is how it is now. It's all about choices. This generation gets what they choose to have.

March 13 2013 at 7:32 PM Report abuse rate up rate down Reply
1 reply to Startanew2's comment
brittwedel

Im glad I don't live where you apparently live now. I'm 22 so part of the "newer generation" but here in a small community in Mississippi we help our neighbors. When we need work done to the house, we go to our community carpenters, roofers, etc. to give them the work instead of big companies with people we don't know. We also go to our community farmers for food before going to Walmart or Kroger for food. I don't think it's a generational thing about not caring about your neighbors and only caring about yourself. I think it depends on how you're brought up and raised and what values are instilled in you as a child. I didn't have anyone putting money away for my college and handing me anything. It was clear that my brother and I had to either get student loans, work our way through college, or get enough scholarships to get us through college. My brother and I worked our butts off throughout school and got enough scholarships to pay for our complete college education with some left over. I decided to compact 4 years of high school into 3 years and graduate high school early while still keeping all A's, being cheerleading captain, vice president of student council, Mayor's youth council, basketball team, and band and color guard. I worked for everything I have and wasn't easy. It could have been if adults in my life would have managed money better. My mom died of cancer when I was 11 and my brother 14. My dad didn't like the responsibility of having kids and didn't take the responsibility of managing money from my mom's life insurance and social security even more seriously. My brother practically raised me for 2 years making sure bills were paid, homework done, dinner and breakfast cooked, clothes clean, dishes washed, etc. until finally our family noticed and found out that our dad was abandoning us and our retired aunt and uncle took us in. They never had children so it was new to them. They never thought that would have children to put through college so obviously they didn't put money away for that. It was a financial struggle but we had everything we needed. Not everyone from my generation is spoiled and handed everything. My brother and I are proof of that among many other kids.

April 12 2013 at 6:29 PM Report abuse +1 rate up rate down Reply
1 reply to brittwedel's comment
whydoyouneedmyinfo

Good for you! I'm sorry for all the hardships you've faced, but you should be very proud. You've overcome a lot and I'm positive you are a stronger, more independent and more appreciative person for it. I wish there were more people with your work ethic and conscientiousness.

I don't think there's anything wrong with putting away money for a child/grandchild as long as they're still learning financial independence lessons. My parents didn't tell me I had a college fund until I had paid off my first set of loans after freshmen year. I maintained multiple jobs and scholarships as well as my grades. I had learned the value of a dollar. (Granted, I barely had to touch the funds until grad school.) It's not like I stopped working or saving, instead I'm 26 and was able to buy a house this past year.

Agreed. We're not all spoiled brats. Although they do seem to be a loud majority...

April 17 2013 at 2:54 PM Report abuse +1 rate up rate down
the2431

Get an online Degree..................about 20 % of Campus cost.

Bye, Bye to Hallowed Halls.

Employeers just as impressed !

March 12 2013 at 4:41 AM Report abuse rate up rate down Reply
jwalt10546

When setting up a 529 plan make sure it is set up with the parents as the guardian and then this problem does not come into play. JW

March 09 2013 at 10:05 AM Report abuse rate up rate down Reply
Mike

How about this? Grandparents shouldn't be chipping in for junior's college education. It's the parents' responsibility along with junior. If junior and his folks can't afford it, then go to community college.

March 09 2013 at 6:22 AM Report abuse +1 rate up rate down Reply
murphymomm123

Old people have way too much money. To bad the next generation is not getting any. They are living longer and they are taking care of themselves. This generation of old people needs to wake up. They are so cheap and very selfish. I hope we institute social medicine so they have to wait no matter how much money they have. Can't wait till they die.

March 09 2013 at 4:20 AM Report abuse -3 rate up rate down Reply
5 replies to murphymomm123's comment
mark and sheri

AARP is out for themselves. They supported OBAMACARE because they market supplimental Health Care insurance/policies. They give bad advice because they care more about the bottomline of their managers.CEO than the members.

March 09 2013 at 3:13 AM Report abuse +1 rate up rate down Reply
mark and sheri

AARP is out for themselves, which is why they give bad advice, They were pro OBAMCARE because they are marketing supplimental health insurance plans. They are for your CEOs/Managers, bottomline.

March 09 2013 at 3:11 AM Report abuse -1 rate up rate down Reply
Anita

in my family if i had gone to college i would have been told by even my grandparents to get a job and find a way to pay for school myself since they cant help me

March 09 2013 at 2:30 AM Report abuse +1 rate up rate down Reply
tamsen86

What is wrong with this page and who's monitoring the comments? I swear, it refused each time I tried. Then goes and posts my reply 3 times. But you get the drift, lol.

March 09 2013 at 12:27 AM Report abuse rate up rate down Reply
tamsen86

Sign of the times when grandparents have to help with a kid's tuition. Pardon us doddering, feebleminded older people, we only meant well. The tault lies with colleges who will do anything to make a buck nowadays.

March 09 2013 at 12:21 AM Report abuse rate up rate down Reply

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