A college education was once regarded as a relatively affordable route to lifelong prosperity, but in recent years it has become a hobbling financial burden for many families.
As a result, older generations are often stepping up to help their families with college funding. According to a Fidelity Investments survey of its investors — a more affluent group than the average — more than half of grandparents "are saving or plan to start saving to help pay for college costs."
Sandra Schiff, who is retired and lives in Denver, has set up accounts for each of her eight grandchildren. Along with her husband, Ronald, she wanted to see their grandchildren graduate from college debt-free.
The desire for one generation to help another with college has recently become more urgent, with many students graduating with six-figure debt obligations.
One of the best vehicles for multigenerational college funding is a 529 college savings plan. Offered by states and managed by large mutual fund companies, these plans allow investment for future educational expenses, and the proceeds accumulate tax-free. Many states also provide a tax writeoff for at least a portion of a contribution.
But there are some potholes to avoid.
Grandparents can set up these plans, naming grandchildren as beneficiaries. If the grandchildren don't go to college, the money can still be kept or used for another educational opportunity.
Since the children do not control the account — the owners do — the assets are not in their names. That means grandparents can withdraw the assets for themselves, although they must pay a penalty and income taxes if the assets are not used for educational purposes.
While 529 plans are the prime vehicles of choice for many grandparents, they can complicate a child's chances of qualifying for financial aid. The stumbling block comes when students receive money from the 529 plan. That will appear as income in the student's name, which must be reported on the FAFSA, the form that most colleges require for financial aid when a student applies and every year he or she is in school.
To avoid a potential reduction in aid, grandparents could delay sending 529 proceeds until the last two years of college, suggests Gary E. Carpenter, a Syracuse-based certified public accountant.
"Distributions from grandparents' 529 plans are seen as student income, and could reduce aid by 50 percent," he said. That means if a grandparent takes $10,000 out of a 529 plan to send to a grandchild, it could cut student aid by $5,000 the next year.