It’s no secret that college is often the biggest expense a student will ever encounter. For a recent high school grad, looking the potential heaps of college debt in the face probably feels pretty daunting, but many students are fortunate enough to have family to lean on. Many grandparents help to provide financial support for their grandchildren’s college expenses.
If you’re a grandparent finding yourself in just this kind of situation: bravo! It’s fantastic of you to offer help when you’re able, but did you know that some methods of financial assistance are actually better for everyone involved than others? Let’s look at the best way to give money to grandchildren for college.
The Best Ways to Give Money to Grandchildren
This year, the annual gift tax exclusion is $14,000 per recipient. Gifting money to your grandchildren is the easiest way to help them pay for college.
For example, suppose Norma Jackson has two grandchildren. She can give them each $14,000 for their college expenses this year. Likewise, her husband Henry can give each of their grandchildren $14,000, too. That means that each grandchild will have $28,000 to put toward college expenses for the year, and Norma and Rob won’t be affected by adverse tax consequences.
As grandparents, the Jacksons can directly pay their grandchildren’s college tuition if they so choose. There is no limit to the amount of money that the Jacksons are allowed to pay for their grandchildren’s tuition—they will not owe any tax for it or suffer a reduction in their transfer tax breaks.
A consequence of gifting money to your grandchildren, however, could be that the financial assistance that they’re granted after filling out the FAFSA may be reduced. The FAFSA takes into account how much money the applicant’s family is likely to contribute to cover the cost of college.
Let’s say Norma and Henry gave their granddaughter Stephanie many gifts throughout her life, and when she fills out the FAFSA it’s determined that after counting up her investment buildup, she has $40,000 in assets. The FAFSA will assess her assets by 20% to calculate the expected family contribution (EFC), which means that her financial aid may be reduced by $8,000. If Norma and Henry pay for Stephanie’s tuition directly, she may see even larger cuts to her financial aid in the coming years.