Today's students pay a hefty price for a college education. The National Center for Education Statistics (NCES) reports that between 1968 and 2019, tuition rates at four-year public institutions in the U.S. grew from $324 in 1968 to $10,232 in 2019 – an increase of 3,009 percent. With college expenses rising about 8 percent each year, a growing number of students are forced to rely on student loans, leaving them drowning in debt for years. Fortunately for some, grandparents are taking note as the AARP estimates that 21 percent of grandparents provide some form of educational support to help alleviate college debt. But before jumping on board, it is important to explore and determine the best options.
Giving cash directly to a grandchild or paying a college directly may be the easiest way to provide support; however, it's not the most cost-effective option for students. While grandparents can avoid paying a gift tax by making tuition payments to an institution, colleges often reduce students' financial aid by the amount of the payment. Likewise, money gifted to students is viewed by the federal government as untaxed income, which can also negatively impact students' aid. While cash gifts can complicate things for today's students, beginning with the 2023-2024 school year, they will not need to disclose such gifts. Until then, grandparents can "gift" funds to parents, as they are not required to report it as income. Another option is to assist grandchildren by helping make student loan payments.
529 college saving plans are a great way to set aside funds for college, as contributions grow tax-deferred and there is no penalty for withdrawals for education expenses of beneficiaries. There are two types of 529 plans: College Savings Plans and Prepaid Tuition Plans. Grandparents can either contribute to a parent-owned existing plan or purchase a separate plan and maintain ownership. It is worth noting that any unused funds can be transferred to another blood relative. Also, 529 plans can be used to cover student-loan debt for beneficiaries and their siblings; however, there is a $10,000 lifetime limit for each.
The state's prepaid tuition program, College Illinois!, allows the purchase of future tuition at today's rate. This is an attractive offer when one considers rising tuition costs and massive student loan debt. According to the NCES, the current cost to attend a four-year public institution in Illinois is approximately $25,000 a year. Taking into account an 8 percent tuition increase each year, students will pay approximately $115,352 for a bachelor's degree earned in four years. Using a college cost and savings calculator, a newborn attending an Illinois public institution for four years starting in 2039 will pay a whopping $134,261 for a bachelor's degree.
Individuals who prefer a more traditional savings option can purchase custodial accounts and serve as the administrator while the grandchild is a minor. These accounts offer a level of flexibility that is missing in other plans. There are no income or contribution limits. The funds can only be used for the assigned beneficiaries, and withdrawals are not subject to penalties nor restricted to educational expenses. One drawback is that institutions may reduce the students' financial aid by up to 20 percent. Custodial accounts cannot be reversed or adjusted, and they automatically transfer to beneficiaries once they reach legal age.
Coverdell Education Savings Accounts (ESA)
Formerly known as Education IRAs, ESAs offer tax-free deductions for educational expenses. Grandparents interested in these accounts should speak with the parents or guardians as there is a $2,000 annual limit per child for all Coverdell accounts. Contributors must also meet specific income guidelines to open the account. ESA accounts can affect students' financial aid and unused funds can be transferred to someone related to the beneficiaries.
There are several other options for grandparents to consider. Savings bonds, which can only be used for tuition and fees, are a safe bet as they are fully guaranteed. Interest earned is not subject to federal, state or local taxes, and the bonds can be transferred to 529 plans. Educational trust funds give grandparents significant control, as they earmark exactly how and when the funds can be used, as well as name trustees to ensure that the funds are used as outlined. Great options for young grandchildren are certificates of deposit, as they grow faster than regular savings accounts. A minimum of $1,000 is needed to start and the funds must remain in the account for a designated period.
When considering your options, Edward Jones financial adviser Brian Hubert emphasizes the importance of "starting early and saving regularly." Hubert, who is based in Springfield, strongly encourages grandparents to meet with a financial adviser who will make recommendations based on one's goals and financial situation.
Jolonda Young, a former Illinois Times staff writer, currently serves as director of a college readiness program serving potential first-generation college students from low-income families. Young lives in Peoria, her hometown.