The Gift That Keeps on Giving: Paying Your Grandchildren’s College Tuition

Paying your grandchildren’s (or adult children’s) college tuition can be one of the greatest gifts you can make. The education lasts a lifetime and opens a world of opportunities for them. In a way, it is like giving a gift to your children as well, since it alleviates their concerns about paying for their children’s education on their own. And when done correctly, the gift of a college education can be an excellent estate planning tool.

One way to help pay for your grandchildren’s education is to simply give them part or all of the money to cover tuition. The gift tax exclusion is currently $17,000 per person per year in 2023, and $34,000 for a married couple, which can go a long way toward covering the tuition for most colleges. Of course, giving the money to your grandchildren carries some risk. Are they genuinely interested in using the money to get an education, or will they suddenly decide a year abroad, funded by your gift, might “better prepare them” for college?

A safer approach is to pay the college directly. In this case, the tuition payment is exempt from gift taxes, meaning you could also make a gift to cover other expenses such as room and board, books and other fees. The same $17,000 / $34,000 gift tax exemption mentioned above still applies.

Finally, you could contribute to a 529 college savings plan, which is offered on the state level. A 529 plan is a college savings account that is exempt from federal taxes. 529 plans were introduced in 1996 to help taxpayers set aside college expenses for a designated beneficiary. Named for Section 529 of the federal tax code, these plans often have tax benefits at the state level for in-state residents. (This applies only in states that have an income tax.) If the maximum deduction is exceeded in a calendar year, the deduction can often roll over into later years. It is important to note that each state enforces a specific total contribution limit, which are typically between $235,000 and $520,000.

Some of these plans allow for the use of various investment options. Others, known as prepaid tuition plans, let you lock in at the current cost of tuition in place of the future cost. A 529 account is not owned by the grandchild—in most cases, one of the parents owns the account, so if your grandchild does not attend college when the time comes, he or she cannot access the money. Similarly, if your grandchild doesn’t want to attend a university covered by the 529 account, allowances can be made to use the funds elsewhere.

Before deciding whether to pay your grandchildren’s tuition using any of these strategies, you must first ask yourself two very important question:

First, “Can I afford it?” You need to consider not just if you can afford it today, but whether you will be able to afford it ten, twenty years down the road.

Second, “What are the negative aspects of gifting money to my grandchildren?” Even though gifts of less than $17,000 won’t cause tax consequences, they can affect your ability to get qualified for long-term nursing home care.

We can help you determine whether you can indeed afford to help your grandchildren pay for college, and if so, the best strategy for your particular situation. Contact us today to schedule a consultation.