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College Funding Options for Grandparents

One of the greatest gifts you can give your grandchild is financial help with his or her college education. According to a 2003 survey by AIG SunAmerica Mutual Funds, 54 percent of grandparents were already helping pay college costs or planned on doing so for their grandchildren. Still, the task can be daunting and financial planners say many grandparents don't realize the most effective ways of going about it. Fortunately, we live in a society that values higher education, and there are more options than ever for ways to put your grandchildren through college without sacrificing a comfortable retirement to do it.

Above all else, you must make your own retirement planning a priority. There is an ever-increasing availability of programs to help kids pay for college, whether it be through colleges, community organizations or the government. Students can also work while they go to school and save money by living at home. Grandparents' options are more limited. You may not know it, but financial aid is based on need, not grades. There are several applications and comprehensive guides available to help students of any grade point average pay for college, including FAFSA, Student Aid on the Web, NextStudent, FinAid and FastWeb. With all of this help available to your grandchildren, make sure your own needs are met before committing to the responsibility of putting them through college.

Once you have determined that you are able to provide your grandchildren with money for college, the least complicated option is to give it in the form of cash or securities. The government allows each grandparent to give away (free of estate or gift-tax liability) up to $11,000 per grandchild annually, or $22,000 per grandchild if both grandparents contribute. However, there are a few drawbacks to this method. For one thing, even $22,000 a year may not be enough money to cover your grandchild's education. Private colleges, for instance, often charge well over $30,000 a year in tuition and fees. Secondly, if you give the money directly to your grandchild, he or she may not be qualified to receive as much financial aid. You'll also have to make sure the money is spent on tuition and other college expenses rather than something it wasn't intended for, like a new car or an over-the-top spring break vacation!

Another option is to pay your grandchild's tuition directly. One advantage to this is that by paying the money directly to the university, you can contribute as much as necessary without it counting as part of the annual $11,000 gift exemption. Giving money to the school yourself will also ensure that it is spent on exactly what it is intended for. The only real drawback of this is that it may reduce the amount of any financial aid offered.

Investing is also an option. If you are earning income, you can open a Coverdell education savings account (formerly the Education IRA) for a grandchild under the age of 18 and contribute up to $2,000 a year. If you don't have earned income, you can always give the money to your children to open an account. You can direct the investments as you choose, as the funds can be used for public and private elementary, as well as college education. Like any investment, however, there is a risk of losing money. There is also a limit on how much can be contributed to the account annually, and once it is deposited, the money and any earnings belong to your grandchild, which may affect the amount of financial aid that he or she is eligible to receive.

If you are a grandparent raising younger grandchildren, you may want to consider opening what is known as a 529 plan. Named after Section 529 of the Internal Revenue Code, 529 plans are state-sponsored savings plans that are designed specifically to help parents and grandparents finance education expenses. While the proceeds can only be used for education, one of these plans can be opened and contributed to by anyone. 529 plans also offer significant tax benefits. Currently, earnings grow tax deferred from federal income tax and often state tax, and withdrawals will remain free of tax through at least 2010. There are no income restrictions, and more than $200,000 can be invested per grandchild. Another added benefit of 529 plans is that you, not your grandchildren, remain in control of the funds, yet the money doesn't count toward your estate for estate tax purposes. Like mutual funds, these plans are vulnerable to swings in performance and potential high investment fees, but they remain a popular option for parents and grandparents alike.

Before you consider opening a 529 plan or begin to weigh other options more seriously, be sure to get as much information about grants and scholarships as you can. Any amount of money your grandchildren are awarded in financial aid will put less of a burden on you. The best time to start researching possible grants and scholarships is during your grandchild's junior year in high school. Most of them have deadlines and require a lot of paperwork, including applications and sometimes recommendations from teachers. It is also important to note that information on college funding, filing paperwork and tracking applications is always free - always. If you find a Web site or company that charges a fee to provide these services, it probably can't be trusted. Don't pay for something you can do just as easily yourself!



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