Student loan debt reached an all-time high in 2019, according to Experian. At $1.4 trillion, Americans’ student loan debt has more than doubled in the last 10 years, rising 116%. The average graduating student had $37,172 in student loan debt.
That much unsecured debt leaves many young adults struggling to save for other financial goals such as buying a starter home, saving for retirement, and seeing more of the world while young and single.
Parents and grandparents can help students reduce or avoid crippling student loan debt come graduation. And with more time under their belt to build wealth, grandparents often find themselves in a better financial position to help out with tuition than mid-career parents do.
If you want to set up your grandchild for a more secure launch into full-fledged adulthood, explore these options to help out with their tuition and other education costs. And as you consider ways to help out, don’t be afraid to attach performance conditions or other incentives. Your help is a privilege, not a right, and people tend to appreciate help more when they have some of their own skin in the game.
How Grandparents Can Help Pay for College
1. Contribute to a 529 Plan
Operated at the state level, 529 plans offer a tax-friendly way to save for college. Anyone can contribute, not just parents, so you can bolster your grandchildren’s accounts with tax benefits for them and possibly yourself as well. You can get started with CollegeBacker or by using the interactive map below.
These plans come in two varieties, each with very different structures.
Contributory Savings Accounts
Most states offer a college savings account option that works similarly to Roth IRAs. While contributions come from after-tax dollars, they grow tax-free. So the beneficiary can withdraw funds without paying taxes on them — as long as they use the money for education expenses such as tuition, fees, textbooks, or room and board.
Unlike with a Roth IRA, however, neither the contributor nor the beneficiary can choose their own investments. The state typically does that for you, so you have little control over returns.
Some states do allow contributors to deduct their contributions from state income taxes, up to a limit that varies by state. It doesn’t impact your federal tax return, which provides no such extra incentive.
If your grandchild ends up earning a full-ride scholarship, you can change the beneficiary with no penalty. Your grandchild can also withdraw money for education costs at any age, so it could go toward private school or earning another degree down the road.
Finally, keep in mind that students can attend college in another state and withdraw money penalty-free for those expenses.
Prepaid Tuition Plans
Some states also offer an alternative in which family members can prepay tuition in advance. It locks in the price of tuition, eliminating the risk of higher future tuition costs, and in some cases includes a discount for prepayment.
Students can then typically attend an in-state university or college with no additional tuition expenses. They still have to pay for textbooks and room and board, however.
It gets tricky when students opt to attend school in another state. Typically, the prepaid state requires students to pay any difference in tuition costs. Some states do make exceptions for students whose major isn’t offered in that state’s university network.
Make sure to read the fine print about what happens if the student doesn’t attend college at all. You may not get your money back.
While it’s a less flexible option, it can prove cost-effective for students who definitely plan to attend school in-state. Talk through all plans carefully with both your grandchildren and their parents before choosing either 529 plan option.
2. Contribute to a Coverdell Education Savings Account (ESA)
Coverdell Education Savings Accounts, better known as ESAs, work similarly to 529 savings accounts, although they share more in common with Roth IRA accounts.
Contributors open the account through their investment brokerage firm, similar to an IRA. Contributors get to pick and choose whichever investments they want. Once again, contributions come from after-tax dollars, but withdrawals are tax-free.
They also come with some IRS restrictions, as Roth IRAs do. The IRS limits annual contributions to a meager $2,000, and like Roth IRAs, the ability to contribute phases out at certain income levels. In tax year 2020, it phases out at $110,000 in adjusted gross income ($220,000 for married couples filing jointly).
While ESAs offer more flexibility in the costs withdrawals can cover, they set an age limit on beneficiaries. Your grandchild must use the funds by age 30 or face additional taxes and penalties on withdrawals.
3. Make Tax-Free Gifts
Grandparents can also simply give cash, whether to the grandchild or the parent.
You can make a tax-free cash gift of up to $15,000 per recipient in tax year 2020. Theoretically, you could give $15,000 to the student and another $15,000 to the parent, to contribute up to $30,000 per year.
Of course, when you give a cash gift, you lose any control over how the recipient uses it. You might intend the gift for education expenses, but your grandchild might use it to buy beer and video games.
If you opt to go this route, discuss the exact tuition, fees, and other education expenses with your grandchild and their parents, and form a detailed plan for how the money will go from your account to theirs to the university’s.
Alternatively, you can pay the tuition bill yourself and make that the gift. Talk it over with your accountant beforehand to make sure you create a paper trail to defend the gift if the IRS audits you.
4. Use Your Roth IRA
You can contribute to your Roth IRA at any age and withdraw funds tax- and penalty-free after age 59 ½. That means you can use your Roth IRA as a tax-sheltered way to invest for your grandchild’s education or as a tax-friendly source of funds to help foot tuition bills.
After age 50, you can contribute an extra $1,000 per year to your Roth IRA, for a total of $7,000 in 2020. While you shouldn’t jeopardize your own retirement in any way to help your grandchild pay for college, you can still max out your contributions and then withdraw money later to cover any costs you like, including your grandchildren’s tuition.
5. Create a Bond Ladder
A “bond ladder” is simply a series of bonds, all scheduled to mature at regular intervals. It works exceptionally well for paying future expenses that come on a predictable schedule —like college costs.
Imagine your granddaughter just turned 8. In 10 years, she’ll need her first year’s tuition. So you buy a 10-year bond. Over the next 10 years, you get to enjoy the income. When it matures, you get the principal back, and you hand it over to your granddaughter to help with that first tuition payment.
But you don’t stop there. You also buy a bond that matures in 11 years, another that matures in 12 years, and another that matures in 13 years. Each then matures in time for her sophomore, junior, and senior years, respectively.
You’ve set aside money to help with her tuition on a perfect schedule for when she’ll need it. And you get to enjoy the interest payments as passive income in the meantime.
6. Invest in Rental Properties
Bonds aren’t your only option for passive income or future sources of capital.
Instead of four staggered sets of bonds, imagine you invest in four rental properties when your granddaughter turns 8. Each property generates monthly cash flow, boosting your income. You can save that income and invest it in a 529 plan, ESA, your Roth IRA, or more rental properties.
When your granddaughter heads off to college 10 years later, you can sell one of those properties to help cover tuition costs. Or you can let it keep generating income and simply contribute money from rental income and other investments you’ve made in the intervening years.
Rental properties come with their own tax benefits for real estate investors, no tax-sheltered account required. You can even partner with your grandchild on the properties to teach them life skills, such as what to look for in a home inspection, how to make home improvements, how to calculate cash flow, and how to manage tenants, contractors, and other vendors.
Perhaps best of all, you get to spend time together, and they get a sense of ownership over their education costs.
Pro tip: If you’re interested in purchasing a rental property, consider using Roofstock. They provide you with a ton of data so it makes researching properties simple. Plus, Roofstock guarantees you’ll have a tenant within 45 days or they’ll pay you 75% of the rent for 12 months. Sign up with Roofstock.
7. Flip Houses With Them
Alternatively, you can flip houses with your grandchild to teach many of the same lessons while earning money together for their college costs.
Walk through homes, do the renovation work, and hire contractors together. Not only do they get a formal education paid for out of the proceeds, but they also learn a practical set of skills they can immediately use to earn money upon graduating.
Plus, they’ll know how to fix the plumbing in their own house when they get around to buying one for themselves.
8. Teach Them a Side Hustle
If flipping homes isn’t your side hustle of choice, you undoubtedly have other skills you could teach them to help them start their own student side gig.
I had a friend in college who paid her bills with an antique business. She constantly scoured yard sales, estate sales, and anywhere she could find old goods. When she found a hidden gem, she’d buy it for peanuts and then sell it on eBay or through a local antique store for its true market value. She didn’t learn the antique business on her own; a family member taught her.
Review all the skills and knowledge you’ve accumulated over your life. Which might help your grandchild earn some income on the side?
Pass your knowledge on to arm them with lucrative skills that can serve them for decades to come.
9. Give Them a Job
Alternatively, you could just give them a job.
It could be a job at your own business if you run one. Or you could help them get a job at the company where you work. Or, like my grandparents did when I was in high school and college, you could give them work around the house.
After all, older adults often have no shortage of yardwork, household cleaning, and home repairs to make if they opt to age in place. Your grandchild gets much-needed income and potentially learns some skills, and you get work done.
10. Help Them Find Scholarships & Grants
The world of scholarships and grants is a labyrinth with thousands upon thousands of obscure paths. Navigating it takes no small amount of patience.
All too often, students — and even parents — succumb to overwhelm and simply give up on all but the most obvious scholarship and grant opportunities. But as an older, wiser, and hopefully more patient adult, you can sit down with your grandchildren and work together to root out every available scholarship and grant.
Like retirement income, college funding shouldn’t come from only one source. You should piecemeal it together — for example, $2,000 from this scholarship, $750 from that scholarship, $1,000 from this grant, $2,500 from a 529 plan, $2,000 from a work-study program, and so on. Dollar by dollar, you solve the puzzle, ideally with little or no student loan debt.
Often it takes someone with strong organizational skills and plenty of extra time to lead the charge on finding scholarships and grants. Someone with time on their hands as their career winds down could be just the person.
11. Guarantee Their Student Loans
One of the many reasons student loans are so expensive is that most college students haven’t established a credit history yet. Often, they can qualify for lower rates if a parent or grandparent cosigns their student loans.
It comes with risks, of course. If they miss payments, you could find yourself on the hook for them — and for the entire loan balance, for that matter.
You could take a slightly different track instead to reduce your liability while still helping to lower their interest rate. Lenders offer several options for structuring student loans. One involves starting monthly payments immediately, while the other waits until the student graduates before requiring payments. Lenders charge far lower interest on the former option.
So, you could offer your grandchild the following scenario: They take out student loans, with monthly payments starting immediately. You cover their monthly payments for the four years of their college tenure, and then they take over when they graduate. They get a lower interest rate, and you keep your name off the loan.
12. Conditionally Pay Off Some of Their Student Loans
Just because your grandchild takes out student loans doesn’t mean you can’t help them with them. You can offer to pay back some of their student loans based on their performance — for example, offering more help for higher grades. Upon graduation, you could offer a certain dollar amount toward their student loan balance for each tenth of a point on their GPA, for instance. If you paid $1,000 for each tenth of a point, and they graduated with a 3.7 GPA, that would earn them $37,000 toward their balance.
The emphasis is on the words “upon graduation.” The last thing you want is to incentivize them to stay in college longer.
Get creative with it and work out a plan that works within your budget while incentivizing your grandchildren to actually go to class while in school.
Beyond helping your grandchildren cover their tuition and education costs, take some time to teach them about money.
Most college graduates don’t know how to create a budget spreadsheet, meet a target savings rate, or invest in stocks, bonds, and real estate. Kids don’t learn financial literacy in public schools, and they don’t learn it at college, either. It’s up to you, their family, to teach your children and grandchildren how to build wealth.
Ultimately, that will take them further in life than a few thousand dollars toward their student loans.
Do you plan to help your grandchildren with their college costs? How do you plan to do it?
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