How Seniors Can Help Grandchildren Pay for College

If you have grandchildren, it’s always early enough to begin thinking about their college education. The cost of attending a university continues to rise, as looking at ways to help fund these expenses is often a priority. Luckily, you have a few options to help with these expenses. Learning about your choices makes it easier to choose the best path for helping your grandchildren pay for college.

How Much Does Higher Education Cost?

College tuition fees can range from $10,000 to $35,000 annually, which adds up to $40,000 to $140,000 in four years. Public in-state colleges are the most affordable option, while private colleges are the most expensive—other student fees, whether food, housing, or books, can quickly add up. Inflation is also making a significant impact on increasing the cost of college each year.

Here is an overview of how you can raise funds to help your grandchildren pay for college:

Invest in a Roth IRA

One way to help pay for college is to use the money invested in your Roth IRA. You can always withdraw the contributions from your Roth IRA without paying any penalties or taxes. However, there are more restrictions if you want to gain access to the earnings in your account.

Typically, you will pay the penalty and income taxes on any earnings you withdraw if you are less than 59 and a half. This penalty is waived if you spend the funds on qualified education costs. You don’t have to worry about paying any penalties or taxes if you are older than 59 and a half and your Roth account has been open for at least five years.

Consider UGMA and UTMA Accounts

UGMA and UTMA accounts are both custodial accounts that will hold your money until a child becomes of legal age. These funds allow you to invest in stocks, bonds, and other funds. The IRS will tax investment earnings that reach a specific amount, but these earnings are taxed at a lower rate.

The money in UGMA and UTMA accounts doesn’t have to be set aside for college, as they can be withdrawn for any legitimate reason to benefit the child. These funds will be available to the child once they reach 18 or 21. Once they reach legal age, your grandchild can spend the money however they wish.

Get a Life Settlement

A life settlement is another option if you are looking to fund the cost of college for your grandchildren, as it provides a lump sum of money for selling your life insurance policy. Once the transaction is complete, you will receive the funds, while someone else will pay the premiums. Your life insurance policy could also be worth 20% to 60% of the policy’s death benefit if you are more than 75 years of age.

A life settlement is a viable option if your grandchild is in high school, as it can provide much-needed cash in only a few months. Very few financial options are available to provide such a large sum of money quickly. However, it’s essential to know about gift tax laws, as the IRS offers a lifetime gift exclusion of up to $11.7 million. Any assets you leave behind for loved ones will be added to this amount.

Gifts over $15,000 in one year to the same person will also count against this figure, and you will need to provide a gift tax return to the IRS. You will only have to pay taxes once you reach the lifetime cap of $11.7 million, which means it’s an excellent way for grandparents to build a tax-free college savings fund. The exception to this rule is if you exceed the lifetime cap or have to pay any taxes on the life settlement.

Use 529 Plans

A 529 plan is another investment account offering tax-deferred earnings and tax-free withdrawals to pay for college. This money is invested in a mutual fund, and it often becomes more conservative as the college date for your grandchildren gets closer. Choosing a 529 plan is especially beneficial if you have time, as it’s an excellent choice for tax-deferred earnings growth that can help you build wealth.

Each deposit to a 529 plan is considered a gift on your taxes. There is even a workaround for keeping your $11.7 million lifetime gift exclusion, as you can deposit five times the gift limit of $15,000 and only have to report it on your gift tax return for the next five years. Doing this tax strategy allows you to contribute $75,000 without penalty. A life settlement can also fund the proceeds of a 529 plan, and you can still follow this five-year tax strategy.

Coverdell Education Savings Account (ESA)

A Coverdell ESA works similarly to a 529, as it allows you to contribute after-tax dollars, and the earnings from the investment are tax-deferred. Withdrawals for tuition and other college costs are also tax-free. However, a Coverdell ESA is more limited than a 529 due to low annual contribution limits and income restrictions.

For example, you can only contribute up to $2,000 yearly to a Coverdell ESA if you file jointly and your modified adjusted gross income is less than $190,000. You can also send money to a Coverdell ESA and a 529 in the same year to a grandchild. Sending money directly to deposit in their account is another option if your income is too much for Coverdell ESA contributions.

Reverse Mortgage

Seniors may also consider a reverse mortgage, as it’s a home equity loan with no repayment requirements. You will live in your home, but the bank will own your house once you pass away. A few reverse mortgage requirements include sufficient home equity; you must be at least 62.

If you leave the proceeds of your house to your loved ones within your will, a reverse mortgage will speed up the timeline. You can cash out the reverse mortgage funds and pass them to your grandchildren instead of giving them a home. It’s also important to know that gift tax rules will still apply. Like a life settlement, you can deposit all the funds from your reverse mortgage to a 529 plan while using a five-year election for tax purposes.

Savings Bonds

Bonds from the U.S. Treasury Department are another choice for funding college for your grandkids. For example, I-bonds provide tax-free earnings if you use these funds for higher education costs. Liquidating the bonds and investing the proceeds in a 529 plan can help you avoid paying taxes. However, the biggest drawback to using savings bonds for funding college is the low returns. The yield on these bonds is much lower than college tuition inflation, so other choices are often more viable.

Creating a College Fund for Your Grandchildren

Looking at ways to fund college expenses for your grandchildren is a big decision that offers many options. If your grandchildren are young, now is one of the best times to begin saving and investing for the future. You can choose a Coverdell ESA or a 529 plan to save up funds for college tuition. On the other hand, UTMA and UGMA accounts are additional options, and they offer more flexibility.

You may want to consider a life settlement or a reverse mortgage if your grandchildren are older. A Roth IRA withdrawal is another popular choice. These options can provide you with a large sum of cash, but you need to consider if you want to save your Roth IRA to pay your expenses. You also don’t need a reverse mortgage if you plan to downsize your house or move to another location.

The decision can often come down to the amount of cash available from your life insurance, Roth, or home. Getting a free quote on the value of your life insurance policy is an excellent way to begin comparing all of your choices. Our team can help you get a quote to determine the best option for paying for your grandchildren’s college costs.