Grandparent’s Guide to Paying for College: Creative Financial Strategies for Your Grandkids’ Education


As a grandparent, you are probably among the 94% who generously contribute to their grandchildren’s financial well-being. Statistics reveal that such monetary support averages out to around $2,562 annually. It’s an act of love, demonstrating that the family tree’s roots run deep.

The largest chunk of your support, as borne out by a 2019 report,  likely finds its way into buying gifts. With 86% of grandparents opting for this avenue, it’s a significant expenditure, averaging $805 annually.  

However, the nature of this financial support may be diverse. Among 62% of grandparents supporting their grandchildren financially, 40% cover the basic expenses, 29% pay for education, 15% help develop savings, and 21% take care of medical bills or wedding expenses. 

6 Strategies To Fund Your Grandkid’s Education

Whether your resources are substantial or limited, what matters most is that your contributions align with your financial landscape and personal values. So, if you’re planning to fuel your grandkids’ education and help them develop a secure financial future, this post may come in handy! It reveals six unique and tried-and-true strategies for your grandchild’s education. Read on and find everything involved. 

Leverage ROTH IRAs

Did you know that Roth IRAs can be your ideal tool for securing a robust financial future for your grandchildren? Although typically seen as a retirement nest egg, the Roth IRA can double up as a strategic education funding resource for them.

Roth IRAs are funded with after-tax dollars. Besides, they allow you to withdraw your contributions tax-free and penalty-free once the account is five years old. It’s like having a secret weapon that lets you support your grandchildren’s education while safeguarding your retirement.

Let’s imagine a tangible scenario. Suppose you’re a grandparent in your early sixties with a grandchild who’s just entered their teenage years. You’ve wisely allocated a portion of your after-tax income to a Roth IRA. 

Let’s say you contribute the maximum limit of $7,000 (as of 2023) each year.

Over time, this yearly contribution grows, not only from your additions but also from the compounded interest. After five years, when your grandchild prepares for college, your Roth IRA will have a principal amount of $35,000 — tax-free and penalty-free.

Now, for instance. The tuition fee for your grandchild’s preferred college course is $30,000. You could withdraw this amount from the Roth IRA, leaving a balance of $5,000 in the account.

However, the story doesn’t end there. As you continue contributing towards the Roth IRA, the balance of $5,000 will also keep growing until your retirement. Plus, the earnings on the principal, which aren’t included in this calculation, will continue accumulating. You can withdraw that tax-free amount once you reach the age of 59.

This way, you can fulfill your desire to support your grandchild’s education while ensuring a financially secure retirement for yourself. It’s a classic win-win! 

However, to make the most of this strategy, you need to keep three essential aspects in mind.

  • Roth IRAs have income limits. If your income exceeds a certain threshold, Roth IRA might not be an option. However, you’re good to go as long as you’re within the limit.
  • There are also contribution limits. While it might not fully cover the costs of a private school or college for multiple grandchildren, every bit helps, and these funds can make a significant difference.
  • Once you withdraw the contribution dollars, you can’t put it back into the account. It’s a one-way street, so careful planning ensures you’re not compromising your retirement funds.

Take Advantage of 529 Plans

529 plans can be a powerful catalyst in your strategy for amassing assets to manage your grandkids’ future education costs. Named after their respective section in the Internal Revenue Code (IRC), 529 plans allow you to contribute post-tax dollars into a state-sponsored account. These accounts are usually invested in mutual funds, and you can utilize them to pay for qualified educational expenses.

Although originally intended for higher education, the versatility of 529 plans has expanded over time. They now allow you to spend up to $10,000 per year per beneficiary on tuition fees for grades K-12 without incurring federal income tax.

Let’s take an example to illustrate this.

Suppose you start contributing $15,000 annually to a 529 plan when your grandchild is born. With an assumed annual return on investment of 6%, by the time they turn 18, the plan will grow to approximately $500,000. 

This broadened reach of 529 plans can be particularly beneficial if you’re considering transitioning your grandkid from a public to a private primary or secondary school. However, withdrawing funds early for primary or secondary school tuition could potentially exhaust your 529 plan funds before you use them for college.

529 plans offer flexibility. If you can’t utilize the funds, you can change the beneficiary. This way, you can reallocate the money for other members’ education.

However, starting as soon as possible is wise if you plan to leverage a 529 plan to finance education costs. The benefits of tax-free growth are maximized over long-term investment horizons.

Consider Security-backed Credit Lines

Besides Roth IRAs, security-backed credit lines can also help you gather enough money for your grandchildren’s education. Officially called Securities-Backed Lines of Credit or SBLOCs, this approach can help you access the liquidity required to cover full or partial college fees, utilizing the value of their non-retirement asset portfolio.

In many ways, SBLOCs are akin to a Home Equity Line of Credit (HELOC) – both permit borrowing against an owned asset’s worth. The primary difference is that your home secures a HELOC, while your taxable investment portfolio forms the foundation for an SBLOC. 

However, the Securities and Exchange Commission (SEC) punctuates this strategy with an advisory note. 

It warns that if your securities’ value declines to a level insufficient to back your line of credit, you will be issued a ‘maintenance call.’ This is essentially an alert that you need to either provide additional collateral or repay the loan within a specified timeline, usually spanning two to three days. 

If you fail to meet these conditions, it could lead to a forced liquidation of your securities, using the proceeds to settle the maintenance call.

For instance, you have a portfolio of stocks valued at $200,000. You’ve secured an SBLOC against it to fund your child’s $50,000 college education. If the value of your stock portfolio falls drastically, say to $80,000, this may trigger a maintenance call. 

Now, if you cannot furnish additional collateral or repay the loan promptly, the firm may sell off your stocks to recover the outstanding credit.

Given this, you should be careful when using SBLOCs. Indeed, they offer a tactically efficient way to fund college costs without disrupting your wealth accumulation, but you shouldn’t overlook the risks associated. Therefore, thoroughly understand these intricacies and assess your risk appetite before proceeding with this financing method.

Create a Trust for Education

Trusts are an incredibly flexible mechanism you can use for various purposes in wealth management and estate planning. You might create a trust to optimize tax savings, shield assets from creditors, cater to disabled family members, or nurture and safeguard wealth over numerous generations. 

Put simply, as a trustee, you will be responsible for managing and investing the assets within a trust. Those assets will then be utilized for the benefit of designated beneficiaries based on the trust agreement’s specifications.

Setting up a family trust can help you fund your grandchildren’s education. Even if you don’t embark on the trusts for educational purposes, you still have options. You can modify them through avenues like  ‘decanting’ laws or non-judicial or judicial settlements to include clauses permitting distributions for education.

As you contemplate strategies involving gifts to trusts to optimize estate and gift tax exclusions, consider adding trust provisions that allow for the fund- allocation towards education.

For example, you could initiate a trust with $200,000 for your newborn grandchild, specifying that the funds can be used for their education. Assuming an average return of 5% per year, this trust could grow to approximately $530,000 by the time your grandkid starts college. 

In many states, you can set up these trusts as perpetual trusts, bypassing future estate, gift, and generation-skipping transfer taxes (GSTT). This approach could make such trusts a potent resource for providing educational benefits to multiple generations of your family.

Count On Series I Bonds

You can extend your investment alternatives by considering another enticing option to fund your grandchildren’s higher education – the strategic use of inflation-indexed Savings Bonds, specifically Series I Bonds

An appealing aspect of these inherently low-risk bonds is their robust performance during inflationary periods. In addition, they offer significant tax advantages when used for educational expenditures.

Series I Bonds combine a fixed interest rate with an inflation-adjusted rate, recalibrated semi-annually. Currently, they boast a remarkable 9.62% annual yield for the initial half-year, subject to adjustment every six months according to the prevailing inflation. 

When you use them for qualified higher education expenses, the interest earned from these bonds can be exempted from federal taxes.

Consider this scenario –  you’ve invested $10,000 in Series I Bonds, and it’s currently earning 9.62% annually. After one year, your investment would grow to approximately $10,962. If these proceeds are used for eligible educational costs, the $962 earned as interest would be exempt from federal taxes.

You can also consider Series EE bonds, but their current interest rate is a mere 0.1%. Hence, they may not be an attractive option for funding education.

Ask Your Grandkids to Use Federal Tax Credits

The U.S. Federal Government provides several compelling incentives to help manage higher education costs. One of these is the American Opportunity Tax Credit (AOTC). The AOTC could grant your college-going grandkids a federal income tax credit of up to $2,500 for specific educational costs. These include tuition, fees, and course materials. 

Up to 40% of this $2,500 credit is refundable, potentially providing up to a $1,000 federal income tax refund even if your grandchildren don’t owe any federal tax.

For instance,  if your grandkid spends $4,000 on qualified educational expenses, they could claim the full $2,500 credit. This could effectively reduce the tax bill or increase the tax refund by that amount.

However, eligibility for this credit is income-dependent. Single taxpayers with a modified adjusted gross income (MAGI) of $80,000 or less can claim full credit for eligible education expenses. The credit diminishes if the MAGI exceeds this threshold and phases out entirely when the MAGI surpasses $90,000. 

Furthermore, it’s crucial to remember that the AOTC can only be claimed for a maximum of four years. 

Besides AOTC, Your grandchildren can also consider the Lifetime Learning Credit. It allows you to claim up to $2,000 for qualified education expenses for all eligible students.

Unlike the AOTC, the Lifetime Learning Credit can be claimed indefinitely. This credit, however, is not refundable, meaning it can only reduce the tax liability. The credit amount is also gradually reduced if the MAGI falls between $80,000 and $90,000. 


How can gifting strategies be utilized to fund my grandchild’s education?

Gifting strategies can effectively help you pay your grandchild’s tuition.  Under current IRS rules, it doesn’t count toward the annual gift tax exclusion. Alternatively, you could use an annual gift tax exclusion (up to a certain limit per person per year) to contribute to a savings or investment account in the child’s name. This strategy can potentially lower your estate’s value while assisting in your grandchild’s education funding.

What are the tax implications of setting up a 529 plan for my grandchild?

Contributions to a 529 plan are not deductible on your federal tax return. Still, any earnings in the plan grow tax-free, and distributions used for qualified education expenses are also not taxed. However, if the funds are used for non-qualified expenses, the earnings portion of the withdrawal may be subject to federal income tax and a 10% penalty. 

Can I establish a trust fund for my grandchild’s education and control how it is used?

Yes, when you set up a trust fund for your grandchild’s education, you can determine the terms of how the trust is managed and when distributions are made. A trust fund can provide flexibility and control, allowing you to specify the conditions under which the funds can be accessed.

Can I use my IRA to help fund my grandchild’s education? 

Yes, if you are 59.5 or older, you can take distributions from your IRA without penalty and use those funds for your grandchild’s education. However, these distributions may be subject to income tax. Additionally, if you have a Roth IRA, you can withdraw your contributions (not earnings) at any time, tax-free and penalty-free, for any purpose, including education. 

The post Grandparent’s Guide to Paying for College: Creative Financial Strategies for Your Grandkids’ Education appeared first on Due.


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