Sept. 13 marks National Grandparents Day, and some college
students should be sure to thank Grandma and Grandpa for something extra
special this year: help paying for school.
According to Sallie Mae's How America Pays For College 2015
report, contributions for college costs from relatives and friends increased 40
percent from 2014 to 2015 – the largest increase among all categories. Overall,
these contributions averaged just $1,247. However, even that small amount
could have a big effect on a grandparent on a fixed income due to retirement.
The number of people over age 50 with student loans has
increased 130 percent in the last seven years. But many older borrowers are
battling their own debt into retirement, so cosigning additional loans could
create financial trouble for them. If one of your retirement goals is to help
pay for your grandchildren's education, consider the following pros and cons
before you do.
Grandparents can take advantage of a few different funding
options to assist their grandchildren. The one familiar to most consumers is a
529 college savings plan. These plans allow you to put money toward your
grandchild's education costs and let this investment grow tax free.
You can contribute to an existing 529 plan or start your own
in your grandchild's name. The downside to the latter option is that the
federal aid calculation considers the funds the student's asset, which weighs
significantly in the need-based aid calculations. Instead, you could give the
money directly to your child – not your grandchild. When given to a parent,
this money is considered the parent's untaxed income on the Free Application
for Federal Student Aid, which is counted less significantly than in the
student's calculation.
Also, be aware of the gift tax consequences should you
provide more than $14,000 to that beneficiary annually. Trying to get around
those tax penalties by paying the funds directly to the university can
backfire, as most schools verify how tuition is paid and can count such gifts
as untaxed income, potentially lowering the student's aid eligibility.
Before using these options, talk with both a tax
professional and a financial aid professional to understand each choice's impact
fully.
Grandparents may also be able to help their grandchildren
win scholarships. Your grandson or granddaughter may qualify for an award based
on your military service, ancestry and more.
If unable to make a direct financial contribution via their
savings, grandparents can help their grandchildren borrow student loans.
Grandparents themselves are ineligible for federal loans unless they have
legally adopted the child they're borrowing for. However, they could cosign a
private loan with their grandchild.
Private student loans do not offer the same benefits as
federal student loans, which can allow borrowers to reduce, postpone or even
eliminate their payments altogether, should they meet certain qualifications.
Some lenders may provide similar options, but they are not entitlements and you
may actually have to pay to take advantage of them.
By cosigning a student loan, you take on equal
responsibility for that debt. Even if your grandchild agrees to handle the
payments, you would still be on the hook if he or she does not. So, should
something unforeseen happen to you or your grandchild, the remaining party
would likely have to pay the remaining debt.
And it's even been reported that some student borrowers face
"auto-default," meaning full repayment of the loan is required
immediately, should their cosigner die or file for bankruptcy. If you're in
retirement and living on a fixed income, you should be sure you could manage
that full debt before cosigning.
If you are already repaying federal study loans from your
own schooling or your children's, you may be able to choose from a number of
different plans that could decrease the amount you pay on them each month. In
particular, there are a few different plans that base your payments on your
income and forgive your remaining debt after 20 or 25 years.
These income-driven plans could especially be of benefit
when you're in retirement. Retirees typically have less income, and that may
qualify them for a much lower payment – one that could be as low as zero
dollars per month. With that extra money, you could help fund a number of
different retirement goals, from travel to helping with your grandchildren's
education. Note that if you're paying Parent PLUS loans, they are only
eligible for income-contingent repayment, and only if consolidated under the
federal direct loan program.
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