Paying for a college education has never been more expensive and complicated. Often, grandparents want to help by making a gift to their grandchildren. You would think this would be great, but in fact, it may do more harm than good.
After admission to a college or university, the next step is determining how much need-based or merit-based aid the student will receive. This is calculated using a formula that determines the family’s “Expected Family Contribution”. If the gift is made improperly, it is possible to decrease the amount of aid the student receives.
Fortunately, there is a special opportunity for grandparents to help. Grandparents are able to pay tuition directly to the school without being subject to gift tax rules and, more importantly, without having an adverse impact on the student’s eligibility for financial aid. To get this favorable treatment, the payments must be made directly to the school and cover only tuition. Payments to cover other expenses such as room and board would be considered gifts.
If you have grandchildren who will be going to college, prior to starting any college gifting, it is important to review your individual situation before taking action.
This information is not intended to provide tax or legal advice. LPL Financial does not offer tax advice. Before considering any of this or any tax strategies described, consult your tax and legal advisers before making decisions regarding your tax situation.