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Monday, May 20, 2013

Helping the Grandchildren with Education

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.

Monday, May 6, 2013

Avoiding Debt or Creating Debt?

Because I have two children in high school, an article in the local Grand Rapids Press over the weekend caught my attention.  It was reprinted from the Wall Street Journal.  The author discussed how complicated it was for her and her husband to develop a plan for paying for college education.  What really struck a chord with me was their discussion of the possibility of borrowing for education.  Her husband was opposed to any debt at all.  In fact, he would prefer to cash out retirement savings in order to eliminate any debt.  Does this “avoid debt”?
I say no, it does not.  We build our retirement savings in order to pay for future anticipated expenses when we no longer work.  We either have enough saved or we do not.  If we do not, then that is debt that we owe our future selves.  If we borrow from our future selves, we either pay it back through additional savings or we will cut back on expenses in retirement.  Either way, it is no different from taking on an additional loan with monthly payments and interest costs.  Borrowing from future selves has significant costs, too.  We lose the potential investment returns of that money over time.
It was disappointing that the author did not make that point.  Often, I see people withdraw or borrow funds from their retirement accounts to pay off debt.  Many times, they pay significant penalties and tax cost to do so.  While reducing or minimizing debt is important to a healthy financial plan, it should not be done without understanding the impact on all aspects of the planning.  If we are just trading one type of debt for another, we may be doing more harm than good.