Are you planning financially to help a grandchild — or niece or nephew — go to college? A common question is whether your gift will hurt the student's chance at financial aid. The answer: sometimes yes, sometimes no. It all depends on the type of aid the child is apt to get.
If the family earns a substantial income, aid based on financial need is off the table. Instead, the school might offer a merit scholarship. This form of aid goes to students a school particularly wants, typically supersmart kids or those with a special gift. Grandparent money has no effect on merit scholarships, says Dean Skarlis, founder of the College Advisor of New York, which counsels families on educational choice. So feel free to give any amount of aid in any form you want.
It's another story, however, if the family qualifies for aid based on financial need. In that case, your gift will indeed reduce the amount the student receives. But so what? The money you give will almost certainly exceed any potential loss in need-based aid. What's more, that "aid" might have come in the form of student loans. Your contribution will help your grandchild graduate with a smaller burden of debt.
Here's how to help the student while still getting the most out of need-based aid.
1. Give the money to the parent rather than the student and let the parent pay the bills. Students are expected to contribute 20 percent of their assets toward college; the contribution expected from parental assets is limited to 5.6 percent. By routing your gift through the parent instead of through the child, the child will qualify for more aid.
2. If the parents have a 529 plan for college savings, see if you can contribute to that one rather than setting up a 529 of your own. Money paid to the school from a grandparent's plan won't affect need-based aid in the student's first year but counts as student income in future years. As a result, aid could drop sharply. Payments from parents aren't considered student income. (Quick note: 529 investment plans grow tax-free when the money is used for higher education. They're offered through brokers and — at lower cost — directly from the states.)
3. Grandparent gifts become a nonissue in January of the student's junior year. By then, the student will already have filed an aid application for his or her senior year. Any future grandparent contributions won't show up in the record, so they'll take nothing from a financial-need award, says Joe Hurley, founder of savingforcollege.com, an expert site for information on 529s. You might let the student and family pay for the first 21/2 years of school and then start making your own contributions after that.
4. A student with financial need might also receive a merit scholarship, says Karen McCarthy, senior policy analyst for the National Association of Student Financial Aid Administrators. A grandparent gift may affect the size of the need-based award but, in most cases, should have no bearing on the merit award.
Before you start writing checks for college (or promise to), be sure that your own retirement is assured. Helping grandchildren to an education is a splendid act — as long as you won't have to ask for the money back in your older age!
Jane Bryant Quinn is a personal finance expert and author of Making the Most of Your Money NOW.