College isn’t cheap. In 2022-23, the average cost for tuition, books and room and board for full-time undergrads was $27,940 for in-state students attending a public college, according to the College Board. The cost ballooned to $45,240 for public school out-of-state students and $57,570 for those attending private colleges. If you have a grandchild heading off to college this fall, or your son or daughter just had a baby, you might be thinking of helping out to reduce the sticker shock.
Daniel McDonald, author of From Savvy Saver to Smart Spender: How to Pick a Tax-Wise Retirement Withdrawal Strategy, says that in the right financial situation, helping pay for college not only will bring you personal joy but will help alleviate the financial squeeze for loved ones and boost your grandkid’s odds of career success. It’s a way to highlight how important you think it is to earn a college degree. “It’s a great way to instill your values and (emphasize that) education is important,” says McDonald, creator of Retirement Tax Saver.
But before you write a big check for tuition to Cornell or the University of Colorado, you must assess your finances to ensure you can really afford to help. “At your stage of life, you still could have 20 or 30 years left in your future, so you’re going to have to make sure your retirement is adequately funded,” McDonald says. “That’s a pretty important consideration.”
It’s a personal finance no-no to give away money earmarked for your retirement that could leave your nest egg underfunded. “If it’s going to derail your own retirement plans, it’s probably not a good idea and you should not do it,” says Judith Ward, a certified financial planner and thought leadership director at mutual fund firm T. Rowe Price.
If you do have the financial means to step in, here are ways you can help with college costs and pass on wealth in a tax-efficient manner.
Pay tuition costs directly to the college
If your granddaughter is graduating from high school this year and heading off to a college campus in the fall, a good way to help is to make a tuition payment directly to the college or university, says Keven DuComb, senior financial planning and estate specialist at Altfest Personal Wealth Management.
The upside to this payment approach is that the Internal Revenue Service doesn’t consider a direct tuition payment a taxable gift, so you won’t have to worry about the $17,000 annual federal gift tax exclusion ($34,000 for a married couple) for 2023.