< Back

Mailbag Monday: Saving for a Grandchild’s College Expenses

piggy with graduation cap on moneyMy wife and I will be a first-time grandparents in six months. We’re very excited, as you can imagine. It is our desire to start a college fund for our grandchild. If it is within our means we would like, over the years, to grow the account so that the entire college education will be paid for.  What recommendations do you have regarding investment vehicles and amounts to save so that we will have enough in 18 years?

— Bob

What a nice gesture. You probably want to look at a 529 plan, which is offered by every state and gives you a tax-advantaged way to save: money in the account grows tax-deferred, and distributions are tax-free if they are used to pay for the beneficiary’s college expenses. In addition, you may get a state tax break for participating in your own state’s plan — though you don’t have to contribute in state, if you find that your state’s plan doesn’t cut it, performance-wise.

That said, you have to be careful as a grandparent because this kind of plan can impact their financial aid eligibility. The plan itself when owned by a grandparent isn’t considered an asset, but when the child is the beneficiary and a distribution is made to pay for college, that distribution can count against him or her when the FAFSA is filed the following year. Note that this is NOT the case with 529 plans that are owned by the parent.

To solve that issue, perhaps your best bet, if you’re willing to do this, is to have the parents open up a 529 plan and then simply contribute to it each year. You will, of course, lose control over the money, so that has to be a risk you are willing to take. As far as how much to save, SavingForCollege.com has a “the world’s simplest college calculator” which you can use to get a ballpark. They also have information on each state’s plan, so you can compare performances and ratings across the board.

One final note: No matter what number a calculator spits back, I want to urge you to save what you can while keeping your own retirement needs front and center. Your grandchild will appreciate this money, of course, but there are also loans available for college expenses — no one is going to lend you money for retirement.