Grandparents Taking the Lead on Education Funding

John F. Pearson CPA CCPS

 

Grandparents have taken third place as a source of college funding, trailing parental help and scholarships, according to Professor Vern Bengston at the University of Southern California.

 

Admittedly, Professor Bengston’s research methods for this statistic are not very formal….each year for the last 20, he has been giving his students a questionnaire on how they are financing college.  Being a grandparent himself, he was amazed to see grandparent’s contribution move up past borrowing and student employment to its current position as the third leading source of college funding.

 

What does he attribute this to?  “Our culture has changed so that education is priced so high and lasts so long, that the phenomenon of economic dependency of the students (on their parents) last much longer than it used to,” states Professor Bengston, who is a sociologist.  As a result, grandparents see the strain it puts on the family and want to help.

 

“Most elderly people today are better off than they thought they would be”, according to Timothy Smeeding, professor of public policy at Syracuse University.  He points to the booming real estate market, favorable changes in Social Security and the rapid stock market increases of the 1990’s as the reasons grandparents simply have more to give.

 

There are favorable estate tax rules that encourage grandparents to pay for education directly or to make contributions to the very popular 529 plans.  However, it appears that they are not taking advantage of income tax reducing opportunities that are easily available to them.

 

For instance, if the grandparents operate a small business, they could hire their grandchild as a part time employee and deduct the wages for the work they do.  Not only does this create tax savings for the grandparents, it provides the grandchild with a sense that they are making a contribution to the cost of their own education.

 

Other techniques include transferring appreciated stock or other assets to the grandchild for them to sell at a lower tax bracket then the grandparents would experience.  Or, if the grandparents own rental property, they could transfer ownership of the land portion via gifting to their grandchild and then pay rent to their grandchild, again creating a tax deduction for the grandparents and cash flow that the grandchild can use to pay for school.

 

Including grandparents in the education funding picture for grandchildren could have the potential to put strains on family relationships.  However, if viewed in a “tax-wise” way, it is certainly preferable to the burden of college loans.

 

John F. Pearson is a CPA and Certified College Planning Specialist who works with individuals to help them develop their optimum educational funding strategy.  He can be reached at 203-984-2518 or through his website at www.johnpearsoncpa.com.