Grandparents and College Savings

By: South Carolina State Treasurer Curtis Loftis, Administrator of Future Scholar College Savings Plan

September 12, 2023

Friends often tell me how much their lives are enriched by their special bond with their grandchildren. At their older stage of life, these happy grandparents also feel a little wiser than they did when they were younger. They have a better ability to understand what’s really important in life. 

It’s no surprise then that wise grandparents often want to give their grandchildren the best gift money can buy – a greater chance for a successful future. That’s why they’ve chosen to save for their grandchildren’s higher education with a 529 college savings plan. After all, 529 plans are widely considered the most effective way to save for future education expenses, and grandparents know a good thing when they see it.

Yes, there’s no doubt grandparents love their grandchildren. And here’s what they’ll love about owning a 529 plan.

Tax and Gift Advantages.

Grandparents are certainly wise enough to know the importance of saving on taxes. They’ll be happy to know a 529 plan’s tax-deferred growth means that earnings are not subject to state or federal income taxes. Funds compound tax-free, so accounts have the potential to grow faster and yield increased returns. And when it’s time, grandparents will be thrilled that their beneficiary can withdraw the funds tax-free, as long as they’re used to pay for qualified education expenses.

As a grandparent, or anyone saving for a child’s future education with a 529 account, you’ll also be glad to know your 529 contributions are treated as complete gifts by the IRS and are removed from your taxable estate. And if you’d like to go ahead and front-load your account, 529 plans have a forward-gifting provision that allows you to gift funds at five times the amount usually excluded from gift tax. One grandparent can contribute a gift of $85,000 in a single year, or a couple filing jointly can contribute up to $170,000 in a single year without incurring gift tax, just as long as they don’t make any subsequent contributions within the following five years.

Currently, more than 30 states, plus Washington, D.C., offer 529 account holders additional tax savings. They allow at least some percentage of the contributions you make to your account to be deducted from your state tax returns. Currently, my state of South Carolina allows residents to deduct 100% of their 529 contributions from South Carolina tax returns.  That’s a real tax advantage.

Flexibility.

Grandparents love that 529 accounts are flexible, too. As the 529 account owner, you can change the beneficiary at any time. If one beneficiary decides not to pursue higher education, you can select a different beneficiary in the family, or the account can be passed down to future generations.

You also can transfer ownership whenever you like. You may want to maintain account ownership while your grandchild is young. Then, when your grandchild is ready for higher education, you can choose to transfer ownership to the beneficiary’s parent to take responsibility for requesting distributions to pay for qualified education expenses. The choice is up to you.

No Financial Aid Trap.

Beginning in the 2024-2025 academic year, grandparents can contribute to the cost of their grandchildren’s education without affecting the child’s eligibility for financial aid. The government’s financial aid questionnaire (FAFSA) will no longer require students to disclose nontaxable support on the form. Grandparents can own 529 accounts themselves and save for their grandchildren’s education without impacting any potential financial aid opportunities. 

The best gift.

Today, even the most industrious students can no longer count on part-time and summer jobs to cover the cost of higher education. Over the past forty years, average college tuition has grown at a rate twice that of inflation. That’s why contributing to a grandchild’s future education is one of the best gifts you can give.

Even if you don’t care to own a 529 account, you can always contribute to an account owned by someone else that benefits your grandchild. Birthdays and holidays are great occasions to give the lasting and essential gift of a future education. 

As a grandparent, you know your grandchildren are your link with the future. So, what could be more important than their futures? By opening or contributing to a 529 account, you show your grandchildren just how much they – and their future success – mean to you.