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6 Mistakes Grandparents Make When Helping Pay for College

By U.S. News & World Report

Even well-meaning grandparents make mistakes. And when it comes to financing college, any missteps can be quite costly, either for the grandparents themselves or the grandchildren.

Be sure to avoid these common mistakes grandparents make when trying to help their grandkids with college costs.

[See: 11 Money Tips for Older Adults.]

Missing tax breaks. If you’re giving cash for college directly to your kids or their kids, you might be missing out on some tax savings for yourself. By contributing to a 529 college savings plan, you could score a state tax credit or deduction for at least a portion of what you give. Currently, 34 states plus the District of Columbia offer some such break for 529 contributions. For example, in Missouri, residents contributing to their state’s 529 plan can deduct up to $8,000 in contributions, or $16,000 if they’re married and filing jointly. So, with a state tax rate of 6 percent, you can save up to a $960 when you max out your contribution. Find information about your own state using the U.S. News 529 Finder.

You’d probably benefit most from keeping the 529 in your own name. Most states only offer this break to residents, so unless you all live in the same state, contributing to an account owned by the parents may not result in any tax savings for you. Only five states — Arizona, Kansas, Missouri, Montana and Pennsylvania — let you deduct contributions to any state’s 529 plan.

Also, earnings on investments within a 529 grow tax-free. When the money is used for qualified educational expenses, such as college tuition, fees, room and board and textbooks, withdrawals are tax-free, too. But if you wind up needing the money for anything else, you’ll have to pay taxes plus a 10 percent penalty.

[See: Dear Younger Me: 12 Financial Truths We Wish We Knew Earlier.]

Titling savings bonds incorrectly. Another popular financial gift for the grandkids is U.S. savings bonds. If they’re used to pay for college, when the kids cash them in, they won’t have to pay taxes on the interest.

“Grandparents just love to buy those savings bonds … I think because of their age,” says Michele Clark, a certified financial planner based in the St. Louis metro area. “They grew up with their parents buying war bonds — and they used to pay 4 percent, which is a really good rate — so it’s just something they’re familiar with.”

Unfortunately, in today’s low-rate environment, savings bonds aren’t quite so generous. Current interest rates for I bonds and EE bonds issued in 2017 between May 1 and Oct. 31 are 1.96 percent and a minuscule 0.1 percent, respectively.

Still, that doesn’t make using them a mistake. Clark notes that grandparents often make an error with savings bonds by putting them in the child’s name. “In order for it to work, the savings bond has to be put in the parent’s name, not the child’s name,” she says. “That’s the tricky thing.”

Harming need-based aid potential. Every student has the opportunity to get aid based on whether the family qualifies for financial assistance. Using the Free Application for Federal Student Aid, also called the FAFSA, a student provides information about her family’s financial situation — specifically her income and assets and her parents’ income and assets. The Department of Education uses that data to calculate the student’s expected family contribution. The EFC is then used to determine whether she qualifies for a Pell Grant and how much colleges may offer in federal or nonfederal aid, including subsidized Stafford and Perkins loans and work-study opportunities.

Notice whose financial data is not included on the FAFSA? “When grandparents are saving for college in a 529 or anything else, that money is not going to hurt chances for financial aid as long as the money stays in the grandparents’ account,” says Lynn O’Shaughnessy, author of “The College Solution: A Guide for Everyone Looking for the Right School at the Right Price.” “There are hardly any schools that care if the grandparents are saving for college for their kids.”

For that reason, it makes sense for grandparents to hold onto the money they save for their grandchildren’s education for as long as possible.

Withdrawing savings too soon. When it finally is time for the little ones to head off to college, don’t jump the gun on tapping your savings. If your timing is off, money from grandparents could count on the FAFSA as student income, which would reduce need-based aid by up to 50 percent.

“Grandparents are so excited after saving this money all these years, they want to rush out the gate and hand it to the college student,” Clark says. “But if you do, it goes in a punitive blank on the FAFSA form, almost like we penalize kids for working, but you don’t want to do that.”

The best strategy in this case is to hold off on awarding your own aid to the grandkids until the second half of their four years in college. That way, the funds you give them won’t get counted on the FAFSA at all.

Giving up control. Besides ensuring you get a tax break, maintaining your own 529 rather than just contributing to one owned by the parents might be a good idea, so that you control those funds. For one thing, if nobody winds up being able to use the savings for qualified educational expenses, you’d have to pay taxes and penalties, but you still could get some of the money back for yourself and use it for other reasons. (Keep in mind that you can change the 529 beneficiary to another family member.)

Another reason: “Sometimes, you’re not sure who your kids marry,” says Fred Amrein, author of “Financial Aid and Beyond: Secrets to College Affordability.” “You may not be happy with a son-in-law, or there’s risk for divorce or something like that, and you want to make sure you maintain control.”

[See: 7 Signs Your Romantic Partner Is Financially Unstable.]

Putting college ahead of retirement. Doting grandparents may easily make the mistake of being too generous with their adorable grandchildren. Be sure you prioritize your own financial needs, such as saving for your retirement, ahead of their college costs. After all, you won’t find any scholarships to help you retire.

“You always have more wishes than you have money,” Clark says. “You have to prioritize your particular financial goals, find a balance and see what works.”

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6 Mistakes Grandparents Make When Helping Pay for College originally appeared on usnews.com

Don’t Settle for Student Loans to Pay for Online Education

By WTOP Staff
Online college programs are becoming a more popular choice for prospective students, with one study finding that more than 6 million students enrolled in at least one online course in fall 2015. The popularity of these courses can be attributed in part to their flexibility with working adults' schedules, students' ability to progress more quickly through online programs and, oftentimes, cheaper tuition. [See 10 low-cost online bachelor's programs for out-of-state students.]Online degrees can be beneficial to many college students, but some studies have shown online learners complete their programs at lower rates than students at traditional brick-and-mortar campuses. Individuals with student loans but no degree comprise two-thirds of defaulted borrowers. Though these numbers are not encouraging, just like for traditional programs, there are ways to reduce how much you'll need to borrow for an online program to ensure you won't become one of these statistics. Don't just settle on borrowing student loans to cover the whole cost of your program and living expenses. Instead, start thinking about how to cut costs and cover your balance in different ways, such as the following. -- Grants and scholarships: Even though you are taking an online course, you can still apply and receive grants and scholarships. But your first step should be to complete the Free Application for Federal Student Aid, commonly referred to as the FAFSA, which will allow you to receive a Pell Grant if your expected family contribution is low enough. The EFC criteria and award amounts are adjusted annually, but the 2017-2018 academic year awards range from $606 to $5,920, which could significantly lower the amount you borrow annually. Your next step is to apply for scholarships. You can start by checking online scholarship search engines, such as the Salt Scholarship Search, College Board's BigFuture and Peterson's. But don't forget to take advantage of local organizations and your school's financial aid office. Both may offer scholarships that you can't find with a national scholarship search. [Review these 10 sites to kick off your scholarship search.]For instance, organizations like the Elks Club, Knights of Columbus or the Rotary Club typically offer scholarships annually to local students. Just because you're going to school online doesn't mean you're ineligible. Visit your local library for scholarship listings, and ask around town. You might be surprised how many local organizations offer scholarships. While these scholarships typically aren't large, every little bit counts. Each dollar you receive in a scholarship is a dollar you don't have to borrow and pay interest on. -- Work-study: Another option for online students may be work-study awards. Not all students enrolled in online programs are eligible, but students at some schools -- including, for example, SUNY Empire State College and Liberty University -- are. Work-study awards are not given upfront like scholarships and grants. In most cases, they are an offer to earn up to the awarded amount if you secure an eligible work-study job. While there is a misconception that all work-study jobs must be on campus, students can work for off-campus, nonprofit or public employers as long as the work is in the public's interest. You may be able to work for a for-profit employer if the job is relevant to your course of study. No matter who the outside employer is, it will need to have an established agreement with your college for you to receive work-study funds. Remember, to be eligible for federal financial aid, you must be enrolled and pursuing a degree or certificate. If you're not working toward a credential, Pell Grants and work-study won't be option, but you may still be able to take advantage of private scholarships -- just be sure to read the eligibility criteria carefully. [Explore what to know about financial aid in online programs.]-- Pay as you go: One of the great benefits to enrolling online is the flexible schedule, which can allow you to complete your college coursework around your responsibilities. But prospective students often overlook using their part- or full-time job earnings as an option for paying for college. Almost 80 percent of college students in 2015 worked at least part time while attending classes, according to the National Center for Education Statistics. By budgeting and thinking strategically about your college costs, you can likely reduce your dependence on student loans by paying a portion out of pocket. Many -- but not all -- online programs are less expensive than traditional programs and often have shorter payment periods. Six, eight or 10 weeks are common course durations. Because of the frequency of payments in an online setting, you may be well-placed to pay as you go and possibly avoid borrowing altogether. Attending college online and avoiding student loans may be challenging, but if you are willing to put in the effort, you can limit the amount you need to borrow. More from U.S. News Q&A: Understanding Student Loan Discharge Eligibility Student Loan Refinancing Isn't Right for All Borrowers
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