Student Loan Debt Solution: Should Grandparents Pay for College?
A new study conducted by Fidelity shows that 53% of grandparents are saving or plan to start saving to help pay for college costs and 90% report they would be likely to make a contribution to their grandchild's college savings fund for special occasions in place of other gifts if they were asked.
More than half, or 52%, of grandparents are familiar with 529 college savings plans , with 37% who say they worry about their grandchild's ability to attend college without incurring significant student loan debt.
Grandparents understand the increasing costs of college and many expect to make significant contributions. When asked how much they anticipate contributing to college education funds of all their grandchildren, they report a median of $25,000, with 35% expecting to contribute $50,000 or more.
"Contributions from grandparents big or small can add up over time and potentially open up a grandchild's opportunities when making college decisions," said Keith Bernhardt, vice president of college planning at Fidelity, the Boston financial institution. "Ongoing communication between parents and grandparents can help when determining how to grow their savings, as well as how to best leverage those savings to pay for college when the time comes."
The study found that grandparents are drawn to 529s, because they are dedicated solely to college savings and those earnings can be withdrawn tax-free for education expenses. Many of them are also a fan of having the funds can be controlled until the time is right to share them with their children, grandchildren or college of choice.
More grandparents are investing in the future of their grandchildren by opening 529 plans. In 2014, the number of new 529 accounts increased by 12% from January through April compared to the same period last year. Overall, approximately 15% of Fidelity-managed retail 529 accounts are owned by grandparents.
"It is very hard for their adult children to save enough given the prices of college now," he said. "Grandparents do place a high value on college education and they know that giving funding for education is critical for their grandchildren to succeed."
For some families, it would benefit the student's financial aid package if the contribution from the grandparents occurred during their senior year so that it is not counted as income, said Bernhardt. "Grandparents need to work with parents and make a decision together to decide when to help pay for tuition," he said.
Many grandparents are regular contributors: one key savings strategy often suggested is to automate contributions so they become habitual and many grandparents are following the strategy with 35% who contribute as part of gifts on special occasions such as birthdays and other holidays.