With college admissions season behind us, many high school seniors are eagerly anticipating heading to college in the fall—while parents, on the other hand, are likely be anxious about how they'll pay for it. Fortunately, many of them appear to be getting help from their own parents: According to a new study by Fidelity Investments, many grandparents are contributing to 529 college savings plans to help finance the high cost of education.
The study found that 53% of grandparents are either already saving or plan to save to assist in paying for their grandchildren’s college costs. Among those who have been socking away money, the median contribution is $25,000, though 35% said they expect to contribute at least $50,000. That's enough to cover more than two years tuition, room and board at an in-state public college, and more than a year at a private college.
The 529 accounts specifically are an attractive option for grandparents because of the flexibility they offer, said Keith Bernhardt, vice president of college planning at Fidelity. Earnings are not taxed as long as the money is used toward education expenses. Additionally, grandparents are free to change the beneficiary of the account or take the contributions back at any point should they find themselves needing the money for their own retirement. (They will, however, owe income taxes and a 10% penalty on any earnings withdrawn.)
While 529s offer many benefits, families should understand the difference between how parent and grandparent accounts are treated in financial aid assessments. Any distribution from a grandparent-owned 529 counts as untaxed income on the following year’s Free Application for Federal Student Aid (FAFSA). Parent accounts, on the other hand, are counted as assets on the FAFSA— not as income—and factor into determining the Estimated Family Contribution.
“Income is assessed much more heavily,” said Joe Hurley, head of Savingforcollege.com.
Because grandparent accounts have a larger impact on financial aid, he added, owners of these accounts might want to wait to use the account until the final year of college, or they could shift the ownership to the parent.
While the amount and frequency of 529 contributions depends on individual financial circumstances, Mary Morris, chair of the College Savings Foundation and CEO of Virginia529, said she’s seen an overall increase in grandparents getting involved education expenses. Anecdotally, she estimated that 20% of Virginia accounts are owned by grandparents. Many contributions are made as gifts on special occasions, a pattern Morris expects to see more often going forward
Despite the trend, however, “there’s a real disconnect” between generations when it comes to communication about finances, Hurley said. According to the Fidelity survey, 90% of grandparents said they would likely make a contribution to a college savings plan—if asked.
“Parents feel it’s their responsibility to help their children if necessary,” Hurley said. So they’re “reluctant” to ask for help.
But the price tag of higher education has made that conversation one worth having.
“Parents cannot save enough, on average, to pay the full cost of college,” Bernhardt said. “Grandparents recognize that and want to chip in.”