How Grandparents Can Save for College

Originally by: Robert Farrington at The College Investor on March 10, 2025
Summarized by: PV Financial Group on 05/16/2

With the school year ending and graduation celebrations underway, it’s a great time for grandparents to think about how they can help invest in their grandchild’s future. There are several ways to save and invest for education, each with its own benefits and considerations, from tax advantages to financial aid impact. Choosing the right plan depends on your financial goals, thankfully, there are several options available that not only help fund education but may also offer tax advantages and estate planning benefits.

1. 529 College Savings Plans: Tax-Advantaged and Flexible

529 plans are one of the most popular ways to save for education. These state-sponsored accounts offer tax-free growth and tax-free withdrawals when used for qualified education expenses.

Benefits:

• Tax-Free Growth: Earnings are not taxed if used for eligible education expenses like tuition, books, and room and board.
• Estate Planning Advantages: Grandparents can contribute up to five years’ worth of gifts at once—without reducing their lifetime gift tax exemption.
• Account Control: You maintain control over the funds and can change the account’s benefit if needed.
• Financial Aid Friendly: Grandparent-owned 529 plans no longer impact FAFSA financial aid calculations as of recent rule changes.

2. UGMA/UTMA Accounts: Flexible, But Taxable

These custodial accounts, set up under the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA), allow you to give assets to a child. The funds become the child’s property once they reach the age of majority.

Benefits:

• No Restrictions on Use: The funds can be used for anything—not just education.
• Simplicity: Easy to set up and manage.
• Tax Advantages: Earnings are taxed at the child’s rate, which is often lower than the grandparents’ rate.

Considerations:

• Financial Aid Impact: Considered the student’s asset, which may reduce eligibility for need-based aid.
• Loss of Control: Once the child becomes an adult, they gain full control over the funds.
• Tax Implications: The “kiddie tax” may apply to unearned income above a certain threshold.

3. Coverdell Education Savings Accounts (ESA): Tax Benefits with Limits

Coverdell ESAs also offer tax-free growth and withdrawals for qualified education expenses but come with stricter contribution and eligibility limits.

Benefits:

• Tax-Free Growth: As with a 529, earnings grow tax-free if used for education.
• Flexible Use: Can be used for K–12 expenses in addition to college.
• Investment Choice: Typically allows a wider range of investment options than 529 plans.

Considerations:

• Contribution Limits: Capped at $2,000 per year per beneficiary.
• Income Restrictions: High-income individuals may not qualify to contribute.
• Age Limits: Funds must be used by the time the beneficiary turns thirty, or taxes and penalties may apply.

4. Paying Tuition Directly: Simple and Effective

For those looking for the simplest route, paying tuition directly to the school or college is an effective way to help without tax complications.

Benefits:

• No Gift Tax: Payments made directly to an educational institution for tuition are not subject to federal gift tax limits.
• No FAFSA Impact: These payments don’t count against financial aid eligibility.
• Immediate Support: Helps meet real-time tuition needs.

Considerations:

• No Investment Growth: Unlike a 529 or other tax-advantaged savings account, there is no opportunity for tax-free investment growth over time.
• Tuition Only: This method covers only tuition—not books, housing, or other education-related expenses.
• Not Always Applicable: This option only helps if the child is enrolled in a tuition-based institution.

Conclusion: Choosing the Right Path

There is no one-size-fits-all solution. Each savings option comes with its own set of benefits and trade-offs, and the best choice depends on your financial goals, the needs of your grandchild, and how involved you’d like to be in managing the funds.

Before making a decision, it’s wise to speak with a financial advisor who can help you weigh your options and craft a plan that fits your family’s unique situation. By planning today, you can make a lasting difference in your grandchild’s tomorrow.

Pioneer Valley Financial Group does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation.

The fees, expenses, and features of 529 plans can vary from state to state. 529 plans involve investment risk, including the possible loss of funds. There is no guarantee that an education-funding goal will be met. In order to be federally tax free, earnings must be used to pay for qualified education expenses. The earnings portion of a nonqualified withdrawal will be subject to ordinary income tax at the recipient’s marginal rate and subject to a 10 percent penalty. By investing in a plan outside your state of residence, you may lose any state tax benefits. 529 plans are subject to enrollment, maintenance, and administration/management fees and expenses.

Only contents distributed during the individual’s affiliation with Raymond James have been approved and retained by Raymond James. Posting outside of Raymond James affiliation were not made on behalf of and do not promote Raymond James.