Early September signifies the end of summer travel and back-to-school time for students. September also brings National Grandparents Day on September 9. As we think about both, I am reminded of the role grandparents often play in the growth of their grandchildren – from school aged to adulthood. One of the many ways grandparents can be supportive of their grandchildren is by helping them save for college. Starting when grandchildren are young and building a college savings fund over the years as they age can be an incredible foundation to foster their future financial success.
As a financial advisor, I’ve worked with grandparents and parents alike to help them chart a course toward paying for their grandchild’s or child’s college education in a way that doesn’t break the bank. Here are some key considerations:
Have the Important Conversations
Talking about money is one of the most difficult things for family members to do. However, being willing to have financial conversations that may, at times, feel difficult often helps the process go more smoothly for everyone. When grandparents and parents are aligned on a common goal — saving for a child’s education — families can more easily have conversations about how to get there.
For example, if a family member is going to start saving through a state-sponsored 529 plan, it is important to coordinate who owns it (e.g., parents, grandparents). Often, there are different rules for how those payments will count toward a child’s education, depending on who the stated owner is. It is important to communicate with family about those details. Tax implications and penalties can come into play if 529 funds are withdrawn to pay for things other than qualified college expenses. Consult a tax professional for more information on potential penalties and be sure your family is clear on those restrictions.
Additionally, beyond number-crunching and exchanging funds, grandparents have a wealth of life and financial experience to share with their grandchildren that can be critical as they grow into maturity. Taking the time to share that information and those experiences helps grandkids establish a strong foundation for both financial literacy and life.
Consider Investing Versus Borrowing
Making smart investments early on that allow your money to grow over time may provide an alternative to borrowing money through student loans. For instance, if a family intends to save $75,000 in college tuition for their toddler, there are several ways they could arrive at that amount. Some parents and grandparents prefer to put away money bit-by-bit monthly, whereas some prefer to contribute lump sums less frequently. Whatever the preference, tax returns on investment accounts could assist you in reaching your goal. Talk to a financial advisor and a tax professional to find out more about what the benefits of investing could look like for you.
Taking out loans, on the other hand, could mean that borrowing $75,000 will turn into much more post-graduation. It is possible that just three months after graduation, accrued interest could push the amount owed up to $85,000 or more. Not to mention, the longer it takes to pay off the loan, the more interest the loan will accrue over time. Work with your child or grandchild to help them try to avoid borrowing as much money as possible so they don’t get stuck trying to pay it back for years after graduation.
Be Realistic
In their significant desire to help, grandparents may inadvertently jeopardize their own retirement to help their grandchildren. If a grandparent places money into an educational saving or investment account but then needs those funds for their own care — or if a grandchild decides not to attend college and there is no other beneficiary to assign the funds to — taxes and penalties may be due on withdrawn funds.
Given that most new grandparents are retired or approaching retirement age, their financial portfolios may not have as much flexibility or growth potential as they did in previous years. It is important for grandparents to not only maintain their own financial health as they help their beloved grandchildren, but also to think about other financial implications for the family, such as how much money will remain for a financial inheritance. Often, a financial advisor can help navigate this path more smoothly.
Grandparents want what’s best for their grandchildren and, with a calculated approach, they can help provide it. Rather than spending money on lavish gifts in the short term, contributing regularly to a 529 college savings plan — and focusing on providing experiences that help them grow as money-smart individuals — offers a true investment in their future. Though they might not appreciate the investment in their future now, they certainly will appreciate the wise forethought down the road when tuition starts to loom.
Kristen Fricks-Roman is a Financial Advisor with the Wealth Management Division of Morgan Stanley in Atlanta. The information contained in this article is not a solicitation to purchase or sell investments. Any information presented is general in nature and not intended to provide individually tailored investment advice. The strategies and/or investments referenced may not be suitable for all investors as the appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Investing involves risks and there is always the potential of losing money when you invest. The views expressed herein are those of the author and may not necessarily reflect the views of Morgan Stanley Wealth Management, or its affiliates. Information contained herein has been obtained from sources considered to be reliable, but we do not guarantee their accuracy or completeness. Morgan Stanley and its Financial Advisors do not provide tax or legal advice. Before investing, investors should consider whether tax or other benefits are only available for investments in the investor’s home state 529 college savings plan. Investors should carefully read the Program Disclosure statement, which contains more information on investment options, risk factors, fees and expenses, and possible tax consequences before purchasing a 529 plan. You can obtain a copy of the Program Disclosure Statement from the 529 plan sponsor or your Financial Advisor. Morgan Stanley Smith Barney, LLC, member SIPC. CRC 2235406 09/18
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