Beyond 529s: How grandparents can help pay for college

Today’s baby boomers hold over half of total U.S. household wealth, while their kids hold a much smaller portion, despite being bigger in population, according to a new study by New York University economists.

Those 65 and older have benefited from long-term homeownership, booming stock markets and steady jobs with 401(k)s to build their golden nests.

Their children, meanwhile, have struggled with student debt, soaring housing prices, less reliable jobs and fewer pensions.

A wealth transfer is coming eventually, and for many grandparents, that means helping to pay their grandchildren’s college expenses. A 2024 study found 53% of grandparents are saving for a grandchild’s education, and the 529 college savings account is the go-to vehicle.

There are some benefits to this strategy. The money grows tax-free, and if it’s withdrawn for qualified educational expenses (tuition, room and board, etc.), there are no tax consequences. Contributions are after-tax, but many states offer a deduction or tax credit for their in-state plans. Withdrawals are subject to federal gift tax exclusion, currently $19,000 for an individual or $38,000 for couples.

Under a recent change in the FAFSA (Free Application for Federal Student Aid), funds supplied by a grandparent through a 529 are not reported as student income, so the grandchild’s eligibility for federal aid is not impacted.

However, about 250 colleges and universities use the CSS Profile to award institutional aid. The application provides a much more detailed financial picture, and if the student is applying to one of these schools, 529 contributions from a grandparent are added back in.

Also, most 529 plans offer limited investment options, mainly in mutual funds. This is why many investment advisers recommend 529 plans — because they want to encourage stock market investment. Very few mutual fund managers, though, beat the returns of the S&P 500. (This is why it’s important to work with a fiduciary, who is compensated by clients, not commissions.)

Here are two other strategies for grandparents looking to fund some of their grandchild’s college expenses.

Cash value life insurance policy

A permanent life insurance policy, universal or whole life, that accumulates cash can be a valuable tool for paying college expenses. You are using the cash value as a living benefit, which reduces the death benefit.

Overfunding a cash value life insurance policy involves paying more than the required premium to build a substantial cash value. You can take a loan from the insurance policy, similar to taking a loan from your 401(k), and use the funds to help your grandchild pay for college. When you pay back the loan, you are paying yourself the interest.

This source of funding is not reported on the FAFSA or the CSS Profile, unless the student puts it in their own savings account. One strategy is for the grandparent to pay tuition directly to the college, which wouldn’t be subject to the federal gift tax exclusion. Depending on the college, however, it could affect aid eligibility, so parents and grandparents need to be on the same page.

It’s important to work with a financial professional to make sure a cash value life insurance policy is appropriate to your circumstances and is structured correctly to avoid tax consequences.

Tax-deferred fixed annuity

Tax-deferred annuities are the insurance industry’s alternative to the banking industry’s certificate of deposit (CD). You deposit a lump sum with an insurance company, which then accumulates tax-deferred interest at a fixed rate and pays out a steady stream of income. The interest is taxed when it’s withdrawn, much like any type of taxable account such as CD, money market or brokerage account.

The advantages of annuities are that you can time distributions to coincide with tuition payments and the money is protected from market volatility.

There are many different types of annuities based on your specific goals. For example, there are annuities geared specifically to college-bound families that allow withdrawals without any surrender fees. This is why you would want to work with a Certified College Planning Specialist versed in annuities for college, retirement or income.

Again, a grandparent can make tuition payments directly to the school rather than giving the money to the student, which would have be reported.

There’s no reason to put all of your college-funding eggs in one basket. Rather, consider a mix of strategies as you think about putting your grandchildren, or future grandchildren, through college.

• Brian Safdari, who founded College Planning Experts in 2004, is a Certified College Planning Specialist. For more information, email Safdari at Safdari@collegeplanningexperts.com or visit collegeplanningexperts.com.