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Helping Grandchildren Pay Their Tuition

By Jane Bryant Quinn
Sunday, May 28, 1995; Page H02


A reader tells me that he and his wife want to help their grandchildren save for higher education. But he's worried that his contributions will have a perverse effect. "Taxes aside," he asks, "if we add to their savings accounts won't that reduce their eligibility for college aid?"

Yes it will. But there are ways of supplying the money without affecting the aid they get.

The basic approach that this reader proposes strikes me as a good idea. He and his wife will match any money that their grandchildren save toward the college bill. They also will match the money that the parents save, up to one-half the cost of tuition. That's a tremendous incentive. It doubles the value of every dollar that the family puts aside.

But the grandparents will greatly diminish the value of their wonderful gift if they add the money directly to the family's college savings accounts. That's because of the way the colleges figure out how much aid to give.

Student aid is based on a complicated federal formula. The formula computes the amount that a family is expected to pay, based on the eligible income and assets of parent and student. That "expected family contribution" is compared with the cost of the school that the student will attend. If the "expected contribution" comes to less than the cost of the school, the gap can be filled with financial aid.

Say, for example, that your child wants to attend a school that will cost $14,000 next year. If the formula says that the family can afford to pay $8,000, the aid package could be as large as $6,000. It probably would include a free grant and a student loan. But if the formula concludes that the family can afford to pay $11,000, the offer of aid won't exceed $3,000 -- and probably will come entirely in the form of loans. The more savings a family has, the less aid it normally will get.

The size of the aid package also depends on whose name is on the savings account.

If the savings are in the parent's name: The aid formula assumes that as much as 6 percent of that money will be used every year for college bills, says Betsy Hicks, coordinator of financial aid for Harvard University. For example, if you have $30,000 in savings this year, the college will expect you to spend $1,800 of it. (The school also evaluates your income and other assets, but I'm discussing only how much it expects from your savings account.)

If the savings are in the child's name: The aid formula assumes that this money was saved specifically for higher education. Every year, the child is expected to use as much as 35 percent of it. If, for example, the family's entire $30,000 were in the child's account, the school might expect the child to pay $10,500 in the first year alone. In each subsequent year, the school would expect 35 percent of the remainder.

Some families try to hide their money from the aid officer's laser eye. They do it by tucking their money into assets that some colleges don't count. For example, the form for federal aid doesn't ask how much you have in retirement accounts or in tax-deferred annuities. It also ignores the equity value of your house or farm. Some financial planners advise you to stash your savings in these "tuition shelters," to make yourself look poorer than you really are.

I think it's unethical to take that approach. Parents who have money, but hide it, should not get as much financial aid as parents who earn less. Many schools agree. They may look at the value of homes and other assets when awarding student aid from their private cache of funds.

Grandparents, however, are another matter. Colleges don't expect them to pony up for their grandchildren's education. So I think it's fair for them to keep their money out of sight.

A grandparent who will contribute to a child's education shouldn't add that money to the child's account. Instead, it should stay in an account in the grandparent's name. That way, it won't be counted when the college doles out financial aid.

Usually, the college's aid package won't be enough. At that point, the grandparents can ride to the rescue.

Tax note: As long as the grandparents keep the money, they will owe income taxes on the earnings every year. The tax bill might be less if the money is moved to the child's account. Every family should balance the tax bill against the chance of getting financial aid, before deciding where the college savings should build.

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