529-plan

Grandparents stepping up to help fund grandkids' education

March 18, 2013 at 8:56 AM ET

Go to a workshop on how to pay for your kids’ college education, and you’ll see more gray hair in the audience than in years past.

It’s not because parents of college-bound students are older — it’s because more grandparents are there, taking notes.

By all accounts, Grandma and Grandpa are more active than ever in funding their grandkids’ educations, including sinking money into 529 college savings plans.

A 529 plan is designed to help families set aside money now to pay for future college costs. Such savings plans are named after Section 529 of the Internal Revenue Code, which created these types of plans in 1996. Typically, 529 plans are operated by a state or educational institution, and most states have at least one 529 plan.

Michael Parker, executive director of the state agency that administers Oregon’s 529 plan, said attending workshops is one way grandparents show what a big deal it is to them that their grandkids get a degree.

“They’re very interested in making sure that their kids, the parents, know this is hugely important, that the grandkids be financially prepared to get a college education,” he said.

By the end of 2012, American families had a record $190.7 billion socked away in 529 college savings plans, according to a March 13 report from the College Savings Plans Network. More than 11 million of the accounts have been started since they were first offered 17 years ago.

Parents still contribute the lion’s share of funds invested in 529 accounts. But contributions from grandparents now make up about 9.5 percent of the total, according to the most recent data from the Financial Research Corp, which tracks 529 investments. It was a substantial enough increase that FRC started keeping track of which types of relatives were funding 529s for the first time last year.

Source: Financial Research Corp., a Division of Strategic Insight /

The trend isn’t lost on financial services companies, and many are starting to market 529 investment opportunities directly to grandparents as a result.

In February, AARP and financial services provider TIAA-CREF launched just such a campaign. It includes a section on the AARP website that members can use to look up college savings plans in all 50 states and get help with investment options and tax questions.

“Our goal is to elevate awareness in how 529 plans can help people save for college, and encourage more people, including grandparents, to save,” said Chad Peterson, a TIAA-CREF spokesman.

Franklin Templeton Investments, which administers New Jersey’s 10-year-old 529 plan, also is marketing to grandparents directly, through seminars and information on its website.

In some cases, grandparents are stepping in to help foot the bill because their adult children haven’t saved, got hit by the recession and have yet to recover, or are too tapped out paying current bills and saving for their own retirement to stash much away for college expenses.

"In this economy, it’s much harder to save for college, so if grandparents give that nudge, or give some money, it’s helping their children do it," said Reyna Gobel, a college finance expert and author of the audiobook "How Smart Students Pay for School."

Depending on their own circumstances, grandparents might find it more beneficial either to set up 529 accounts for their grandkids or contribute to existing accounts created by parents of college-bound students. When grandparents create accounts, they maintain control over where funds are invested, and can take money out at any time without penalty, according to Parker, the Oregon 529 plan director.

Once funds are transferred to pay for tuition or books, the money is recognized as student income, which could affect how much financial aid the student receives the following year, he said.

Money that grandparents deposit into a 529 account set up by a student’s parents shows up as the parents’ assets on the student’s financial aid applications, which could adversely affect how much they receive in scholarships or grants.

Either way, tax law changes that took effect this year allow grandparents to put a maximum of $14,000 a year per grandchild into a 529 account. They can also make a one-time gift of five years’ worth of contributions per person. That means a married couple could conceivably give a lump sum of $140,000 to each grandchild once every five years.

Not all grandparents make such major contributions. At Franklin Templeton Investments, people can open 529 accounts with as little as $25. The firm encourages parents and grandparents to contribute on a regular basis. As a present for a birthday or holiday, it’s a gift that “makes more of an impact,” said Roger Michaud, senior vice president for Franklin Templeton Investments' North America advisory services division and current chair of the College Savings Foundation.

There’s some evidence that grandparents may be aiding their offspring’s offspring at their own expense. Sixty-two percent of grandparents report providing money or other financial support to grandkids within the past five years, according to a September 2012 MetLife survey of 1,008 U.S. grandparents ages 45 and older. Of that number, a third said they gave financial support even though it had a negative effect on their own financial security, according to the report.

It’s harder to determine to what extent grandparents are working longer to provide that financial assistance, said Kathleen Christensen, program director at the Alfred P. Sloan Foundation, which provides grants for research on aging and work. “We do know it’s happening, and I think it’s an important trend to recognize,” she said.

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