Grandparents race to the rescue of college funds

NEW YORK - In an era of stagnant wages and rising prices, Americans are expected not only to pay the daily bills and save millions for retirement, but also put away enough for college for their kids.

The only problem is that most people can't afford to save simultaneously on so many fronts.

So who is coming to the rescue? Grandparents such as Maureen Reiter.

Reiter, a retired pharmacist from Kansas City, Missouri, has four grandkids, ages four and under. Reiter and her husband are already contributing to 529 college-savings plans for every single one of them.

"I see a lot of grandparents doing whatever they can to help their grandkids," says the 61-year-old. "And a 529 plan is an ideal way to do it."

Indeed, according to Boston-based financial research firm Strategic Insight, more and more grandparents are doing exactly that. The firm's 2014 529 Consumer Survey found that 13.1 percent of 529 accounts are now owned by grandparents. That is up from 9.5 percent in 2012, meaning generous grandparents have ballooned by over a third in just two years. And that doesn't even include other types of giving, such as contributing to 529 accounts that owned by the child's parents.

Mutual-fund firm Vanguard Group tells Reuters that roughly 17 percent of the 529 accounts it manages are owned by grandparents.

"In the old days, grandparents used to buy Treasury bonds, like I used to get on my birthdays as a kid," says Paul Curley, director of college savings research for Strategic Insight. "Now they are contributing to 529s."

This may be a natural expression of the fact that Baby Boomers hold much of the nation's wealth. With a massive cohort of roughly 76 million members, some already at the tail end of long careers, many have accumulated enough assets to be in a financial position to help.

Meanwhile, their grandkids are facing whopping price tags for higher education. The average annual cost of a private, four-year college has now surpassed $30,000, according to The College Board - and that is for tuition and fees alone.

"I think we're going to see more and more grandparents helping out," says Gerald Cannizzaro, a financial planner in Reston, Virginia. As a granddad of two himself, Cannizzaro set up 529 plans for both within months of their births. "This generation of parents is not doing quite as well as previous generations, and jobs are so hard to find."

With this growing trend, though, some complex tax, financial-aid, and emotional issues emerge. Will grandparents' generosity affect the grandkids' ability to qualify for federal student aid? Who enjoys the tax-benefits of 529-plan contributions, exactly? And might the mixing of money and family spark some unintended drama?

In short, it's not enough to be generous. You also have to be smart about your generosity. Some advice from the experts:

THINK ABOUT THE FINANCIAL-AID IMPLICATIONS

The more assets available to a student, the higher the expected family contribution, which results in less federal financial aid. While a grandparent-owned 529 plan is not among the assets you have to list on the Free Application for Federal Student Aid (FAFSA), distributions from the plan are considered income during that year, says Andrea Feirstein, a 529-plan expert and head of Manhattan's AKF Consulting. And that could affect aid granted for the following year.

The way to structure a grandparent's 529 is to set it up so that it's the money used in the final year of a child's higher education, Feirstein says.

"That way, it has little impact on FAFSA analysis, and you have managed to keep it out of available assets," she notes.

CONSIDER OTHER WAYS TO CONTRIBUTE

A grandparent-owned 529 is far from the only option you have to help out the grandkids. You can simply direct cash into an existing parent-owned account, since almost every 529 plan accepts third-party contributions.

The process is simple: Get a contribution form from the 529-plan provider, fill in basic information such as account number and the names of the account owner and beneficiary, and send in a check.

Just keep in mind that third-party contributions may not be eligible for tax deductions, which can be substantial. It depends on the particular state plan. Check out a full list of potential tax benefits (http://www.finaid.org/savings/state529deductions.phtml).

And don't forget popular site Upromise from Sallie Mae (http://Upromise.com), where users accumulate rewards for purchases at participating businesses - money that can then be funneled into college savings. Users have earned more than $850 million towards college costs so far, the site boasts.

START SMALL, AND STAY CONSISTENT

When your first grandkid comes along, you are no doubt overwhelmed with love and pride. But as much as you want to lavish huge financial help on the first one, remember this: Others are likely on the way.

Maureen Reiter and her husband start off the grandkids with $1,000 in their 529s on their first birthdays, then $200 a month for two years, dropping down to $50 a month after that.

"You should have a plan, and start by assuming the maximum amount of grandchildren you might have," says Reiter. "If you start too high, and then have five or six grandkids, my goodness, that could become a big financial burden."