3 Tax-Smart Ways Grandparents Can Help Pay for College
With the all-in cost of some universities now nearing $100,000 a year,1 paying for higher education is increasingly a multigenerational family mission, with grandparents a critical piece of the puzzle.
"For many grandparents, helping with college costs is about more than money—it's a way to instill the importance of education and support the dreams of the next generation," says Chris Kawashima, CFP®, director of financial planning at the Schwab Center for Financial Research. "As it happens, it can also be a smart tax- and estate-planning move."
Here are three options—which you can use individually or in combination—for providing such support, including their potential tax advantages.
1. Direct tuition payments
Tuition payments made directly to an accredited institution don't count as gifts for tax purposes—meaning you can help cover tuition expenses without eating into your annual gift tax exclusion of $19,000 per recipient in 2025. "Plus, tuition payments no longer affect a student's federal financial aid eligibility," Chris says.
Although direct payments don't offer immediate tax benefits, they do allow you to remove a potentially sizable amount from your estate without tax consequences.
For example, if your grandchild's tuition is $40,000 per year for four years, making full payments directly to the college would remove $160,000 from your estate tax-free. If you and your spouse also each gift that grandchild $19,000 a year to help cover other expenses, you could transfer an additional $152,000 without taxes over four years.
2. 529 college savings plans
These college savings accounts have no annual contribution limits (though there are maximum account balance limits set by the state in which they're administered), and investment gains are tax-free if the money is used for qualified educational expenses.
Generally, contributions larger than the annual gift tax exclusion will count against your federal lifetime gift and estate tax exemption ($13.99 million in 2025). Fortunately, 529s offer something of a workaround: You can front-load the account with five years' worth of contributions in a single year, so long as you treat them as happening over five consecutive years for tax purposes. For example, a married couple could contribute up to $190,000 ($19,000 per spouse × 5) to any number of eligible 529s in 2025—though they cannot make additional contributions to those accounts for five years unless there is an increase in the annual exclusion amount.
"Contributions aren't federally tax-deductible, but some states offer tax credits or deductions for residents," Chris says.
What's more, if you have leftover funds after the beneficiary graduates, you potentially can roll up to $35,000 into a Roth IRA for the beneficiary without incurring the typical 10% penalty or income taxes for nonqualified withdrawals.
3. Custodial accounts
If your grandchild is still a minor, funding a custodial brokerage account can create a pot of money to pay costs 529 plans don't cover, such as transportation or other expenses that exceed the school's published cost of attendance. You can make an irrevocable gift of any amount to these accounts—including appreciated assets from your own portfolio—though anything above the annual gift exclusion may result in gift taxes.
These accounts do have some potential drawbacks:
- Earnings from the assets in excess of $2,700 in 2025 may trigger the kiddie tax, potentially exposing the funds to the parents' tax rate.
- Because the assets are considered the property of the student, federal financial aid calculations treat 20% of the funds as available to cover college costs, which could affect their financial aid eligibility.
- Control of the account transfers to your grandchild once they reach the age of majority—typically 18 or 21, depending on their state of residence—and they can use the funds as they wish.
Other considerations
Whichever funding methods you choose, be sure to discuss your plans with your wealth advisor, who can help you find a strategy that best aligns with your gifting, estate-planning, and tax goals.
1Jessica Dickler, "Costs at some colleges nearing $100,000 per year, but many families pay a lot less," cnbc.com, 04/03/2024.
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The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.
The information and content provided herein is general in nature and is for informational purposes only. It is not intended, and should not be construed, as a specific recommendation, individualized tax, legal, or investment advice. Tax laws are subject to change, either prospectively or retroactively. Where specific advice is necessary or appropriate, individuals should contact their own professional tax and investment advisors or other professionals (CPA, Financial Planner, Investment Manager) to help answer questions about specific situations or needs prior to taking any action based upon this information.
Investors should consider, before investing, whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available in such state's qualified tuition program.
The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.