Grandparents Can Help Fatten Thin 529 Accounts, Study Suggests

Hartford says scholarships and grants may fall far short of what grandparents expect in covering college costs. Its study found 60% of grandparents think financial aid is the most likely way their grandchildren will pay for college. Moreover, 29% have not started saving because they believe their grandchildren may receive scholarship funds.

In fact, scholarships and grants cover only 15% of the higher education price tag, according to a recent poll sponsored by Sallie Mae. Hartford also points to a 2007 study by the College Board which found that between 1997 and 2007, total federal aid fell from 66% to 58% of the total funds used to finance higher education.

The tax advantages of 529 plans appeal to many grandparents. Contributions may be deductible for state income taxes when purchased by residents of that state. In addition, investments in the plan will grow tax-deferred, while funds taken out of a 529 plan for qualified expenses are free of federal income tax.

Grandparents who open their own 529 plan accounts to benefit a grandchild can decide how contributions are invested and when withdrawals are made. In fact, 59% of grandparents who already have a 529 plan opened it because they could maintain control over the investment, the Hartford study found. Furthermore, if the grandchild decides not to go to college, the owner can change the account beneficiary to any of the current beneficiary’s eligible family members, including other grandchildren, without triggering federal income taxes.

To foster grandparent contributions, Hartford advises making it as easy as possible. Many state 529 college saving plans offer gift coupons or special investment forms so benefactors can contribute readily whenever they want, within the plan’s contribution limits. Automated contributions from the grandparents’ bank accounts or donations as birthday presents or for other milestones add up over time.

Jeff Coghan, director of 529 programs at Hartford, says it is vital to make sure grandparents know how such plans can help them leave a lasting legacy for their grandchildren and for those planning to send their own children to college.

Conducted on the Web by Praxis Research Partners, Monroe, Conn., the Hartford surveyed over 600 grandparents with at least 1 grandchild under age 15 and who work with a financial advisor.