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Author: reallyalldone Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 4360  
Subject: College for grandchild Date: 9/14/2013 11:48 AM
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I really appreciate JAF031 starting the thread on the tax board - it is very timely for me. It sound like a 529 isn't the good deal it once was. I can't look 17 years in the future so it's getting to be a tough call on this one.

Unless I can & would foot the entire bill for college for a grandchild, I do need to be cognizant of the financial aid issues. I'm beginning to wonder about various strategies. I have no reason to think I won't live to my 80s(but those of you who know me know that I know there can be surprises). I can see making any grandchildren the beneficiary of a segregated investment account with a custodian/trustee.

Other thoughts ?
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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4193 of 4360
Subject: Re: College for grandchild Date: 9/14/2013 2:27 PM
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Hi RAD,

It sound like a 529 isn't the good deal it once was.
I'm not sure they were *ever* all that much of a good deal.

Unless I can & would foot the entire bill for college for a grandchild, I do need to be cognizant of the financial aid issues.
Absolutely! Any advanced education plan needs to work in such a way it is sure not to eliminate options. Unfortunately, virtually all the traditional and qualified plans do exactly that; eliminate options for various aid, subsidies, and even scholarships.

I'm beginning to wonder about various strategies. I have no reason to think I won't live to my 80s(but those of you who know me know that I know there can be surprises). I can see making any grandchildren the beneficiary of a segregated investment account with a custodian/trustee.
Other thoughts ?

The strategy of structuring indexed universal life contracts for education plans is often superior. It can be owned outside the FAFSA calculations, keeping all potential alternative funding sources available... it grows tax-deferred... it's spendable tax-free... but one thing better than all the traditional plans is that there is no specific usage requirement! You won't be penalized for using it at a non-traditional educational resource, or even for no educational purpose at all.

It outperforms traditional mutual fund and index buy & hold strategies in virtually all cases, and that's ignoring the fact it has a life insurance death benefit that comes along for the ride with the financial performance.

Of course, there is a 'catch'... although it outperforms the financial alternatives on a risk-weighted basis, not everyone can get it. Someone (doesn't have to be the person putting up the money necessarily... but someone appropriately related with insurable interest) must be pass insurable underwriting.

BTW, when its designed for financial performance, it doesn't matter if its written on the life of a single, healthy young person, or a cross-underwritten pair of lives of older seniors (even ex-smokers.) The actual financial performance comes out roughly the same, the only difference is how much minimum death benefit comes along (by IRS mandate) with the amount of money getting built into the performance.

Something to look into.
Dave Donhoff
Leverage Planner

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Author: reallyalldone Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4194 of 4360
Subject: Re: College for grandchild Date: 9/14/2013 2:40 PM
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Something to look into.

No, no it's not.

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Author: synchronicityII Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4195 of 4360
Subject: Re: College for grandchild Date: 9/15/2013 7:43 PM
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Dave, I'm assuming you're discussing the possibility of rad personally owning an Indexed UL policy, preferably structured to maximize cash value, and at some point in the future taking out loans/surrenders to basis and using those withdrawn funds to pay for a grandchild's education. Is this correct?

-synchronicity

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4196 of 4360
Subject: Re: College for grandchild Date: 9/15/2013 10:27 PM
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Hi synchronicity,

Dave, I'm assuming you're discussing the possibility of rad personally owning an Indexed UL policy, preferably structured to maximize cash value, and at some point in the future taking out loans/surrenders to basis and using those withdrawn funds to pay for a grandchild's education. Is this correct?

Yes, with an asterisk. Whether she personally owned it, or controlled it in an ILIT, would be a matter of further detail. It used to be that holding such accounts in an ILIT killed the tax-advantaged liquidity features, but that is no longer the case, so in terms of asset protection you can now often eat your cake *and* have it too.

Dave Donhoff
Leverage Planner

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Author: synchronicityII Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4197 of 4360
Subject: Re: College for grandchild Date: 9/15/2013 11:24 PM
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It used to be that holding such accounts in an ILIT killed the tax-advantaged liquidity features, but that is no longer the case, so in terms of asset protection you can now often eat your cake *and* have it too.

I usually see ILITs used for estate planning rather than asset protection, but that's neither here nor there. However, I'd be thinking that an ILIT that benefits the grandkids could result in the trust assets being included in the various financial aid formulas for the beneficiary (ies). I don't know about FAFSA offhand but do know that different colleges use slightly different methodologies. I suspect rad knows far more about this aspect than either you or I.

-synchronicity

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Author: buzman Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4198 of 4360
Subject: Re: College for grandchild Date: 9/16/2013 9:21 PM
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After you calculate the cost of the ILIT it's hard to imagine how a 529 plan would not be a better option.

If you have several grandchildren the cost of individual ILITs multiplies.

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Author: synchronicityII Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4199 of 4360
Subject: Re: College for grandchild Date: 9/16/2013 9:46 PM
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If you have several grandchildren the cost of individual ILITs multiplies.

You could have one ILIT benefiting multiple beneficiaries. That's the most common way to structure things. I think ILITs usually cost $2,000 to $2,500 to draft and set up and all. But again, ILITs are generally estate planning tools (as I'm sure you know, but I'm just saying) with "paying for college education" as just one of many benefits. And the ILITs I've seen do not benefit the grantor. (OK, there's kindasorta an exception to if it has spousal access provisions, but that's getting way off track from the question asked).

IULs, or any other form of life insurance policy structured to be "cash heavy so the insured can withdraw from them at a later time, are really not much different from any other investment vehicle, with their own unique set of advantages and disadvantages.

-synchronicity

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Author: buzman Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4200 of 4360
Subject: Re: College for grandchild Date: 9/16/2013 10:31 PM
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Good point but $2500 is a big hurdle to clear.

OTOH, if you are selling Universal Life Insurance then maybe it makes sense.

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Author: synchronicityII Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4201 of 4360
Subject: Re: College for grandchild Date: 9/16/2013 10:59 PM
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Good point but $2500 is a big hurdle to clear.

I'm assuming someone purchasing $1M minimum DB, likely more, and clients worth several mil minimum and up. Again, that's discussing ILITs generally, which is far afield of rad's question and Dave's answer.

All the more reason why an ILIT for college funding as a primary purpose is not something that makes much sense to me, BWDIK?

-synchronicity

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4202 of 4360
Subject: Re: College for grandchild Date: 9/16/2013 11:38 PM
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All the more reason why an ILIT for college funding as a primary purpose is not something that makes much sense to me, BWDIK?
The only reason I know of anyone using an ILIT for tuition planning is to get it out of the control of someone who expects they may be currently or in the future included in disqualifying aid calculations.

I certainly get nothing out of suggesting them, that's a lawyer thing... and defending them against those who may want to breach them is far beyond my paygrade.
Dave Donhoff
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Author: synchronicityII Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4203 of 4360
Subject: Re: College for grandchild Date: 9/17/2013 12:19 AM
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So, getting back to the main question, you are suggesting an IUL as a cash accumulation vehicle for the owner/insured, which could be used for any purpose desired, including "paying college costs for children/grandchildren/whoever", correct?

-synchronicity

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4204 of 4360
Subject: Re: College for grandchild Date: 9/17/2013 1:31 AM
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you are suggesting an IUL as a cash accumulation vehicle for the owner/insured, which could be used for any purpose desired, including "paying college costs for children/grandchildren/whoever", correct?
Yep, its one of the strongest performing strategies (with the least/none usage constraints) for this purpose.

Dave Donhoff
Leverage Planner

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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4205 of 4360
Subject: Re: College for grandchild Date: 9/17/2013 12:43 PM
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Dwdonhoff:

<<<you are suggesting an IUL as a cash accumulation vehicle for the owner/insured, which could be used for any purpose desired, including "paying college costs for children/grandchildren/whoever", correct?>>>

"Yep, its one of the strongest performing strategies (with the least/none usage constraints) for this purpose."

Any funds paid by the grandparent will be reported on the following year FAFSA as untaxed income, and generate an EFC equal to 50% of such amount.

See question 44. j.

44. Student’s 2012 Untaxed Income (Enter the combined amounts for you and your spouse.)

. . .

j. Money received, or paid on your behalf (e.g., bills), not reported elsewhere on this form.

http://www.fafsa.ed.gov/fotw1314/pdf/PdfFafsa13-14.pdf

Regards, JAFO

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4206 of 4360
Subject: Re: College for grandchild Date: 9/17/2013 1:15 PM
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Hi JAFO,

See question 44. j.
44. Student’s 2012 Untaxed Income (Enter the combined amounts for you and your spouse.)
. . .
j. Money received, or paid on your behalf (e.g., bills), not reported elsewhere on this form.
http://www.fafsa.ed.gov/fotw1314/pdf/PdfFafsa13-14.pdf


Interesting... but at a cursory scan I don't see anywhere to enter debt. I wonder what the proper FAFSA treatment is for loans taken for expenses, and if those are disqualifying factors for other aid.

I have affiliates who eat, drink & poop on this issue... I'll pop off an inquiry. (Or, if you know the obvious that I am missing, bring it, please.)

Dave Donhoff
Leverage Planner

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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4207 of 4360
Subject: Re: College for grandchild Date: 9/17/2013 5:34 PM
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Dwdonhoff: "Hi JAFO,"

Howdy.

JAFO: <<<See question 44. j.
44. Student’s 2012 Untaxed Income (Enter the combined amounts for you and your spouse.)
. . .
j. Money received, or paid on your behalf (e.g., bills), not reported elsewhere on this form.
http://www.fafsa.ed.gov/fotw1314/pdf/PdfFafsa13-14.pdf >>>

"Interesting... but at a cursory scan I don't see anywhere to enter debt. I wonder what the proper FAFSA treatment is for loans taken for expenses, and if those are disqualifying factors for other aid.

I am no expert, but I believe that loans are not reported.

Before you suggest loans from grandparent to grandchild, please remember tax rules regarding applicable interest rate and income to lender/grandparent and that foregiveness of interest due would be non-taxable income reported on the next year's FAFSA.

Regards, JAFO

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Author: synchronicityII Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4208 of 4360
Subject: Re: College for grandchild Date: 9/17/2013 6:18 PM
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Before you suggest loans from grandparent to grandchild, please remember tax rules regarding applicable interest rate

Make it a short term loan. AFR on that sucker is only about 25 basis points (wait, lemme check...hey, spot on, 25 basis points! http://www.irs.gov/pub/irs-drop/rr%20-13-18.pdf )

Alternatively as a demand loan. They're only 22 basis points for now.

Forgiveness of interest on that would be pretty minimal. I mean, twenty-two bucks on $10K of loan. The grandparents could "loan" $200K to pay for all of college and annual interest would be only $440. Interesting (no pun intended). I wonder what happens if they forgive the principal shortly after the grandchild graduates.

-synchronicity, yeah it would be a lifetime gift for amounts forgiven above the 14K annual exclusion per person, but with the lifetime exemption at $5.25 million per person they might not care.

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Author: reallyalldone Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4209 of 4360
Subject: Re: College for grandchild Date: 9/17/2013 10:01 PM
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Hope you guys enjoy the bantering because so far none of this has been helpful.

Truly sorry I asked.

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4210 of 4360
Subject: Re: College for grandchild Date: 9/18/2013 12:10 AM
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RAD,

So results what do you want that you are not getting?
What financial features do you want?
Why is a 529 plan not what you want?

You asked for "other thoughts" and you've got them. Don't go sour grapes on us if you don't like the responses & subsequent conversations to the wide open request... modify what *specifically* you want.

Dave

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Author: reallyalldone Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4211 of 4360
Subject: Re: College for grandchild Date: 9/18/2013 9:37 AM
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I didn't get other thoughts - I got a sales pitch.

In thinking about it, I rescind the request. I can deal with it when the time comes if I am alive. If I am not, his parents will be able to pay the college bills without a concern.

Wow, "sour grapes." Way to woo.

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Author: LOTROQueen Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4212 of 4360
Subject: Re: College for grandchild Date: 9/18/2013 3:00 PM
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Other thoughts ?

If the parents don't already have a Coverdell Education Savings Account fully funded, what about one of those?

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Author: reallyalldone Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4213 of 4360
Subject: Re: College for grandchild Date: 9/18/2013 3:19 PM
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If the parents don't already have a Coverdell Education Savings Account fully funded, what about one of those?

It has the same impact on the FAFSA - distributions are reported as untaxed income on the following year's FAFSA.

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Author: buzman Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4214 of 4360
Subject: Re: College for grandchild Date: 9/18/2013 9:15 PM
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Sounds to me like you want to save for college and maximize your chances for financial aid. Guess what that's complicated.

You are missing the most important aspect of a 529 plan.

When you open one you are telling a kid you expect them to go to college.

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Author: reallyalldone Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4215 of 4360
Subject: Re: College for grandchild Date: 9/18/2013 10:44 PM
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Guess what -I spent my life working in higher education and yes, we expect him to go to college.

What I know is that there's not much out there I don't know about this.

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Author: TMFHockeypop Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4216 of 4360
Subject: Re: College for grandchild Date: 9/19/2013 8:05 AM
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Reallyalldone:

Sorry I haven't seen this thread and I may be going over some of it.

1. You probably know the links that the CO 529 plan is better than most because it eliminates the state tax for you AND uses Vanguard (IMO). I didn't see the thread on the tax board.

2. What I needed to consider when I was doing this for my daughter was to forget, at times, the FAFSA form. What you are doing is trying to eliminate that debt as an impediment for their future. Your contributions, and their parents, do possibly reduce the loans, but isn't that a good thing? Performance scholarships are always available.

3. In that vein, I'd considered cash flow as far as college. For instance, your ability to gift for college can come much closer to college, if they choose it. You can reduce the loan process IF you and their parents understand that a gift is planned. This involves a discussion and your own planning, but so does the 529 plan. In addition, I had one child for whom college wasn't possible. I used some of those funds to help with his own business.

4. For instance, my as yet unnamed grandaughter has caused me to rethink this for DW and me. Recently I bought shares in an educational stock (with no dividend) and mentally DW and I agree that belongs to Roo (Kanga and Roo :-). We've got similar options with Berkshire or perhaps MKL, and the costs of one buy and sale vs 15% cap gains cost is really low if amortised over 18 years.

5. Should DW and I take the dirt nap before any unnamed and yet unborn grandchildren then a trust takes hold through our Will.

6. IMO there probably are more options to avoid tax. Not sure about Colorado, but there are also pre-paid tuition options and others. I'm not sure I like those any better.

Sorry if you've been over this. Good luck and let us know what you decide. I've got grandchildren to add to my plan!!!!! YEAH!!!!

Bob
RYR Home Fool

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Author: Trini209 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4217 of 4360
Subject: Re: College for grandchild Date: 9/19/2013 8:54 AM
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I have 7 grandchildren, the oldest almost 20 and the youngest just turned 5, so I've had a loooong time to figure out a plan for helping them out with their education costs.

Indulge me for a minute while I relate this anecdote about the one who just entered his first year in college: he had already received his financial aid package from the school he's attending, when just before graduation day from high school he received a bunch of awards and scholarships, including 3 cash awards, as I recall one for $200, one for $100, and one for $500. Part of the rules were that he had to report these amounts to his college, who immediately reduced their grant by the $800 he'd received! So not a penny went to him for books and other expenses he'll incur. Perhaps if the three organizations who gave him the awards had known this, they would have given their awards to some kid who might have actually benefitted.

Here's what I now think. Financial aid is based on the income and resources of the child involved and that of his parents, not on his grandparents. If the parents can finance his education, let them. If financial aid is necessary, it'll come in the form of grants, loans, and work/study. Gifts, etc. from a grandparent will reduce the amount of financial aid the student qualifies for. I plan to let each grandchild accumulate whatever loans he has to (my 7 grandkids are the children of my 3 children, who have very different incomes and savings, so the amounts may vary greatly). Upon their graduation, I plan to pay off their loans. In case I die before their graduation, I will open up accounts in my name that have POD capability, one for each child with loans, naming them beneficiary, and keep an amount equal to their loans set aside for this purpose. And if I should die before the last of them graduates (after all, I'm 76) then the amount that my 3 kids will inherit will enable them to finance the kids' education without my participation.

Trini

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Author: TheBreeze Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 4238 of 4360
Subject: Re: College for grandchild Date: 1/16/2014 6:36 AM
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I plan to let each grandchild accumulate whatever loans he has to... Upon their graduation, I plan to pay off their loans.

Sorry about being late to the party, but this is almost what my parents did for my kids. There were bills that they covered by giving the money to me to pay on the kids' behalf, and I kept track of each loan. After kid #1 paid off all his Federal loans (14 months!), we all settled up with what I'd borrowed from my parents. Their "payback"--he had to put the amount borrowed in a 401k/403b/IRA. So, essentially they *gave* him the money, which he is putting into tax advantaged investments over time.

He's the only one to finish college so far. The process is continuing with the next ones. (And, they're under no obligation to make the same deal with subsequent grandkids.)

Also, on 529s, my state gives a 20% credit up on money put into a 529. So, I put in $5000 every year and get $1000 credit on my state taxes. Each year I pay between $3K and $7K of college expenses from it. When Son 1 graduated, I changed the beneficiary to the next kid.

As a grandparent, you can decide what you want to spend for each child's college (or trade school? or apprenticeship?). If you wait until the last semester (or later), your gift amount doesn't affect their FAFSA data.

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