Elizabeth O'Hara's goal for her grandchildren and great-grandchildren was for them to never have to borrow money to pay for college. While she couldn't afford to pay for everyone's education herself, she came up with an idea in the 1990s to make this possible: Start 529 plans, tax-advantaged investment accounts, for all her grandchildren. Then, nudge her children to contribute when they can. The nudges have worked.
So far, she says has played a part in paying for the college education of seven kids. None of her grandchildren have taken out a single student loan. Recently, she started 529 accounts for both of her great-grandchildren.
O'Hara, who resides in Georgia, and Mark Berg, an Illinois-based certified financial planner, offer grandparents the following advice on contributing to their grandchildren's 529 plans.
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1. Create your own matching contributions program: A matching contributions program is an informal offer by a grandparent to contribute a certain amount to their grandchildren's 529 plan if the parents do the same. The amount could be any denomination, but it's important that contributions are affordable to both parties, Berg says.
"You don't want to say, 'If you do $500 per month, I'll do $500 per month,'" he notes. Instead, start out more modestly or sweeten the offer with a 2 to 1 match. For instance, a grandparent could offer to contribute $100 a month if the child's parent agrees to contribute $50 per month.
2. Commit—and recommit—to specific time periods: Grandparents shouldn't risk their own retirement by committing to the same monthly contribution from the time a child is born until they reach 18 or beyond, Berg says.
"Grandparents should decide the dollar amount of 529 contributions annually, so they're not committing for 20 years," he says. The timing and amounts of O'Hara's contributions have changed every year, but she always makes a contribution instead of giving a gift for a special occasion.
Her great-grandchildren have enough toys and won't notice that there's one less, she says, so she'd rather spend her money on their future.
[Learn more about providing financial gifts to students.]
3. Give to grandchildren equally: Parents always try to give to their children equally, and this doesn't stop when a child grows up and has his or her own family, Berg says. But grandparents contributing to 529 plans must decide what to do if one child has three kids and the other child has no kids.
"The way I address it is this is not a gift to your adult child; this is a gift for the grandchild," Berg says. Give equally to each grandchild, he suggests.
It may be tempting to start an account for the other child to prepare for when he or she eventually has children, but this can be tricky. Doing so may add pressure on the child to have kids, or the funds saved may go unused, Berg notes. In most cases, he says, grandparents, if asked, should offer to give equally based on what they can afford.
[Find out how to ask for donations to kids' college funds.]
4. Lead by example: Sometimes a matching offer isn't needed to give parents a nudge. When O'Hara opened the first two 529 plan accounts for her eldest grandchildren, her son didn't contribute any money for a year. However, she sent him quarterly earnings statements and showed him the state tax savings she enjoyed by contributing to a 529 plan.
By the time her granddaughter graduated, her son had matched her contributions with $2 for every $1 she contributed. One of her proudest moments was watching her granddaughter graduate summa cum laude—and debt free.
Reyna Gobel, frequently quoted as an expert on student loans and college costs, is the author of "Graduation Debt: How To Manage Student Loans And Live Your Life" and "How Smart Students Pay for School: The Best Way to Save for College, Get the Right Loans, and Repay Debt." She has appeared on PBS's Nightly Business Report and speaks regularly at CollegeWeekLive.