The goal of Ohio couple Laura and Andy Bean is for each generation to become more educated than the previous. Finances should never be an excuse for not going to college, Andy Bean says.
In addition to saving for college for their own three children, the couple is saving for three nieces and one nephew with Ohio's CollegeAdvantage 529 plans, tax-advantaged investment accounts for higher education.
There are many reasons why an aunt or uncle would sock away money for nieces and nephews.
[Learn ways to save on college costs.]
1. To get state and federal tax benefits: Aunts and uncles who might normally give cash or gift cards to their nieces or nephews are missing out on tax savings, says Rob McCord, Pennsylvania state treasurer.
It's a myth that only the 529 plan owner, normally a parent, gets to reap the tax benefits, he says. It's always the contributor who gets the break, including on gifts made through a program like Ugift, which Pennsylvania uses.
"It's not dependent on them owning the account," says Paul Paeglis, executive director of the Ohio Tuition Trust Authority. "It's dependent on them making the contribution to the account."
The Bean family received $7,300 back on their taxes over 13 years of 529 plan contributions. People who didn't claim their 529 plan contributions on their state tax return in the past can amend state income tax returns in order to get the tax benefits, McCord says.
In Pennsylvania, taxpayers can amend state returns for three years; other states have different rules. Taxpayers should check with their home states about the time limit for filing an amendment.
2. To share entrepreneurial windfalls: "I travel all around Pennsylvania," says McCord. "I hear aunts and uncles often say I'm more economically secure than my sister and brother. I want to pay for half of their children's education – in some cases, all of their college education."
Many have enjoyed windfalls, McCord says. In the entrepreneurial world, when someone receives a lot of money as part of an exit package they often want to take a percentage and pay off someone's debts, he says.
In some cases, it's to pay for a niece or nephew's college expenses. Often the aunt or uncle will choose a prepaid plan where the tuition is guaranteed, so he or she knows college tuition is covered.
[Learn how to pay cash for college.]
3. To give a lasting gift: Aunts and uncles are learning more about their siblings via Facebook, says McCord, and they see new toys featured in photographs with the child. Some relatives feel they need $50 for college more than a new toy.
The Beans figure their siblings have enough money to spend on everything their children need for play, so the couple chips in for college instead.
"You're giving a meaningful, lasting gift of reducing college debt, instead of a toy that provides a few hours of enjoyment or minutes of enjoyment" and is never used again, Paeglis says.
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4. To control how savings are used: Aunts and uncles can own the account for their nieces and nephews to maintain control of the funds they're providing, Paeglis says.
Bean and his wife have control because of the conditions set on the account. For instance, the couple explains to their nieces that a quarter of the funds is for their first year of college. "We expect you to get a four-year degree," Andy Bean says they tell their nieces.
"The goal of college is really a family goal for that youngster," says Paeglis. "All of the savings coming from multiple individuals helps make college affordable."
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