Help pay for college without risking student's aid

WASHINGTON, D.C. (11/9/09)--With the gap between the average annual cost of attending a four-year public university ($14,333) and the average annual amount of financial aid ($8,896) topping $5,400 a year, help from family members is becoming increasingly important. In fact, 65% of grandparents told the College Savings Foundation that they intend to chip in for their grandchildren's higher education (CNNMoney.com Nov. 2).

But as welcome as free money from a relative may be, unless you make the gift properly, it actually can reduce a student's financial aid.

A student must report assets to the government through the Free Application for Federal Student Aid (FAFSA). If money a student receives is considered income, it has the unfortunate effect of reducing the aid award by up to 50 cents on the dollar.

Here are three alternatives from the Credit Union National Association for improving the amount of financial assistance you can deliver without negating the amount of financial aid:

• Good: Give money to the parent. This increases parental assets but, because of the way the aid calculation works, such a gift has a much smaller negative effect on the student's financial aid--less than 6%. Of course, be sure not to exceed the annual gift-tax exclusion, which is $13,000 for 2009.

• Better: Participate in a 529 plan. Depending on the rules in your state, these International Revenue Service-authorized plans allow you to contribute up to $13,000 a year or a lump sum of $65,000. As long as the plan is in your name, its balance doesn't become an asset to the student until distributions start flowing. The 529 plans come in two flavors--a savings plan that operates like an individual retirement account (IRA) or 401(k) investment account or a prepaid tuition fund. Unfortunately, recent stock market declines have squeezed prepaid funds, forcing some states to reject new enrollees and others to raise fees. In either case, it's smart to consult with your financial adviser about 529 plan setup details.

• Best: Help the new graduate pay off student loans to the tune of the annual gift-tax exclusion. This won't help the student avoid debt, but neither will it harm aid eligibility. And as an added bonus, it's a welcome reward for successfully earning a college degree.

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