Not long after Monique Showalter had her two sons some 40 years ago, her mother set the tone for how to save for the college education of all her grandchildren. “She told us, ‘I’ll pay the college tuition and you guys pay for everything else,’” Showalter says. “We still had hefty college bills for room and board, and all, but it really helped.
“That set a precedent, and I thought ‘I’m going to do that for my grandchildren,’” she adds. Today, with five grandchildren aged from 12 to 3 years old, and a sixth on the way, she has been socking away about $10,000 a year per child.
She’s not alone. Baby boomers are the most well-heeled group of Americans, holding $82.4 trillion in wealth, according to the Federal Reserve. With that kind of moolah, many are choosing to transfer some of that wealth to their grandchildren while they’re still alive and kicking, according to Susan Hirshman, director of Wealth Management for Schwab Wealth Advisory and Schwab Center for Financial Research.
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“Years ago, all anyone wanted to talk about was, ‘how much money can I make,’” she says. “Now the conversation is more about, what do I want to use my wealth for, and we’re talking a lot about their legacy while they’re still alive and seeing the benefits.”
Education for grandchildren has become a priority, she says. There are a handful of ways grandparents can help foot the bill totally or partially to fund a grandchild’s education, but financial advisers are quick to warn: Don’t drain your retirement fund to do it.
“You can finance education. You can’t finance retirement,” Hirshman says.
1. Let’s get started
Rule No. 1: You have to make absolutely sure you are saving correctly for yourself first, accounting for your lifestyle and future wants and needs, as well as having an emergency fund in place and reserves to cover medical and other unexpected needs. No one wants to outlive their finances.
2. The talk
Rule No. 2 is communication with the parents, according to Hirshman. “You need to understand what their plans are and how your plans and their plans meet,” she says. “Maybe parents don’t want you to do it or have other ideas.” Know too that some steps you might take to help fund college could affect financial aid eligibility for parents or the grandchild.
3. Should you just write a check?
Yes, that is an option. But it’s not the smartest choice when it comes to taxes. If you don’t care about tax deferrals and incentives, remember that the IRS has gift-giving rules. You can bypass those exemptions by writing the check directly to the school, according to the IRS, but that applies only to tuition.
4. The 529 plan
Let’s turn to tax-free options. The most common savings approach is the 529 Plan. These accounts allow you to add as much as $19,000 each year, equal to your full annual gift exclusion, without being liable for capital gains taxes when withdrawing for qualified education expenses.
Contribution limits and deductions vary from state to state, and you’re allowed to have 529 plans in more than one state. The IRS won’t be involved unless you exceed the annual gift allowance. There are no federal tax deductions, but many states offer deductions for in-state plans.
Besides tuition, those funds can be used for fees, books, computers and supplies, as well as tutoring, studying abroad or post-secondary education and more. And they’re transferable to another beneficiary, such as a younger sister or cousin.
5. Custodial accounts
This is another savings account path with terrific pros and some serious cons to opening them for children. Under the Uniform Gifts to Minors Act (UGMA) and the Uniform Transfer to Minors Act (UTMA), these accounts allow anyone to contribute cash, stocks, bonds, CDs and several other securities with no limits to the total funds held in the qualified education expenses-only account.
Grandparents — actually anyone — can contribute as much as the $19,000 annual gift tax exclusion per child, without encountering the attorney fees and other associated costs tied to trusts. But these are taxable investment accounts and the grandparent is the custodian of the account until the child reaches adulthood. The assets then transfer to the beneficiary, who can use them however they wish. College? Maybe not.
“We’ve all heard the story of the kid saying, ‘I know you wanted me to go to college, but I’m going on a motorcycle trip across Africa instead,’” Hirshman says.
6. Coverdell accounts
The Coverdell Education Savings Account is much like a 529 plan, but with income and contribution limits that might offer a good starting point for those with lower modified adjusted gross incomes. In 2025, those were $110,000 for single filers, and $220,000 for married couples.
Unlike 529s, Coverdell contributions cannot exceed $2,000 per beneficiary per year, according to the IRS. While two sets of grandparents — or anyone — may open separate accounts for the same child under age 18, the total annual contribution is still capped at $2,000. Also, when the grandchild turns 18, the account and distributions are theirs.
Coverdell accounts can be combined with other education savings accounts, or can be rolled over into a 529 plan without tax implications if it’s for the same beneficiary.
7. Irrevocable education trust fund
Generally used as part of a larger estate plan, it gives grandparents far more flexibility than 529s or Coverdells, and one trust can be created for a number of grandchildren. The funds are legal arrangements that can generate income that can be taxed, including capital gains that must be addressed by the trustee and later by the beneficiary after the trust is handed over. They’re not as tax-efficient as a 529 or Coverdell, but they can help reduce grandma’s taxable estate by excluding the assets from her estate.
Typically, there are no investment restrictions unless they’re spelled out in the trust. And they do fall under federal gift tax laws, whether it’s an annual exemption or the lifetime exclusion. That’s why it’s important to have a trustee that you, well, trust.
These aren’t cheap, requiring trustees, lawyers and paperwork, not to mention ongoing maintenance. But the assets are protected in trusts and the flexibility they offer can be compelling.
8. Pay off the student loan
Now there’s a surprise. The grandchild takes out loans to pay for school and lo and behold, her grandparents take over the payments (no tax deduction) when she graduates.
9. Reevaluate your plans
In a perfect world, everything you plan in 2025 will play out for the next 20 or 30 years. But, alas, we do not live in a perfect world. That’s why it’s important to update your plans on a consistent basis, double-checking that you’re still on track to meet all your financial and lifestyle goals. Who knows, maybe changes will be positive.
10. Just do it
Yes, there are many hoops you can jump through to gain tax deferrals and savings, but grandparents can also just do it. That’s not to suggest skirting tax laws, but giving your grandchild money here and there over the years, earmarked for college, works too. Of course, it opens the door to dollars getting spent on other things, but at least you tried.
Note: This item first appeared in Kiplinger Retirement Report, our popular monthly periodical that covers key concerns of affluent older Americans who are retired or preparing for retirement. Subscribe for retirement advice that’s right on the money.