Helping Adult Children Financially – Education
Many parents help their adult children with education costs. Virtually, all parents pay for any K-12 costs. However, when it comes to post-secondary education, support depends not only on parental ability to pay but also on each family’s philosophy on how much cost older children are expected to cover.
This dynamic has been affected by surging education costs over time. When parents attended school, it was not unusual that many could say, “I worked my way through college.” Today, a much higher percentage of students need parental help.
Some ways parents can help their adult children with education costs are:
- Direct payments, including savings from 529 plans.
- Cosigning or paying off student loans.
- Paying for grandchildren’s education costs.
Direct Payments
The simplest option is for a parent to pay some or all of the student’s costs out of pocket. Payments can be made to the student, who then pays the costs, or the parent can pay the educational institution directly.
Paying the institution directly ensures the money goes toward bona fide education costs. Also, tuition expenses paid directly to a qualified educational institution are classified as an exclusion from gift tax calculations. However, this exclusion doesn’t apply to costs for items like books, supplies, and room and board.
529 Plans
Another way to pay for education expenses is a 529 plan. These plans were added to the federal tax code (Section 529) in 1996, with the 50 states and the District of Columbia administering the plans. Parents (or anyone else for that matter) saving money in a 529 account can withdraw the funds tax-free to pay for educational expenses. Each 529 is set up for the benefit of a specific student, so a parent saving for three children would have a 529 for each kid.
What Does It Cover?
Funds in a 529 plan can be used for costs like tuition, fees, and room and board. A 529 can also pay for registered apprenticeship program costs and student loan repayments of up to $10,000 for account beneficiaries. However, there are limitations on what types of expenses can qualify. For example, testing and application fees, transportation to and from school, health insurance, and extracurricular activities don’t qualify.
How to Open a 529 and What to Contribute
A 529 plan can be opened directly through a state or via a broker or financial advisor. There is no yearly contribution limit for 529 plans, but states place a cap on the total amount contributed during the life of the account, ranging from $235,000 to $550,000. Since the rules and fees of these plans differ by state, it’s wise to learn all the details for the state administering a 529.
Most 529 plans are the savings type. The other type involves prepaid tuition arrangements, which account for only 10% of all plans. Money deposited in a savings plan type is typically held in mutual funds, but other investments could include stocks, bonds, and guaranteed investment contracts.
Cons of 529 Plans
While there are terrific benefits for these plans, some disadvantages to 529 savings plans are:
Limited Investment Choices
Depending on the state, investment options may be limited in terms of variety or low-fee alternatives.
Lack of Uniformity Across States
The federal tax laws allow much flexibility in how states set up their programs.
Strict Plan Rules
Funds from a 529 plan are limited to a specific list of educational expenses. Should funds be misused, investment gains on the funds are taxed at the regular capital gains rates plus a 10% penalty.
Federal Student Aid Impact
When applying for financial aid, funds in 529 plans reduce a student’s eligibility to receive financial aid.
Potentially High Fees
529 plans differ in terms of fees, which reduce investment earnings, so it pays to compare fees between different plans.
Perhaps because of these disadvantages, only 20% of U.S. parents use or plan to use 529 plans to fund education. For lower-income parents, a 529 might not make sense anyway. A couple filing jointly would pay no long-term investment capital gains taxes if their modified adjusted gross income is below $96,700 (2025). Therefore, they would save just as well with a non-529 account.
Helping with Student Loans
Student loans are a popular way to pay for education; paying off the debt is burdensome for many.
For example, current student loan indebtedness stands at $1.74 trillion with an average monthly payment of $500, which the typical borrower will pay for 20 years.
As a result, many parents are motivated to help reduce the sting of student loans for their adult children in three ways:
Cosigning
Cosigning can help a student qualify for a loan, but it means the cosigner is on the hook if the student fails to repay the debt. Therefore, both the borrower and the cosigner must clearly understand the risks prior to taking this step.
Helping to Pay Off Student Loans
Another route a parent can take is to help the student make loan payments. However, before agreeing to do this, there are some important considerations.
Can You Afford to Help?
It’s important to realistically assess your ability to help with payments without jeopardizing one’s own financial health. Sacrificing retirement savings or putting off paying one’s own high-interest debt can be risky. The best strategy is to organize finances to maintain fiscal stability and then help with whatever funds are left over.
Make Payments Automatic
Make sure the way you pay is both efficient and effective. Consider setting up automatic withdrawals from a bank account to prevent missed payments.
Make Payments Before Graduation
Many student loans do not require payments to start until after a six-month grace period after graduation. However, since loan interest accrues from day one of the loan, a parent making payments before the end of the grace period can reduce the total debt.
Match Student’s Payments
A great way to share the payment burden is to match the adult child’s monthly payment. This could motivate the student to pay more than the minimum each month.
Help with Non-Loan Expenses
Helping with other expenses like groceries or a cell phone can free up funds for the student to make loan payments.
Loan Payments as Gifts
Consider making loan payments as holiday or birthday gifts. Also, if a parent receives a windfall like a work bonus or unexpectedly high tax refund, these funds could be directed to loan payoff without jeopardizing the parent’s regular financial obligations.
Refinancing/Consolidation
If the student has federal loans, a consolidation loan might help. If refinancing private loans is an option, a parent could cosign, thereby reducing the interest rate and helping with payments.
Taking Out a Parent Loan
One of the most profound commitments a parent can make is to take out a parent student loan. According to Sallie Mae, a public corporation that handles private student loans, about one-fifth of parents borrow to pay education expenses. A federal option is the Parent PLUS loan. There are also private parent student loans. Other alternatives are home equity loans and borrowing from a 401(k).
Paying for Grandchildren’s Education
One way parents can support their adult children on the education front is to provide funds for grandchildren’s education. The assumption is that adult children’s finances are freed up by helping with grandkids’ education expenses.
Ideas for doing this are:
Set Up a 529 for Grandchildren
As noted above, there are no restrictions on who can set up a 529 plan for a given beneficiary.
Paying for Preschool
Funds for preschool tuition are excluded from gift tax calculations. This applies only to preschools qualifying as educational institutions, not regular daycare providers. On the other hand, if a grandparent’s annual contribution to preschool or daycare is under $19,000 for 2025, then no gift tax paperwork is required.
Helping with Student Loans
If grandkids are college-age, most of the ideas noted in the section above apply to grandparents who want to help pay or cosign for student loans.
Helping to pay for education is one of the most satisfying ways a parent can help their adult children get ahead in life. However, it needs to be done with eyes wide open to all the options available and implications for the parent’s finances to ensure the best decisions for both student and parent.
Read the previous articles in this series here.
Let’s Have a Converstion:
Have you helped your children with educational expenses? Which route did you take? Are you now helping with grandchildren’s education?
Tags Adult Children
All this is excellent and thorough information, but the premise is what I question.
I believe one’s own retirement security needs to be prioritized above any extended family costs. After checking on long term care costs, reasonable seniors might want to put on our own oxygen masks first. And then if there is a surplus, fine.
But really—it takes deep pockets to pay for memory care, assisted living, and long term nursing care. When you see the actual numbers it is staggering, and for many if not most families, it will take everything you’ve got. As in, in the millions. If you’re lucky.
Of course if you have multimillions, then this is great! Yes, give your kids Harvard for grandbaby! And Yale for second grandbaby! And Stanford for third! etc.. But for most of us?
My goal is not to become a burden to my chidren. They chose to have children and were fully aware of how much college etc would cost. But what they don’t need, and shouldn’t have to plan for, is funding my assisted living etc., which I should plan for. So I’m going to spare them that by proritizing it. They can handle the college tuitions, just as we paid their college tuitions. (Once of that in a lifetime is enough.)
Well-written and well-considered. My biggest gift to my son is not to have to worry about Mom or Dad. (I still send money to my 92-year-old Mom and don’t want my son to have to fret about that someday.) I am wondring if I should worry more about taking care of myself and my husband as we age. I have written off memory care and expensive nursing care in favor of in-home health care aides, and when it comes to it–in home hospice. My Mom was able to care for my Dad at home up until he died at 88 in his own bed, with minimal help
from the outside—healh insurance provided at-home care to help BECAUSE they save money by sending their people out to the houses rather than pay the cost of facility care.
Am I living in a fantasy world?
Thanks, Catherine Vance—I don’t think you’re living in a fantasy world at all, and currently, in-home care costs less than facility care, you’re right.
But for me, a single person with a partner, if he dies first, I’ll be alone and will not likely be able to coordinate my own in-home care by myself. So I’m looking at CCRCs (very expensive). I guess for us, the short answer is, whoever gets sick first gets in-home care; the remaining partner will have to spend for a facility. At least that’s how we’re planning it. But everyone’s situation is a little different.
And the kids (both of us have children from first marraiges) will be relieved they don’t have to bankrupt themselves for our care. But they’ll need to pay for their own downpayments and their own kids’ college. As we both did. The Bank of Mom has been closed since I wrote the last college tuition check!