6 ways grandparents can help pay for their grandchildren’s education

As a grandparent, there’s nothing more important than helping your grandchild reach their full potential in life. One of the most meaningful ways you can affect their future is by helping to fund their education.

Whether it’s contributing to a college savings plan, paying tuition costs directly or lending your grandchild money, there are several effective ways to provide education funds for grandchildren.

Review the most common options to help you determine the best strategy for you and your family.

1. Explore rules for grandparents opening a 529 account

State-administered 529 education savings plans are the go-to choice for many families, and their generous tax benefits are a big reason why. The money your grandchild withdraws for qualified education expenses — including private K-12 tuition — is completely tax-free. And most states offer a tax break on contributions to these investment accounts as well.

While you can contribute to a 529 plan owned by a parent, grandparents can also start a 529 account on the student’s behalf. The former may be a simpler option, but opening an account in your name gives you greater control over your money. And, beginning with the 2024–2025 academic year, withdrawals from grandparent-owned 529 accounts don’t affect the student’s eligibility for financial aid.

Advantages of setting up a 529 for grandchildren

• Federal and state tax incentives allow your contributions to go further than traditional investment vehicles.
• You can transfer the funds to another eligible family member, such as a grandchild’s sibling, if the first child decides not to attend college or receives a large scholarship.
• 529 rules for grandparents allow you to front-load contributions and make up to five years of annual gifts in one year (capped at $95,000 each in 2025). This larger gift wouldn’t be subject to the gift tax if you live for the full five years.

Disadvantages of setting up a 529 for grandchildren

• 529 funds can only be used for qualified educational expenses such as tuition, textbooks, school equipment, and certain room and board fees. If you’re not sure that your grandchild will go to college, you may want to consider other options.

2. Pay your grandchild’s tuition directly

One of the easiest ways to support your grandchild’s education is to make payments directly to their college or university. Simply ask your grandchild for their student ID number and billing statement. Make sure the billing office applies your contribution to the tuition portion of their bill, rather than housing or other related expenses. Otherwise, it will count as a gift for tax purposes.

Advantages of paying your grandchild’s tuition directly

• Paying the institution directly gives you the confidence of knowing exactly how your money is being used.
• The payment doesn’t count toward your annual gift tax exclusion ($19,000 per person in 2025).
• Because it doesn’t count toward your lifetime gift tax exemption, you can still give additional funds, like 529 contributions.

Disadvantages of paying your grandchild’s tuition directly

• In some situations, your grandchild may receive less need-based aid because of your financial support. Before making a direct payment, first check on their eligibility for federal and institutional aid.
• A direct payment doesn’t offer you the tax benefits of a 529 account. Depending on what type of account you pull money from, your distribution may be subject to income or capital gains taxes.

3. Loan your grandchild money for education

Rather than paying the college directly, you can simply give your grandchild a loan to cover their education expenses. You can offer modest loans that are zero- or low-interest, providing your loved one with a more affordable lending alternative.

Advantages of loaning your grandchild money for education

• You have the flexibility to determine the terms of the loan, tailoring the agreement to your needs and those of your grandchild.
• You can lend up to $10,000 at below-market interest rates without having to pay income tax.

Disadvantages of loaning your grandchild money for education

• For loans above $10,000, the IRS imposes a minimum interest rate and the interest “payments” count as taxable income for the grandparent. The grandchild cannot deduct this interest on their tax return.
• A grandchild’s failure to repay the loan can be a major source of stress within the family, so think through this option carefully.

4. Establish a trust fund for grandchildren

If you’re worried about your funds being used for something other than your grandchild’s education, you might think about setting up an irrevocable trust with your grandchild as the beneficiary. A trustee manages the assets and distributes them according to the terms of the trust — in this case, specifically for your grandchild’s education needs.

Advantages of establishing a trust fund for grandchildren

• The trustee is legally required to follow the trust documents, which helps avoid the possibility that the money will be misused.
• The money you put into the trust fund for grandchildren does not count as part of your estate, which can help you limit potential estate taxes.

Disadvantages of establishing a trust fund for grandchildren

• Unlike contributions to a grandparent-owned 529 plan, you can’t withdraw funds that you put into an irrevocable trust.
• You must pay an estate planning attorney to draft the trust, in addition to ongoing administrative fees.
• Investment gains are generally taxed at relatively high trust rates, putting them at a disadvantage to 529 accounts in this regard.

5. Use U.S. savings bonds for education

Another option is to purchase U.S. Savings Bonds in your own name with the intention of using the proceeds for your grandchild’s education.

Series EE Bonds are a popular choice, since they pay a fixed rate of interest. If you’re worried about inflation eroding your earnings, Series I Bonds, which peg their interest payment to the cost of consumer goods, can be a compelling alternative.

Advantages of using savings bonds for your grandchild’s education

• The bonds are backed by the full faith and credit of the U.S. government, making them safe investments.
• If you, as a grandparent, own the bonds, you can redeem Series EE and Series I bonds tax-free when you use them for qualified education expenses. The interest is always exempt from state income tax.

Disadvantages of using savings bonds for your grandchild’s education

• Historically, U.S. savings bonds have provided a lower long-term return than stocks.
• If you redeem a Series I Bond within five years, you’ll lose three months of interest.

6. Help your grandchild with student loan repayments

Even if your grandchild has already completed their education, it might not be too late to help with their education costs. By paying all or part of their student loans, you can alleviate your grandchild’s financial burden, allowing them to start saving for other goals.

Advantages of helping your grandchild with student loan repayments

• When you help your grandchild pay off their student debt sooner, you could be saving them thousands of dollars in interest.
• Because you can gift up to $19,000 a year without it counting against your lifetime gift tax exemption, helping your grandchild with loans can be a smart estate planning strategy.

Disadvantages of helping your grandchild with student loan repayments

• When you only pay education expenses after they’ve accrued, rather than via an investment vehicle, you’re not taking advantage of compounding, which allows your money to grow over time.
• If your grandchild has low-interest student loans, you might find better ways to help them financially, such as contributing to a home down payment or investment account.

With thoughtful planning, grandparents can help support their grandchildren’s higher education, setting them up for a fulfilling adulthood and successful career.

Learn how our team-based planning approach can help you review financial opportunities from all perspectives.

For more information regarding college savings plans, please visit www.collegesavings.org. Participation in a 529 plan does not guarantee the investment return on contributions, if any, will be adequate to cover future tuition and other higher education expenses. Before investing in a 529 College Savings Plan, consider your state of residence, which may offer a 529 College Savings Plan with state tax or other benefits available only to residents of the state. Federal income tax on the earnings and a 10 percent penalty on distributions for non-qualified expenses may apply.