Escalating college costs have prompted grandparents to get into the college savings act, supplementing-and in some cases paying the lion's share-their grandchildren's college savings plan, say industry experts.
Ric Edelman, chairman and CEO of Fairfax, Va.-based Edelman Financial Services LLC, said many grandparents at various income levels recognize the financial challenge facing their own kids in trying to save for their children's education.
"The reason that they're doing it is that they have the money, more so than the parents do,'' Edelman said. "Many grandparents have the money-or least feel that they have the money-and are happy to contribute."
Sandra C. Field, founder and president of Cypress, Calif.-based financial advisor Asset Planning Inc., said she's seeing more grandparents invest in their grandchildren's educational fund.
"Grandparents tend to be in a better position in their sixties, seventies and eighties, and the parents being in their forties and fifties may have lost a job," said Field. "The parents can no longer afford to pay for the kids' tuition and the grandparents are stepping in to help out."
But some industry experts question which grandparents can afford to siphon funds that might jeapordize their own financial security during retirement.
"It may not always be the best idea," Edelman said. "The first reason is the fact that grandparents often underestimate their own expenses in retirement."
Edelman said when grandparents start saving for their grandchildren's college costs, they are typically still working, are in their fifties or sixties and have grandchildren who are babies.
"Until you are in your seventies and eighties, you might be astonished at how expensive retirement is going to be with health care, long-term health care costs and other issues," Edelman said. "We find that the grandparents may be actually harming their own financial security more so than they realize."
Advisors, said Edelman, should discuss with their senior clients the financial ramifications of making a major change in their spending and savings plan that could affect their retirement earnings and savings.
"Although everyone anticipates that their senior years will be reminiscent of 'Ozzie and Harriett,' in today's society divorce is very common," Edelman said.
Edelman said the best advice for grandparents wanting to set up a college savings fund is to save the money in their own name. "At age 18, when the child is ready and headed to college--write a check," he said. "If the child needs the money and you're inclined to give it, you can write a check of unlimited amount of money to that college without any gift tax considerations."
Edelman said educational economics today are completely different than when young adults went to college 30 years ago. "It is really beyond the ability of most parents to fully pay for college for their children, which is why college (student loan) debt has now exceeded $1 trillion."