THE ULTIMATE STOCKING STUFFER: CASH
c.2013 New York Times News Service
All Elizabeth Starkey wants for Christmas is a little help paying her student loans.
With a monthly payment topping $1,000, the 31-year-old digital designer for Bravo, the cable television network, said that even a small contribution would provide some breathing room.
“The only things I really need are a new computer, which is more than anyone wants to spend, or student loan money,” Starkey said, who owes more than $51,000. “That is the biggest burden for me, financially, other than rent.”
So after she learned about a new service that allows people to send cash gifts to student loan providers, Starkey alerted her family through her Facebook page and Twitter. But she’s not terribly optimistic that they’ll comply.
“People said, ‘I want to get you something fun,’” she said. “But I live in New York and I don’t have room for things. I pay $1,023 in student loans, and it kills me. Even $100 toward that would be helpful.”
Cash gifts are often written off as too impersonal or, as in Starkey’s case, not festive enough. But as you’re scrambling to find the perfect something for a loved one, particularly the students and graduates who collectively hold about $1.2 trillion in student debt, a little financial wiggle room might be exactly what they want and need.
Beyond help with student loans, there are a variety of ways to give more personalized money gifts, whether you’re shopping for an aspiring retiree or a young adult. Here are some ideas, with instructions on how to minimize taxes and other unintended consequences.
PLAIN CASH: If you’re not too concerned about exactly how your gift is spent, there’s nothing easier than old-fashioned cash. Individuals can legally give gifts of up to $14,000 to as many people as they wish in 2013, with no tax consequences. That means a couple could potentially give up to $28,000 per person.
STUDENT LOAN PAYMENTS: There are a few ways to help graduates chip away at debt. Anyone can make a payment on behalf of a borrower by check, although you need to know the loan servicer, the borrower’s account number and the monthly payment amount, according to student loan experts.
A more effective method is to send a letter with your check that states that the money should be used to prepay or reduce the principal of the loan and not for a future loan payment. Also request that the money be applied to the loan with the highest interest rate, if the lender has multiple loans for the borrower, said Mark Kantrowitz, a senior vice president and publisher of Edvisors, an informational website about paying for college.
A new service, through Tuition.io, makes this easier, since it requires only that you know the gift recipient’s email address. After the gift-giver pays by credit card, the recipient receives a plain or holiday-themed email telling her about the gift and then directs the recipient to the Tuition.io website, where she enters personal information. Tuition.io, which also offers loan budgeting information, then shuttles the payment to the loan servicer.
There are caveats: The gift, limited to a maximum of $500, will apply to future loan payments only (although the company said it was working on ways to make principal payments). The gift-maker will also be charged a credit card processing fee of 2.9 percent (plus 30 cents), and a 3.5 percent transaction fee. So a $100 gift would amount to $106.70.
TUITION HELP: Anybody can pay for some or all of a student’s tuition directly, whether it’s a credit hour at a community college or a year at a pricey private school. There are no gift tax implications, as long as the payment is made directly to the institution. The same goes for medical debts.
But if you pay a big chunk of college tuition, or even provide a large cash gift, it could hurt the student’s ability to get financial aid. One workaround is to give the cash to the parent, since cash support to parents isn’t reported as untaxed income on the Free Application for Federal Student Aid, or Fafsa, and generally has a minimal impact on federal aid, he explained.
529 CONTRIBUTIONS: All contributions to these state-run, college-savings accounts grow tax-free. And the money can be withdrawn without paying capital gains taxes as long as the proceeds are used for education expenses. A majority of states provide state income tax deductions for contributions, but the rules vary.
If you want to make a contribution to an existing account, start by calling the plan for instructions, although you’ll need an account number. That might be easy enough for a grandparent or a close relative to obtain, but it can be a hassle for everyone else.
Services such as GiftofCollege and GradSave try to make this easier. They allow you to contribute to anyone’s account through a college gift registry. At GiftofCollege, the prospective student must be registered on the site to receive a contribution. (It’s currently waiving the 5 percent service fee charged to givers). At GradSave, you can buy a gift card even if the recipient doesn’t have a 529 account or a registry on the company’s website. The service passes on a 2.9 percent credit card processing fee, although transfers from a checking account are free.
If the gift recipient has a 529 plan administered by Upromise Investments, you can make a contribution through its Ugift program, which doesn’t charge any fees and is available in 31 plans in 17 states. The account owners will first need to send family and friends an email invitation to contribute.
If you’re a friend or relative who wants to open an account on a child’s behalf, keep in mind that it’s better for the parent to be the account owner with the child named beneficiary — particularly if the student may be eligible for need-based financial aid.
“Grandparents should not set up a 529 with themselves as the account owner,” Kantrowitz said.
“Such a 529 plan will have a harsh impact on eligibility,” he added.
Money withdrawn from a grandparent’s account — or any other friend or relative who is not a parent — would be treated as untaxed income to the student.
RETIREMENT MONEY: Anyone can open a Roth individual retirement account — where contributions are made with money that’s been taxed, and withdrawals come out tax-free — for another person. Adults can also open custodial accounts for children at brokerages like Vanguard or Charles Schwab. But if the account owner is over 18, he will need to sign the authorization documents.
You can also make a gift to an existing account. But the gift recipient will need to have earned income at least equal to the amount of any contributions to the account, said Mark Luscombe, a principal analyst at CCH Tax & Accounting, and singles must earn less than $127,000. This year, the maximum total contribution to a Roth (or traditional) IRA is $5,500.
APPRECIATED STOCK: Given the stock market’s ascent over the last few years, you may be sitting on stock that has also risen appreciably. If you give those shares to a relative or friend in a lower tax bracket, she can sell them for cash and may pay far less in capital gains taxes than you would. The gift recipient could also use the proceeds to reinvest in broad-based index fund within that new Roth IRA you helped set up.
But parents who give stock to younger children may not achieve the same sort of tax savings. The kiddie tax may apply if the child is under age 19 and in some cases up until age 24 if he is a full-time student and still receiving parental support. In that case, the child would still pay capital gains taxes at the parents’ rate, Luscombe explained.
FINANCIAL ADVICE: Maybe a parent has an adult child who needs assistance organizing his financial life, because he just experienced a big life event such as a marriage or the birth of a child. Or maybe someone wants to send a parent to a certified financial planner as she contemplates the hard questions of retirement. Some advisers offer gift certificates, including planners through the Garrett Planning Network.
LearnVest, an online financial advisory, offers gift certificates via email. The gift giver can either pay for the setup fee ($399), or an entire package, which includes the fee and an entire year of support.
CONSUMER DEBT: Helping pay down a loved one’s credit card debt can help ease some stress at the start of the new year.
“If someone has $5,000 or less in credit card debt and can add a mere $50 a month to a minimum payment every month until the debt is paid off, depending on the interest rate, you can literally shave off a decade or more from the paydown period and wipe out thousands in extra interest,” said Manisha Thakor, who runs MoneyZen Wealth Management.
The same goes for giving a lump sum. All you need to do is provide a check written to the name of the credit card company with the amount you’d like to give.