As high school years wind down, parents begin contemplating how they will pay for their children's college tuition. For those who are tackling this question for the first time, and for some who are tackling the question for the second, third, or fourth time, the mere consideration is enough to tun one's head prematurely gray. But, for those who receive good advice, gray hair can be postponed for a few more years.



Worried about skyrocketing college costs, parents of high school seniors often suggest that grandparents make donations to their grandchild's college fund in lieu of holiday gifts. If they're financially able to do so, most grandparents happily comply. After all, one reason they've accumulated their wealth is to help younger generations achieve success, including going to college. Unfortunately, their generosity can devastate their family's finances.

What most parents, grandparents and even financial planners don't realize is that the timing of financial gifts is critical in determining how much their family pays for college. As innocent as it seems, receiving a monetary holiday gift could not only cause your child to lose scholarship and other forms of gifted aid, but could also cause you to be expected to contribute more towards your child's educational costs.

Many parents turn to the U.S. government to find supplemental money to help pay for college. To determine eligibility for this money, which can be in the form of either gifted aid or preferred loans, families are required to fill out the Free Application for Financial Student Aid (FAFSA).

The FAFSA is used to determine the Expected Family Contribution (EFC), which in most cases is the minimum dollar amount a college anticipates a family to contribute toward their child's education in any given school year. Families with more money have a higher EFC than families that are less well-off who are not expected to contribute as much toward the cost of college.

A higher EFC also indicates a student does not need financial help in the form of scholarships and other types of gifted aid, which do not require repayment. Instead, the student may only qualify for loans and other forms of assistance that require repayment, which can result in thousands of dollars in interest charges.

The EFC calculation is primarily based upon an assessment of parental and student income and asset values. The income and assets attributable to the student are assessed at a higher rate than those of the parents.

When cash gifts are given to high school seniors for Christmas or Hanukkah, the money is in the child's name and bank account when the family completes the Free Application for Federal Student Aid (FAFSA) in January. Hence, this gift is assessed at the child's higher rate.

The bottom line? Between the increased Expected Family Contribution and the potential loss of gifted aid, that $5,000 gift at Christmas given to your granddaughter during her senior year of high school could feasibly cost her a total of $3,000 or more over the course of her college career. This reduces grandma's generous gift of $5,000 to only $2,000. The good news is that you can avoid these painful consequences by ensuring that your gift is given at the right time and in the right way.

Saving money is only one consideration when putting a child through college. To fully leverage your educational investments, you have to understand how the financial aid formula will be affected by how and when you use your investments. The choices you make - even those as simple as giving Grandma holiday gift ideas for your son or daughter - could cost or save your family tens of thousands of dollars.