Guest Blog: How Financial Aid and Student Loans are Affected by Gifts and Inheritance
This guest blog post was written by Rachael Everly. Rachael is an undergraduate student who loves to write on the topics related business, finance, technology and education. Follow @RachaelEverly for further updates.
Usually the last thing on a student’s mind is financial planning. All except the most strictly groomed teenagers will be concerned with how their early financial decisions will impact their long-term financial future. Learning about the responsible use of credit cards, management of assets and inheritance, and avoidance of debt accumulation, are all unlikely to be on top of their personal priorities – but they should be.
For both students and guardians, the issues of assets and inheritance are best understood early, and managed a few years before high school graduation, to meet the needs of the individual attending college or university. For those planning to apply for financial aid by filing a Free Application for Federal Student Aid (FAFSA) there are additional concerns.
Inheritance income undoubtedly affects a student’s eligibility for certain amounts of financial aid and can affect the amount of loans taken out as well. Here are a few points to consider in the case of inheritance income of a student.
Assets and financial aid
The FAFSA is a single form that uses a variety of formulas to consider the financial needs of students and determine their eligibility for the various grants available. These grants include the Federal Pell Grant, Federal Perkins Loan, Federal Work-Study, Federal Supplemental Educational Opportunity Grant, William D. Ford Federal Direct Loan, Iraq and Afghanistan Service Grant and TEACH Grant. The FAFSA looks at the total family finances as well as the previous tax year’s income, which means that inheritance or gifted money, even to a parent, can affect the amount of financial aid a student is entitled to receive.
Generally, one-time events, like receiving an inheritance, are handled by adjusting the income and also calculating that amount as an asset. The FAFSA does make an asset protection allowance (APA) and allows a certain amount of assets – like inheritance, non-retirement savings, and investments – to be spared assessment. But the federal government does expect parents to use a percentage of their unprotected assets to pay for their child’s education.
The APA is based on the age of the oldest parent, and though recently corrected by the office of Federal Student Aid in the Department of Education, according to Forbes, it’s still ridiculously low and hurting the middle class. Most parents of college-age children will only have an allowance of around $17,400 as of August, 2015. If a parent’s assets exceed this amount, the inheritance and other assets will affect the student’s financial aid eligibility.
Additionally, it’s possible for families to document any special circumstances that will affect their ability to pay their expected family contribution. This can help some families renegotiate their child’s financial aid package and decrease the amount the family is expected to contribute.
The less federal financial aid that a student is eligible for, the more likely they may be to take out student loans to make up the difference needed for their four year education. This can mean borrowing thousands of dollars, thus increasing their debt burden and total interest due over the length of the loan.
For college students, it’s more important than ever to look for ways to reduce the amount they need to borrow by saving money well in advance. College savings plans, scholarships, and grants are excellent ways to manage these funding shortfalls and avoid federal or private student loans. Personal savings, however – especially that of the student – is risky business. The federal government will expect the student to use up to 20 percent of their personal savings to pay for school.
For parents, another way to legally lower or decrease the inheritance and total amount of assets recorded on the FAFSA is to use any gift or inheritance to pay off credit card debt and auto loans – since consumer debt is not considered when a student applies for financial aid.
If parents wish to transfer assets held in a child’s name its best to do so at least two years before a child begins their college career. If possible, transfer any custodial accounts and trusts to an eligible 529 savings plan and keep ordinary investment accounts in a parent’s name. Remember also that moving assets and investments around can create other issues when it comes to both financial aid and taxes so be sure to contact professionals for seasoned money management advice.
Timing is everything
When it comes to gifts, inheritance, financial aid, and debts, timing is everything. It’s important to plan for and structure gifts so that they have the least impact on a student’s eligibility for financial aid. Managing gifts may mean having an ailing relative put the finds into a trust account for the student while they are in college. It can also mean giving gifts the year before the tax return year that will be considered on the FAFSA, or saving for a student’s final year of college once aid has already been disbursed.
While gifts and inheritance can be helpful to a student’s continuing education, they are best handled wisely and with due diligence and responsibility. If possible, consider timing, and take advantage of asset protections to ensure that students are not unnecessarily penalized or forced to acquire additional federal or private student loans to pay for their college education.
Image courtesy of: https://pixabay.com/en/coins-pennies-money-currency-cash-912718/
Editor’s note: The blog was dormant for most of the summer. There are some interesting legislative developments in the trusts and estates arena that I intend to address over the coming months. Also, don’t forget to follow me on twitter @JeffGottliebLaw.