How to Help Pay for College without Affecting Financial Aid
Grandparents, godparents, aunts, uncles and other friends and family may want to help a student pay for college costs, but worry that this might hurt the student’s eligibility for need-based financial aid, which would be counterproductive. Here’s how to help pay for college while avoiding or minimizing the impact on financial aid.
Background: Double-Counting of Gifts
Gifts to the student may get counted twice in the financial aid formulas, once as untaxed income to the student and once as an asset.
Financial aid eligibility is based on the income and assets of the student and parents. The financial aid formulas count both taxable and untaxed income as part of total income. So, untaxed income will have the same impact on aid eligibility as taxable income.
Although total income is based on two-year-old information, from the prior-prior year, assets are reported as of the date the Free Application for Federal Student Aid (FAFSA) is filed.
So, a gift to the student will be reported as income on the FAFSA in two years, but as an asset on the current year’s FAFSA.
Use our Financial Aid Calculator to estimate your expected family contribution (EFC) and financial need based on student and parent income and assets, family size, number of children in college, age of the older parent and the student’s dependency status.
Workaround: Delay Giving the Gift
The FAFSA uses income information from the calendar year that is two years prior to the academic year. For example, the 2021-2022 FAFSA will be based on 2019 income information.
So, a possible workaround is to give the gift to the student on or after January 1 of the sophomore year in college. If the student will graduate within four years, there will be no subsequent FAFSA to be affected by the gift.
If the student will graduate in five years, wait until January 1 of the junior year in college to give the gift.
Workaround: Gifts to the Student vs. Gifts to the Parents
There is a loophole on the FAFSA with regard to cash support provided to the parents as opposed to cash support to the student.
Cash support includes money and gifts to the student, as well as money paid to someone else on the student’s behalf. Cash support also includes payment of bills for housing, food, clothing, car payments, medical and dental care, and college costs that the student is responsible for paying.
Cash gifts to the student, including payments of tuition bills, are reported as untaxed income on the student’s FAFSA, but cash gifts to the parents are not reported as untaxed income on the FAFSA.
So, a possible workaround is to give the money to the parents instead of the student. Such gifts will not be reported as income on the FAFSA.
Gifts are Still Counted as Assets on the FAFSA
Gifts must still be reported as an asset on the FAFSA if the money hasn’t been spent as of the date the FAFSA is filed.
Student assets reduce aid eligibility by 20% of the asset value. Parent assets are assessed on a bracketed scale, with a top bracket of 5.64%.
Money in a 529 college savings plan that is owned by the student or the parent is reported as a parent asset on the FAFSA and distributions are ignored.
Money in a 529 plan that is owned by anybody else is not reported as an asset on the FAFSA, but distributions count as untaxed income to the beneficiary (the student), yielding a similar issue as giving a gift to the student.
However, one can control the timing of the gift to avoid having it affect eligibility for financial aid. If the gift is given after the FAFSA is filed and spent before the next FAFSA is filed, it won’t be reported as an asset on the FAFSA.
Similarly, one can rollover money to a parent-owned 529 plan in the same state after the FAFSA is filed to avoid having it affect the student’s expected family contribution (EFC).
So, a possible workaround is to contribute the money to a parent-owned 529 plan. The gift will either have no impact on aid eligibility or a minimal impact, depending on the timing of the gift with regard to the date the FAFSA is filed. It is better to give the money or roll it over into a parent-owned 529 plan after the FAFSA is filed.
Another workaround is to contribute the money to a Roth IRA in the student’s name. Money in a qualified retirement plan is not reported as an asset on the FAFSA. However, distributions from the student’s Roth IRA count as income to the student. Even a tax-free return of contributions will count as untaxed income to the student. But, the student can always wait until after they graduate to take the distribution to pay down student loan debt.
A good place to start