Thanks to the many television commercials and school-supply advertisements in the Sunday newspaper, it’s easy to remember that the new school year is just around the corner. And for recent high school graduates and their families, it’s also “pay college tuition” time.
It’s no surprise to anyone that the cost of college seems to be heading nowhere but up. And as costs increase, many grandparents, aunts, uncles, and other family members may be looking for ways to help students reduce the impact on their wallets. But what’s the best way to do so, considering your specific circumstance?
Gift Directly to the Recent Graduate: Cash or a check in a graduation card is a convenient way to give money to a student for college. However, direct gifts present some issues when families submit their Free Application for Federal Student Aid (FAFSA) applications. Because 20% of the student’s assets and 50% of the student’s income (after some allowances) is considered money available for the family to use toward college, a cash gift could be considered either an asset or income and therefore reduce the student’s eligibility for financial aid (Source: www.savingforcollege.com). Another common issue: Making sure the graduate actually uses the money for college and not for the newest cell phone or tablet.
Gift Directly to the Parents: This method also has merits, but timing the gift is crucial. Financial gifts to parents do not count as income available to cover the costs of college, according to FAFSA calculations. However, if the gift is made before parents file the FAFSA, they must report the gift on the application as an asset (counted less heavily than income, but still considered). As such, the gift may reduce the student’s eligibility for financial aid. Another possible issue with this method: Ensuring that the parents actually use the gift to pay for their student’s education and not to pay down their mortgage or fund a family vacation.
Pay the School Directly for Qualified Education Expenses: A big benefit of this method is that the money is definitely used to pay for college expenses. Additionally, it’s a tax-free gift for the donor, even if the gift amount exceeds the annual exclusion limitation. The challenge: The payment to the school must be reported by the family when they fill out their FAFSA application for the next school year. This could reduce the amount of financial aid available to the student.
Pay the School Directly Utilizing a 529 Account (Not Owned by Parent or Student): This is another way to make sure a money gift is used to pay for college. Also a benefit: The account is not considered a student’s or parent’s asset in financial aid calculations. However, distributions from the 529 account are considered as income belonging to the student when the family files the FAFSA application for the next school year. This distribution may significantly reduce potential financial aid to the graduate. It may be best to wait until the graduate’s senior year of college before using this 529 account to help with the tuition bill. By that time, all FAFSA forms have been filled out and the distribution from the 529 account would not impact future financial aid.
Contribute to a 529 Account Owned by the Parent or Student: The benefit of this method versus utilizing a 529 account not owned by the parent or graduate is that distributions from a 529 account owned by a parent or graduate are not considered income when the family applies for financial aid for the next school year. Yes, the 529 account will be considered an asset on the FAFSA application. However, only up to 5.6% of the account’s value will be considered part of the expected family contribution (Source: www.savingforcollege.com)—a much lower percentage than student or parent income.
Help Pay Off Student Loans: Unlike the other methods mentioned, this suggestion takes place after the student graduates from college. The great thing about helping pay off student loans is that it has no impact on the family’s financial aid eligibility during college. Plus, it’s a wonderful way to help the graduate take their focus off paying down debt and encourage them to start saving and investing for their future financial goals. One possible drawback of helping a graduate pay off their student loans is that some interest that may have accrued while the student was in school, if their student loans were unsubsidized.
As you can see, each college money gift option has both merits and drawbacks. The key is to compare the benefits (reducing the burden of college expenses) with the possible disadvantages (impact on financial aid eligibility). Talking with both the student and the student’s family about how you can help is a great first step. If you need someone else to serve as a sounding board or provide advice on how best to support a budding college student’s dreams, talk to your Wealth Advisor.
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Please remember that RegentAtlantic does not provide tax advice. Please consult witha tax advisor of your choosing prior to implementing any of the strategies discussed in this article.
Important disclosure information
Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.
Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.
This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.
RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.