EFC, Inheritance, and unemployment

Paying for College
1

<p>Hi, I've got a question.</p>

<p>Our son has ADD and some LD and has been an elite competitive swimmer, who began a hiatus in his junior years of high school to deal with some issues. I "retired" from work in when DS was a 4th grader to help him with his academics. Husband works as a writer, but is not well paid for our area (<$60,000, when the avg income here is >$130,000). His contract came to an end and he is unemployed. We did not have much in savings, until his elderly mom died last December, when we inherited a fairly large chunk of money.</p>

<p>My question is this...my husband's income has been very sporadic, at best. We decided that I would stay home and work with DS to smooth out the bumps in his life. We knew that our inheritance would be the only way we could hope to retire. Now, reading up on FAFSA I've learned that because of the inheritance our EFC will be about $20,000 more per year. It hardly seems fair. I feel like we're being punished for having one income and I feel that we are being punished because we are older parents. If our child had been more "normal", I could have continued to work. And, had we not been older parents, we would not be a position to inherit until after our child completed college. What bothers me is that it is the timing of the inheritance that decides what the EFC is. An older parent inheriting in 2005 the same amount as a younger parent inheriting in 2010 will receive less financial aid than the younger parent. So we with less will pay more.</p>

<p>Does it seem fair to you?? I believe that we could pay off our home, but with my husband's current state of unemployment we need the money now to survive and perhaps later if he is laid off again. What to do?? Your advice is welcome??</p>

2

<p>To clarify...</p>

<p>We could pay off our home, because as I understand it FAFSA doesn't consider equity in a home as part of its calculations. The only other way out is to hope to stay below the means test, which would take our other assets off the table.</p>

<p>Look forward to hearing from you.</p>

3

<p>HGow about paying off your home and setting up a home equity line to allow you access should you need it in the future? This moves the asset out of the category of being counted (for FAFSA schoosl, Profile schools ask about your home equity) and still gives you some flexibility for future income bumps.</p>

4

<p>Generally, property you receive as a gift, bequest, or inheritance is not considered income for IRS purposes, and as such not reported. However, if property you receive by gift, bequest, or inheritance later produces income such as interest, dividends, or rents, that income is taxable and would have to be reported to IRS. Thus, the inheritance by itself is not income, but will be treated is an asset by schools.</p>

<p>A family’s EFC (expected family contribution) is a sum of a percentage of four factors: parent’s income, student’s income, parent’s assets, student’s assets. Find the line on your 1040 Adjusted Gross Income (AGI). Under the federal methodology, if the parent’s AGI is beneath $50K and the parents file a short form (1040A or 1040EZ), then two of the above factors (parents assets and student assets) will be excluded when your EFC is determined. See
<a href="http://www.finaid.org/educators/needs.phtml%5B/url%5D"&gt;http://www.finaid.org/educators/needs.phtml&lt;/a&gt;&lt;/p>

<p>The AGI that I refer to is from the 1040 that you file for the tax year before DS starts college, e.g., if DS son starts school in fall 2006, the AGI used is from 1040 2005.</p>

<p>In addition, under federal methodology, if parents AGI is less than $15K and parents (and DS) file short forms or don’t file, or if parents don’t file and have combined income from work of less than $15K, your EFC will be zero (automatic zero). </p>

<p>So if DS applies to schools that only use the federal methodology (FAFSA), the inheritance will be excluded when the EFC is calculated if the parent’s income (AGI) is beneath $50K and the parents (and DS) file short 1040’s (or none at all). On the other hand, if DS applies to schools that use institutional methodology (PROFILE) then the inheritance will be treated as an asset and used by the schools when your EFC is calculated.</p>

<p>You indicate that you’re older parents. If DS only applies to schools that use FAFSA, it will be to your advantage if AGI stays below $50K. If DS really wants to go to school that uses PROFILE, I would still have him apply, see if he gets accepted, and then see what financial aid package is offered. DS should also apply to financial safeties and get accepted there. I know that by only applying to schools that rely on FAFSA may limit DS dreams, but DS has to be realistic towards your long term financial well being as well.</p>