My mom wants to help my son with college. She was initially saying she wanted him to borrow the max fed loans and then the rest in alt loans and then she would help him repay after college. I had tried to explain the negatives of alt loans and she wouldn’t hear it. She has done some of her own reading though and now has been considering the possibility of giving him $14k/yr instead for school (max gift without gift tax).
She wants to give the money directly to him and then have him pay the school. We would time it after the FAFSA has been submitted so it wouldn’t be an asset. Is there anything wrong with this plan? I thought I had read something about how it’s better to give the money to the parents and have them pay the school, but I really can’t think of a reason why that would be the case.
Thanks for your help!
She should pay directly to the college for tuition, and it will not be considered a gift and I don’t think it will affect FA.
Others know more about it than me though.
Yes and no. A payment directly to the school of any amount will avoid any concern with the annual gift tax exclusion, but it will need to be reported on the FAFSA and Profile (if applicable) two years later as expenses paid on behalf of the student (it will be treated as student untaxed income). The easy way to get around taking the hit on financial aid is to wait until spring of sophomore year to make the first payment; at that point any student or parent income will no longer need to be reported under the new prior-prior year methodology (assuming the student finishes college in four years).
Edited to add:
Unless your mother will have a combined estate and gifts given during her life that total $5.4 million, federal gift tax will not be a concern. Depending on where she lives, state gift/estate tax might be a factor, but even then the limit will probably be pretty high (millions of dollars).
Thank you for your replies!
No, she will not come remotely near the lifetime limit for gifts.
Can she give the money to my son and then he can use it to pay the school? Are there any possible consequences for doing it that way? I really don’t want to worry about the sophomore year/prior-prior year thing in case he wouldn’t finish in four years.
If she gives the money to your son, there is a question on the fafsa in the following years that asks if he’s received money from others to pay expenses. If grandmother gives the money to the parent, that doesn’t have to be reported as a parent can pay tuition for a child.
You might want to figure out how much need based aid you son may be getting anyway. If the answer is none, he 2ont lose anything if grandmother pays the school directly or gives you son the money.
Adding to post 5. If the college doesn’t meet full financial need for all or your family doesn’t qualify for need based aid, again, the money from the grandparents could make the difference between being able to attend…or not.
Of course.
If she gives more than the annual gift tax exclusion (this year it’s $14,000) to any one person in any one year, she will have to complete and submit the appropriate IRS form. But this is for record keeping only; she wouldn’t actually owe any tax unless her lifetime gifts that exceed the annual exclusion limits total to more than the basic exclusion amount (which is $5.4 million + for 2016). Remember, any gifts given during life that exceed that annual exclusion amount will count against the exclusion amount that her estate is allowed.
Money she gives to your son will have to be reported on his FAFSA (and Profile if applicable) as untaxed income for the appropriate tax year. Just make sure that on the day that FAFSA and/or Profile is completed, the money has been spent so that it won’t be counted as an available asset. You might want to consider having her give the money to you, and then you pay the school, so that the gift won’t be counted as student untaxed income.
Right. The only real way to NOT have this gift counted for financial aid purposes is to have it gifted to the parents…who then use it to pay the college bill.
Thank you all! Yes, we will qualify for need based aid at some schools.
So, it’s true that the best way would be for her to give the money to us, and then we pay the school. That money would not be reflected on the FAFSA the following year and would not affect his aid for future years.
Thank you very much!
I believe money given to the parents is considered on future CSS Profile forms. If you’re not filling out the CSS Profile, then not a concern.
There are concerns about waiting until spring of sophomore year before paying, especially if grandmother has health concerns, etc. Can GM set up a separate account for your S, with him as beneficiary, in case god forbid something happens to her?
Lots of grandparents want to help with their grandkids’ education costs, and it is wonderful when they are able to do so. But there are a lot of considerations.
Are there other grandchildren in the picture? Sometimes the grandparent wants to do something for all her grandkids but if there is a gap in ages, what they can do for the oldest is no longer feasible for the younger ones.
Different schools have different requirements - as mentioned above, if the GM gives aid to the kid, it may need to be reported on the CSS profile, but it may or may not need to be mentioned if the gift is made to the parent.
Most families who have to chase need-based financial aid will make reasonable efforts to put the student in best position to maximize the aid available. What we find is that since the rules are often a little different at different schools, sometimes we end up looking at some of this with 20/20 hindsight.
I believe that @privateID is correct that there is a Profile question about the parents getting gifts or support, not just the student.
Thank you for your replies!
I am the only child and my son is the only grandchild.
The potential question on the CSS Profile is a concern. I can’t find a PDF of the actual application online.
Does anyone know for sure if it asks about money received by parents?
Thanks again!
Question PI-225D: “Enter the amount of other untaxed income your parents received or expect to receive in 2015. See the worksheet for types of income to include and the instructions for types of income to exclude. Worksheet”
From the worksheet: “Cash received or any money paid on your behalf (e.g., bills)”
Thank you for finding that. That’s too bad.
Does anyone know of another way to receive the money that would not affect future aid?
I’ll have to look and see which potential schools use the Profile.
I promise that I am trying to say this in a nice way…but:
The answer is yes: it is cheating.
It is as much cheating as if your son cheated on a test to win a prize (which I trust you would not sanction).
Of course it has to be reported: if your son receives $56k ($14K x 4 years) towards tuition, how is it ethical (never mind fair to the student who doesn’t have a grandmother with that kind of money) to pretend that he didn’t get it? That’s why the question is on the CSS.
If the school uses the profile and considers this question, I think they don’t want you to find away around it. If the grandparent pays for the tuition, the school considers that income and the student shouldn’t also receive need based aid for that amount. It’s the school’s money and the school’s choice of what to consider as income and assets, to consider outside scholarships or not, to consider that a student who has a grandparent willing to pay not in the same financial situation as a student who doesn’t have such a grandparent.
You have a couple of choices, such as going to a FAFSA only school and having the grandparent give the money directly to the parent. You can have the grandparent not pay until after the last tax period considered for the student (for junior year aid). Another option is to just not report it, but you are the one signing the report as correct and you’d know it to be incorrect. There are also a few CSS schools that only require the CSS to be filed the first year.
There are many things in financial aid that seem unfair, and having someone else pay the tuition and then having to report it may seem unfair to you. Having to pay taxes on the inflated price of room and board after receiving a scholarship is my particular thorn, but I pay.
You and/or your son can borrow money from his grandma. Each year sign legal documents for the loans. Then after the last FAFSA and CSS documents are filed, grandma might forgive the principal (and accrued interest?) at a rate of $14k per year/per donee-borrower (or whatever the annual gifting limit is that year).
Use the AFR table for the interest %, depending on length of loan.
Thank you for your replies. @Madison85 thank you - that’ is a great suggestion!
I think the other option would be borrowing PLUS loans after Staffords are maxed.
Thanks for your help!