Gift money & FAFSA

Paying for College
1

<p>I am considering attending an expensive private university to which I received a substantial (but of course still not enough) amount of need-based financial aid. In addition, a wealthy family member has offered to contribute to paying my cost of attendance; however, I need that gift money on top of the financial aid that I have been offered for my freshman year in order to attend. </p>

<p>My question is what I can do to shelter this gift money from the FAFSA so as not to diminish my financial aid awards through graduation. How can I keep the gift money "hidden," so to speak, in order to allow my relative to help pay for my school on top of financial aid? (Without doing anything illegal!)</p>

2

<p>It needs to be reported. The FAFSA is a legal document, and you need to attest every year that you are filling it out truthfully.</p>

3

<p>Others more qualified may know better but the family contribution can be borrowed via loans. In your case you can borrow the money from your relative. You should create a document with the terms for the loan. After graduation, you could pay back the loan per the terms, or they could forgive the loan (which could have income tax implications for you at that time).</p>

4

<p>@KKmama I am very much aware of that fact. I am looking for a way that I could still report it on the FAFSA while diminishing my aid awards as little as possible. I’m not a criminal. </p>

<p>@keesh17 that sounds like a good option–thank you, and I will have my dad look into that. </p>

<p>I have also heard of putting the money in custodial 529 accounts – anyone know about that at all?</p>

5

<p>How much money are we talking about? The cost of books, transportation, and personal expenses that you might actually be capable of earning on your own or covering with a federal loan? Or is this a chunk of the tuition/fees/housing/meals?</p>

6

<p>Yes, it can go into custodial 529 accounts which are then reported as parental assets which comes to about 5% onto the EFC over their asset protection allowance.</p>

7

<p>@happymomof1 a chunk of tuition/fees/housing/meals.</p>

<p>@cptofthehouse Thank you, that’s very good to know. Does that apply even for schools that use the CSS profile and/or Institutional Methodology? And would that be a better option than a loan (which would then be forgiven)?</p>

8

<p>I don’t know, because the rules for those can vary from state to state. THere can be limits as to what is contributed and when you can take it out, and all sorts of other paperwork. It might be easier to go on the internet or find an attorney to draw up standard loan papers with market terms, have it notarized, and you have taken out a loan. Just make sure you pay interest at least each year, and have a provision that it is forgiven upon her death or disability. I don’t know the legality of having graduation in the provisions. That’s why maybe paying a lawyer a couple of hundred bucks for the first loan to do it right would be a good idea,. Once you are in senior y ear, with no FAFSA/PROFILE in the picture, you can get the money as a gift. Also, the forgiveness of the loans probably should be done so that they don’t go astray in terms of gift tax laws. So really, an attorney should be involved. I have no ideas of the legalities and ramification of this, so please do not take my word on any of this.</p>

9

<p>@cptofthehouse Thank you, even just some info about the situation is helpful. My dad might talk to our accountant; do you think he would be able to give us advice in the matter?</p>

10

<p>He might, but honestly, there are accountants out there, I daresay most of them, who have no idea how FAFSA/PROFILE work. They just don’t deal with that. So do ask them. There are EFC estimators out there and you have your current FAFSA so you can figure out at about which asset level your parents’ assets are assessed the 5% or so towards EFC. That is how 529s are counted.</p>

<p>PROFILE wants to know ANY money parents or student are given, and really, there is an open question as to whether there is anyone out there that will pay for your education, and also what your parents can afford to pay, all there to catch anything like this. So strictly speaking, those questions are not going to be answered truthfully once that offer from the relative was made. But if s/he thinks it over and prefers lending the money…well, that’s a loan, not a gift. It does become a gift as it is forgiven, however, and to be a legitimate loan certain repayment and interest have to included and the terms met. Your accountant might know about those. You have to fulfil the provisions of a legitimate loan, not go through the motions so that if there is an audit, you are covered. It has to be a legitimate loan to not constitute fraud.</p>

11

<p>Couldn’t the gift be given to your parents? Then it would count less against you.</p>

12

<p>To add details to a couple of the options, you can consider the following:</p>

<ol>
<li> Relative opens a 529 account with you as the beneficiary, deposits a lump sum into the account. </li>
</ol>

<p>FAFSA - this is not reported as an asset. As money is withdrawn to pay for college, the amount of the withdrawal is reported on FAFSA as “other income” during the calendar year it is received.</p>

<p>Profile - this is reported as your asset. </p>

<ol>
<li> Relative gives you a lump sum, you open your own 529 and deposit the money into it. Your 529 is known as a custodial 529 or a UTMA 529.</li>
</ol>

<p>FAFSA - your 529 is reported as an asset but assessed at the parent rate of 5.6%</p>

<p>Profile - the 529 is reported as an asset. I don’t believe the gift is reported as income but you’d need to confirm this.</p>

<ol>
<li> Relative you loans you the money with valid loan papers in place. The relative is prepared to forgive the loan when you graduate.</li>
</ol>

<p>FAFSA: the loan is not reported. It is neither income nor an asset.
Profile: the loan is not reported </p>

<ol>
<li> You take out loans in your first 3 years of college. During the spring of your junior year, after you’ve filed FAFSA and Profile, your relatives pay off all your loans and gift you money to pay for your senior year.</li>
</ol>

<p>FAFSA: nothing is reported
Profile: nothing is reported</p>

<p>Remember that the gift of money is taxable to the giver if it’s greater than the IRS exclusion limit. The limit is $14,000 in 2013, or $28,000 for a couple. The exception to the exclusion limit applies to 529 accounts: people can contribute up to five years’ worth of annual exclusion gifts in one year if the money is deposited into a 529. State-imposed contribution limits vary by state, and the state law that governs your account will be the state in whose plan your relative is investing, not the state in which you live.</p>

13

<p>If we don’t go the loaning route, it will definitely go into my parents’ name so that it counts less in the FAFSA. My mom is going to be making less income next year than she did last year, so it should cancel out at least a little bit.</p>

<p>Another question, though: I know that if it is less than ~$13k, we do not have to claim it as taxable income. I also know that both my aunt and my uncle could EACH give $13k, which would amount to $26k total. Would we have to claim that as taxable income because it is more than the $13k or not because it is from two separate (albeit married) donors? Because if not, we should probably put it all into a 529 account so it cannot be taxed.</p>

<p>This is all so complicated and confusing!! :(</p>

14

<p>@vballmom thank you, all that information is great!!</p>

15

<p>Even if it were more than $13K you don’t have to claim it as taxable income. The gift tax is something that the GIVER has to pay and it’s really a bit complicated which is why the $13K annual limit is often cited. It just makes it easier. This is not the issue at all here.</p>

<p>The problem with it being a gift, whether it is under $13K is not the tax issue that we are addressing here, however. The PROFILE definitely asks if you get other money from any source, and that does include gifts. A forgiven loan is also a gift which is a reason too to involve a lawyer. </p>

<p>Each state has rules about 529s and some don’t let you take the money out right away. There are rules as to how they can work. There are also limits. You can look up the rules for your state’s 529 and also see if there are other state 529s that may work better for you. Your aunt could get state tax deductions for 529 deductions depending on the state. </p>

<p>To me the easiest thing is for your parents to borrow the money, and pay the interest and a given loan amount as the acct or attny says is necessary for this to be a legitimate loan. I suggest the money sit in your parents accounts, not yours because FAFSA/PROFILE will hit you up a full 20% on ANY assets you have the day you fill out the form whereas your parents do have an exclusion allowance and are assessed only 5% above that. In fact, it might be smart just to send the money to the school and not have it sitting anywhere on FAFSA filing day. You never should complete FAFSA on a day that your accounts are flush with money. Pay day is a bad day for that as well as anytime you have money that is earmarked for something sitting there since fin aid wants a snapshot of actual balances and don’t care whether that is money you just borrowed to buy a car tomorrow or that the carpenter’s check did not clear yet from the house repairs. Them’s the rules.</p>

16

<p>I am not sure anymore, but I thought the law was changed so that all 529s are now assets of the parents rather than the student after all of the grandparent 529 issues></p>

<p>Nope, guess not. A quick look shows that 529s in the names of other than student or parent have issues in how distributions are reported the following years</p>

17

<p>So the best option would be the loan?</p>

18

<p>Ambrey, we can only throw out ideas. We don’t know your particulars, your aunt’s particulars. What you end up doing is up to your family. You can throw out the ideas, the reasons, some consequences and try to get to the best solution. That there is an accountant in the picture is good.</p>

19

<p>Thank you for the help! I’ll see what I can do</p>

20

<p>529 plans are out of the question in your name or parent’s name. You are basically telling the college that you set aside money just for them. You want to position the assets into instruments that do not have to be disclosed on the FAFSA by law.</p>

<p>You can also use loans to cover the difference and accept the payments from the relatives after you complete the FAFSA your Junior year.</p>

<p>There are at least 3 or 4 strategies that work…but I haven’t read any of them on this post. Find a decent college planner that can help you with this.</p>