Grandparents want to loan my son some money for college with the stipulation that they will forgive the loan when he graduates. Where can they find a template for a promissary note to get notarized?
Also, in another grandparent situation, if she gifts $10K to us as parents, and we use that to pay for tuition, does that get reported on FAFSA or CSS Profile for the next year?
Grandparent gifting the money to you…and then you paying the bill is the way to go with this.
@thumper1 If they do, don’t we have to report it on CSS? (And maybe FAFSA?) This is for a private school that uses the Profile.
I think I read somewhere on the forum that it’s better to set it up as a loan. If that’s the case, I’m trying to find out how to write up a loan note without having to go to an attorney.
How much is the loan? How much would a lawyer cost you? You want this done right…s,that there are NO questions asked later on.
Things to consider:
If it were me, I’d spend the couple hundred dollars to see a lawyer.
http://educatedrisk.org/analysis/taxation-cancelled-or-discharged-debt
If the plan is to forgive the loan, is that then considered income to your son?
With FAFSA and Profile moving to prior-prior year income information starting with academic year 2017-2018, students can receive gifts without FA consequence as early as spring of sophomore year. If the grandparents can wait until then to make the loan/gift, you won’t have to jump through any hoops to document the arrangement for FA purposes.
Good point @BelknapPoint. The OP just needs to make sure that the FAFSA and Profile are filed BEFORE the gift is received. They do not want it sitting in their bank accounts where it will be counted as an asset on the date of filing these forms.
http://blog.taxact.com/family-loans-does-the-irs-care-if-i-lend-my-kids-money/
I think gifts might be best, you don’t want the forgiven loan be taxable income to your son or the interest on the loan be taxable income to the grandparents.
Another option if child will take federal loans - have the g-parents promise/set aside funds to pay those off at graduation.
OP should look at the link ^, explains a lot about the tax consequences.
Isnt the best situation for the OP to receive the gifts rather than her kid?
Is there anything on CSS that asks if parent receives gifts from anyone? Or has their bills paid by anyone?
If OP wants a promissory note form, google Blumberg forms. Also perhaps legal zoom has something, Have not looked at either form personally so cannot recommend but take a look.
Is it because grandparents want the grandson to work hard in school if they pay?
How about if they just gift the money to the parents every year provided the grandson meets a certain GPA?
Or contribute money to a 529?
The 529 would have to be in the parent names not the grandparent otherwise distributions would count as income.
Not income (not IRS income) but amounts paid from a 529 belonging to the grandparents would show up in
“amounts paid by others” on FAFSA
^ would a straight gift from grandparent to kid or to mom show up the same way?
Thanks to all. Sorry, I was at an Easter lunch with family.
Answers to questions.
His grandparents are willing to gift the money outright either to us or to our son, whatever works out best for financial aid purposes. I was the one who suggested a loan after reading advice somewhere on CC that setting it up as a loan would not require reporting it as income.
They are not requesting a loan document because, as mentioned, they are willing to just gift the money. People recommended a notarized loan doc. I’m assuming it’s in case the financial aid office wants to know where the money came from? We would just keep the doc in our safe.
We thought of taking out the federal loans and paying them off later, but we’d have to pay the origination fees. Seems like it would be better to save on those fees so that more money can go to the student. We’d rather avoid those fees if possible. Someone said prime + 1% and set it up so the balance is forgiven. But I had not considered that the forgiven loan would then be taxable. No one mentioned that on previous threads.
We (parents) have a 529 for our kids, but it’s not huge. If the grandparents contribute to it, is it still considered income? Or is it considered an asset? And does it make sense to contribute to the 529 if the money is coming right back out 3 months later? This might be the easiest way to go, but I’m not sure what the consequences would be.
CSS - I just checked and line PI-230A says “enter the amount of cash your parents received and any money paid on their behalf (e.g, bills) in 2015.” I believe this is where we’d have to report a gift, right?
Would a contribution to our 529 have to be reported here?
The loan forgiveness doesn’t hinge on GPA. He is a hardworking student who will be going to a top school.
The loan origination fee on a Stafford loan to the student is 1%. It is not a big deal at all. Sure, you’d rather not pay it but if he takes $2500 in the fall it is $25, and it comes off the loan proceeds. Believe me, I’m a cheapskate and I had no issue with this. For a parent loan, the fee is 5%, and that hurts more.
Will he qualify for any financial based aid? You may be worrying about something that won’t matter. Would he qualify for a Pell grant if the grandparents aren’t contributing? If not you may be doing all these gymnastics for nothing. If his EFC is $15k and the grandparents’ gift would take it to $18-20k, it probably won’t matter how they give the money (but to you and then you pay for the tuition is usually best).
@twoinanddone I was referring to the origination fee for a parent loan. We’re talking about $30K.
We have a similar situation and are also seeking to be as smart as possible. Before reading this thread we had decided the best bang for your buck method would be gifts from my spouse and myself to the parents made in annual installments over the 4 years. With the fafsa timing change a lump sum gift in Spring of sophomore year would be a better option but doesn’t apply to us as our kid has a sister one year behind him.
Now, after learning that cash receipts will need to be reported on the CSS, I am thinking that annual gift installments to the parent’s 529 plan, while seemingly silly, may be the best way to go. It is my understanding that 529 contents are considered parental assets, but are only assessed at a very low level, something like 5%. Does anyone know if that is accurate? If yes, that may be the best and easiest way to go.
529 accounts that are owned by a parent or the student, if exceeding the parent asset allowance, are indeed assessed as a parent asset at 5.64% for FAFSA purposes.
So to clarify, if the grandparents contribute to our parent-owned 529, we would not need to report it as income? How about on CSS? The parent asset assessment at 5.64% is much preferable in that case.
Wouldn’t the financial aid office wonder where the money came from? I’m assuming they track a student’s financial file from freshman year to senior year.
How about this year? Would it make sense to contribute to a 529 and withdraw 3 months later?