I think part of the problem is that for the vast majority of HS students, they don’t have any savings beyond the little they earned at after school jobs. Most kids don’t have the means for their savings to pay for much more than books and incidentals.
Your daughter is in a fairly unique, and frankly enviable, position. Hopefully she’s excited with the schools that are offering her more aid if she doesn’t want to pay for the Ivy.
If your D is interested in the Ivy is it worth having a conversation with the FA office to clarify some of the issues with using the IRA funds, and how that affects the FA, in particular the fact that once the funds are withdrawn the full amount of the withdrawal will be reduced by the taxes owed which is not the case with money withdrawn from a savings account?
It does seem a bit odd that this school was the only one to factor in the inherited IRA in their FA calculations.
Who says it’s not intended to be used for education? Certainly not the IRS. This is like a student saying their savings account is not intended to be used for education, so a college should not assess it against them when calculating need-based financial aid. Good luck with that argument. Your daughter has a non-spouse inherited IRA. Depending on when the IRA owner died, your daughter either needs to withdraw the entire balance by the end of 10 years after the owner’s death, or take annual required minimum distributions starting the year after the account owner’s death and based on your daughter’s life expectancy. Either way, the amounts withdrawn from the inherited IRA will be taxable income to your daughter. The IRS clearly does not contemplate that this is a retirement asset for your daughter, and neither should any college.
I don’t know where you are getting this from. The standard, widely used formula in calculating need-based financial aid is that 50% of the student’s savings are available to be used for the student contribution portion of the payment plan each year. Need-based financial aid is recalculated each year, based on assets on hand when the forms are completed, and income from the prior-prior year. At a meets-full-need college, there is no expectation that a student will have to liquidate their entire savings to pay for college. There is definitely an expectation that a student will make reasonable contributions based on their ability to pay from existing non-retirement assets, as well as assets acquired while a student, including wages earned.
I think she means it is not an “education IRA” (ie, a Coverdell account) where withdrawals are tax free if used for educational purposes.
And can you clarify on the 50 percent assessment on savings that you posted? I thought it was 25 percent a year for profile schools and 20 percent a year for FAFSA-only schools.
Indeed you are correct; I was thinking of the student income assessment percentage. Thank you for pointing this out. FAFSA assesses student savings at a maximum of 20%. How Profile schools do this will be based on each school’s own methodology, but I expect that in most cases it will be similar to the FAFSA 20%.
I think you’d have a stronger argument if:
The source of the account was a life insurance payment from a deceased parent: OR
The source of the account was payout from a crippling accident or medical malpractice; OR
The source of the account was- in fact- an actual retirement vehicle that the kid had set aside funds out of earned income (but how a HS kid could accumulate an IRA or 401K out of earnings is a mystery; I guess a Tik-Tok influencer with a substantial following and a 6 figure income could have actually saved real money…)
Etc. The reality is that none of these things are true. Why on earth would you think that a child shouldn’t liquidate their various assets to pay for college? If I told you about a kid with a trust fund worth half a million dollars (i.e. money that the kid had inherited, albeit in a different way than your D’s inheritance) would you be happy knowing that the kid was getting need-based aid because the college was “protecting” his trust? Do you think it’s fair if a Rockefeller descendant gets need based aid because mom is a social worker, dad volunteers as an organic farm consultant and so their actual W2 earnings means they qualify for need based aid? Wouldn’t you expect a well managed college to do a deeper dive and see that the family has substantial assets-- and therefore their income does not accurately portray their financial status?
That’s how a kid with a $125 savings account (put aside from working as a server at a diner; the rest goes to help the family pay the electric bill) sees YOUR kid’s situation!
Just some perspective.
Based on the endowment size mentioned, it seems like the school in question is Cornell. They tell applicants up front how student assets are treated:
https://cornelladmissions.happyfox.com/kb/article/81-how-is-the-student-contribution-calculated/
They aren’t a particularly wealthy school (compared to HYPSM) known for great FA. However, they will match aid awards from other Ivies, Duke, Stanford, MIT.
In any case it’s worth a call with FA to see if anything can be worked out.
I suspect the other schools mentioned either don’t have a clear policy on this or else were unaware that the funds are available for college.
As for the double counting of assets and income, this would really only be an issue for funds withdrawn in the first 3 semesters. Those issues could be avoided by backloading withdrawals. As mentioned, the kiddie tax is probably a bigger issue.
History lesson- the “kiddie tax” was imposed because affluent people were transferring assets to their kids and grandkids to avoid paying taxes on them. The impression someone might get from reading this thread is that it is a punishment for thrift. It generally is not, because children (in most cases, actors and models being an exception) are not high earners, and so most of their assets (and the cash flow that comes from them- dividends, the proceeds from a stock sale) is as a result of someone gifting those assets to the kids. And in the case at hand- those assets (sheltered by the aunt’s IRA) have NEVER had a dime of taxes paid on them.
End of lesson. The tax code isn’t perfect, financial aid isn’t perfect… but before you rail against the insanity of a particular, highly individual specific case, it sometimes helps to understand why something is the way it is. And an Adcom can use Professional Judgment (or not) to override a particular policy. The IRS less so, but taxpayers win enough of the time so that it’s an actual “thing” to challenge an IRS decision on a complex asset situation.
Yes, when I mentioned the kiddie tax as an issue I meant that OP needs to be aware of it and optimize tax planning around it. Many aren’t aware and therefore don’t plan for it.
Treatment of some scholarship/aid and undergrad stipends as unearned income, and how that interacts with the kiddie tax, is also an area that surprises a lot of parents/students come tax season.