<p>Hi all, I'm doing some research for my girlfriend's little sister. </p>
<p>She is currently a freshman in college and qualified for some FAFSA loans (i dont know what, specifically) this year. Unfortunately, her mother passed away two months ago and one of the concerns is how the life insurance money that she and her father received is going to affect her ability to qualify for FAFSA loans. Is she essentially going to get punished for coming into a little bit of money as a result of her mother's life insurance and now be less qualified to receive FAFSA loans? Or is it possible that she would now be more qualified since she is living in a home with only one parent/source of income?</p>
<p>Is there any exception that FAFSA has when it comes to life insurance payouts? If they put the money into something non-liquid such as a 2 year CD does FAFSA take that into account when calculating how much loan money she could receive? Are there any assets in general that FAFSA does not look at when calculating loans? They obviously dont want to break any laws, but they also want to make sure they qualify for as much loan money as possible since using the life insurance money to pay for college would seriously harm the financial well-being of the family, now that they are on one income.</p>
<p>Thanks in advance, I sincerely appreciate any help :)</p>
<p>There is no income cutoff for Stafford loans. The FAFSA EFC only determines whether the loans she’ll be offered next year will be subsidized or unsubsidized. A student with a $99K EFC can still take unsubsidized loans.</p>
<p>Parents have an asset protection allowance for FAFSA, but it’s fairly low for single parents (generally under $20K). Assets including the primary residence, qualified retirement plans, life insurance policies, etc. are not reported for FAFSA. All other parental assets are reported and 5.6% of the balance per year, after the asset protection allowance, contributes to the FASFA EFC.</p>
<p>Not FAFSA loans, federal loans. No, a CD is not asset protection (nor are trusts, mutual funds, etc.) Retirement acounts are protected- which can be an issue for a teen. Her assets will be dinged at a higher % than a parent’s 5.6%. Under some circumstances, if the family income is below a threshhold, I believe assets are not counted on the Fafsa- but they can be on the CSS Profile, which many schools also use. Try looking at finaid.org for a lot of finaid savvy.</p>
<p>Can she spend it for necessities? If it isn’t a huge amount, that might work.</p>
<p>If it isn’t in the bank, it isn’t a liquid asset.</p>
<p>^ But does it show up on a 1099? I believe it may, which would then appear on income tax forms. Then, (I am no expert,) there is a subsequent death benefit exclusion. But, the point is, it appears. So, how does a college view this? I think this is a good question to ask an actual college finaid dept.</p>
<p>Her loan eligibility is NOT affected by the money. The only issue would be how much is subsidized vs. unsubsidized … but the amount stays the same, and all loans might end up unsubsidized next year, anyway.</p>
<p>Don’t mess with the money in order to try to maximize loan eligibility. She is eligible for a certain amount based on her year in school, and that amount will not be reduced by the money.</p>
<p>That’s been the discussion for awhile. Now that they are talking about eliminating the interest subsidy during the grace period, I think that this is the next logical step. For years, the discussion has been one grant, one loan, one campus based program. That will be Pell, unsub Stafford, and work study once all is said & done.</p>
<p>thanks for the responses everyone. so am i to understand it that ones assets dont impact how much financial aid you can get, but simply if the loans are unsubsidized or subsidized? if that is true, how do they actually determine how much need based financial aid one gets?</p>
<p>We’re mainly trying to figure that out. if they just look at assets to see how much money she gets then she is going to gift the money to her aunt who can hold it for a few years (if this is legal…)</p>
<p>Assets do affect how much aid you can get. But if she is only getting loans (not grants) anyway, the only difference will be how much is sub versus unsub. </p>
<p>Gifting the money is a bad idea. There are tax consequences if the gift is substantial Plus “giving” it to he aunt with the intention of taking it back does not pass the smell test (in other words she is just trying to hide it, not really giving it away).</p>
<p>If her dad is low enough income (<$50k AGI) and meets some other criteria, it’s possible the assets may be ignored anyway.</p>
<p>^^ so the question is not just about loans?<br>
So, my question about a 1099 holds? We don’t know how much will be in the student’s name versus the parent’s. We don’t know the income level or current finaid package.<br>
Have you run the college’s Net Price Calculator to see where you are, worst case?</p>
<p>As I recall, Life Insurance pay-outs are not reported as income. However once they are converted to cash in the bank, or invested somewhere else, they become investments that will be reportable on the FAFSA. If any of the money was in a retirement fund, then that might be able to be rolled-over into a “Beneficiary IRA”. The daughter would be obligated to take minimum withdrawals each year based on her age, but the bulk of the money would be in a retirement vehicle that is not reportable on the FAFSA. At any time she would of course have the option of withdrawing more than the minimum. Not all retirement funds can be converted this way, and the hassle of setting it up might not be worth it to her even if she could.</p>
<p>If the money is coming to the dad, he may be able to roll his share into his own IRA, or set up an annuity. Annuities are tricky things, so he would need to get good advice about that. If the money won’t be needed for a very long time, the dad does have the option of using a chunk of it to purchase life insurance for himself. Again, that would tie it up where FAFSA can’t “see” it. A representative from the insurance company would be happy to explain that kind of option.</p>
<p>^^^ Agreed.</p>
<p>You do not get a 1099 for a life insurance payout, and it is not taxable.</p>
<p>I stand by my original advice - spend the money on necessities, and as far as FA is concerned, it is not a factor. Pay down your mortgage, pay off your car, something like that.</p>
<p>Now if you get millions of dollars, that would be a different story (and then there is no reason you can’t self-pay for college anyway). But if you are taking about a few grand, just take care of the bills.</p>
<p>Not just an insurance salesrep, a financial planner. </p>
<p>I don’t want to muddy the waters. Some life insurance can be paid out as an annuity, and interest is reported. There are cases were, if I understand correctly, a 1099 may be issued. And, how things are viewed by the IRS can depend on several factors. (Though, in general, a death benefit is not taxable.) An expert is needed. Sorry if I confused things, but I don’t believe there is any simple answer.</p>
<p>If the student is receiving ONLY Stafford loans…then the student will CONTINUE to receive the Stafford loans…REGARDLESS OF INCOME OR ASSETS. The life insurance payout won’t affect anything at all.</p>
<p>If the loans do become unsubsidized, I would suggest using part of that life insurance payout to pay the interest as you go…instead of letting it accumulate. It won’t be a very large amount of money to pay each year.</p>
<p>For her sophomore year, she would get $6500 in Stafford loans. </p>
<p>The only difference would be if they are subsidized…or not. BUT the loans will still be there.</p>
<p>There is no need to spend down this money if the ONLY thing this student is getting is Stafford loans.</p>
<p>The above posters are correct. Life insurance proceeds paid as a lump sum generally do not cause a 1099 to be issued and are not income taxable.</p>
<p>There is no need to play games with the money if all she is receiving is loans, in that case, if it were my DD I would say skip the loans and use the insurance money for the education.</p>
<p>If grants are involved, you might review other options, but how much coverage are you talking about? $10k? $50k? $100K? $500k? That really makes a difference</p>