noncustodial parent gift to student son.

Paying for College
41

93b. Child support paid because of divorce or separation or as a result of a legal requirement.

This means “child support paid because of divorce or separation” OR “as a result of a legal requirement.”

NonCustParent, you state, “If custodial parent happens to pay child support, then they specifically mention a legal requirement, but if she/he receives child support, nothing is said specifically. FAFSA cannot have it both ways,” but if I interpret what you are saying correctly, I believe you are interpreting the sentence incorrectly (whew - that’s a long sentence!). What it means is that you need to report child support paid if you are divorced/separated … but if you are not divorced/separated and there is a legal requirement to pay child support, that must be reported. For example, if you never married but are required to pay child support.

42

@kelsmom, you are correct! thanks.

I think I have found a solution that will make many people on the board happy (well, not completely).

Since student did not draw down on all possible federal loans available for the year, simply tell student to fully draw and pay for summer abroad.

Eventually once fafsa’s don’t need to be filed anymore, at that time I pay off the student loan.

any ethical dilemmas with this solution?
Again thanks for the pushback, which helped me look for alternate solutions.
Which seem to have the same outcome as far as I am concerned.
Actually it removes the risk from ex-wife doing something crazy with the money.

Please note that I do pay many expenses out of a 529 plan I have, and student does properly report them on 45j fafsa.

43

Perfect solution! Student can wait until spring to request the loan - but make sure student doesn’t miss the loan cutoff date for the year.

44

That would work if the amount needed is coverable by a student loan. There are limits to what a student can borrow on his own ($5500/$6500, $7500/$7500 over the four years) Anything else is up to the financial aid office and Perkins loans are hard to get and are not usually for that much.

45

No ethical dilemma in my corner, and a very nice thing to do for your kid.

And gets your ex-wife out of the “do I go on a spa vacation or give the money to my kid” position which I think is a good thing for everyone, even your ex.

46

When you gift the money to pay off loans, remember the annual gift exclusion amount.

47

@cptofthehouse, loans will cover almost all, I can just give missing amount to student and declare on 45j.
@Madison85, plan to break payment of loans between 2 senior semesters which fall in different tax years.

48

And any accrued interest?

49

You can start your loan repayment in the spring of your kiddo’s junior year.

50

of course interest.

51

To continue on the idea in Post #48 - and pay the college directly beginning in spring of junior year for tuition and fees, even if more than the annual gift exclusion, since direct educational expense payments are one of the exceptions.

52

I have this money in a 529 plan.
In spring of junior year and going forward, I have to think about how best to draw out of it to pay tuition and pay outstanding loans, without running into any issues of gift tax, or Qualified Expenses, etc… My son does have a partial merit scholarship, so I will be able to draw out for non-qualified expenses, and then use that to pay student loans.

I think I will have to draw tuition money from 529 to my account, and then pay the university to not incur gift tax limit.

Darn, I think I enjoy this stuff.

53

There shouldn’t be any gift tax implications when taking distributions from a 529 account.

54

There really aren’t gift tax implications to you unless you are giving away millions. The lifetime gifts are really more of an issue than any one year.

55

Can you pay student loans with 529 money? I don’t think so.

56

Thanks @MiddKid86, I just read a bunch of stuff about this.
Since I put much less than $70K limit into it, There were no gift taxes going in.
And there are not any gift taxes coming out of 529 plans.
So basically I dont have have to worry about any gift taxes coming out of 529 plan! You learn something every day being on this board. Less hoops to jump through than I thought.

@twoinanddone and @Madison85, no, you typically cannot pay student loans with 529 money. But if your child has a merit scholarship, you can withdraw the equivalent amount from the 529 without incurring penalties, (but still paying taxes on the gains at student’s tax rate, which will be low or close to zero). Money withdrawn through this option can be used for anything, including paying student loans.

57

Student loans can’t be paid with 529 money without incurring a penalty, because student loans don’t qualify as QHEE.

58

So basically NonCustParent * has * the money to cover some undetermined amount of his child’s college expenses in a 529 plan, but doesn’t want the 529 payments to decrease financial aid, and, wants to use 529 money later to pay off loans when it won’t affect aid?

I want to have my cake, and eat it too!

59

I just knew that someone would still not be happy!

Let me repeat, I do withdraw money from my 529 to pay expenses and tuition and it is declared on fafsa 45j, and consequently aid is reduced.

This whole hullaballo was because ex-wife said that if paying for an unnecessary summer abroad, reduced financial aid further, that I would have to pick up the tab for the reduction. So I was looking for a solution. I am thankful for all the advice here.

Ex-wife does not complain when aid is reduced when I pay for things that she thinks are necessary.

60

Once I feel a discussion is over, I like to summarize what I learned in the discussion.
Like I did in the other thread I opened.

Most information here regarding 529 plans will apply to non-custodial parents, but also grandparents 529’s.
Also the discussion is only meaningful for schools that only require only fafsa, either because they are fafsa-only schools, or because the college is not providing institutional need aid anyway.

1 - You can put up to $70K into a 529 plan without incurring gift tax.
2 - When money is withdrawn from the 529 to the student it does not incur gift tax.
(Therefore it never make sense to withdraw to yourself or pay the university directly from the 529)
3 - When you withdraw from non-custodial 529 to student, that should get declared on fafsa line 45j
This causes a 50% marginal increase in EFC, but that is what has to be done.
on the other hand the 529 is not declared as an asset on the fafsa, since it is the non-custodial parent’s
4 - 529 plan money can only be used for tuition, fees, room, board, books. Withdrawal over those incur penalties and taxes.
5 - if student has a merit scholarship you can withdraw the equivalent amount from the 529 without incurring penalties, (but still paying taxes on the gains at student’s tax rate, which will be low or close to zero). Money withdrawn through this option can be used for anything
6 - 529 plan money withdrawn Junior Spring semester and later does not need to be declared on fafsa, since there is no further fafsa to file after that point.

Regarding non-529 support non-custodial parent wants to provide:

1 - If given directly to student, has to be declared on fafsa 45j, causing 50% marginal increase in EFC.
2 - If given to custodial parent, for her to spend on kid, independent of if part of a legal requirement, it should be declared as child support on fafsa 94c, causing a 25% marginal increase in EFC.
Even though this is better from a fafsa perspective, there is some loss of control, as custodial parent can do whatever he/she wants with the money, also current spouse is more comfortable giving money directly to student.
3 - non-custodial parent can provide a fully legal loan at prime+2% interest. After Junior Spring semester, loans can be forgiven, paying attention to gift tax limits(14K/y/pp), splitting into separate tax years if necessary.
4 - Also fully draw down on any federal loans available to student, or custodial parent. After Junior Spring semester, loans can be paid off on behalf of student, or custodial parent, paying attention to gift tax limits(14/y/pp), splitting into separate tax years if necessary. In this case student and/or custodial parent need to trust non-custodial parent enough that the loans will in fact be eventually paid.

Finally, it seems that there is a loophole in that grandparents are allowed to give money to custodial parents instead of directly to the student, and it does not need to appear anywhere on the fafsa as long as under gift tax limits(14K/y/pp).

In the entire discussion, anything over gift tax limit, I did not address, since it is not within my reality, and I am not sure of the effects in that case.