Tuition Payment from a "Rich Uncle" questions

Paying for College
1

<p>Hi,
This is very hard for me to discuss financial things on a public forum, but after reading all the great responses to other questions here, I have to give it a shot to see if anyone has any advice. We currently have two students in private colleges (and honestly, it works out to be similar to state schools, because the financial aid at the privates is better than the zero aid at the states). One child will be a senior next year, the other a sophomore. We did okay with using saved money and getting student loans to get through the past several years, but this past year we've had to take out equity loans to pay tuition bills, and also the second year took out a significant loan from a wealthy relative and we are paying him back monthly, like a car loan with 5% interest. No, it's not pretty but it gets the job done.</p>

<p>Here's the question: This past Christmas the very generous 'rich uncle' who lives far away, called and asked if he could help out with the kids' semester's tuitions, knowing or hearing that we were having to make difficult choices to pay the bills. We had already paid one of the bills, which had been due in December, but he paid the other child's bill, online through the college's online 'Other Payer' option. We did not know that this kind of thing can help the giver, as paying a relative's tuition can factor into a tax strategy for them. (*that hadn't occurred to us, as we were too blown away by the generous gesture and still are.) </p>

<p>We recently were reviewing our son's financial aid package with the college and meant to ask about this 'gift'/payment and totally forgot. My husband feels we should not accept any more "gifts", as it will probably backfire and reduce the financial aid package our child gets as it is, leaving us in worse shape. </p>

<p>I've read so much on the financial aid guidelines/laws though cannot find out if/how this hurts a student, if a relative does pay a portion of their tuition. The amount was well under $10,000, but we do not have any plan to pay this relative back, as it was a gift to our son. We wondered if he should have just gifted the money to us, but I think they make out better tax-wise by paying the tuition directly to the college.</p>

<p>I think/know it's time for us to sit down with a financial adviser, something we've not been able to put the money into thus far. We don't want to have any false information or shady things happening on our kids' documentation and would never hide assets, etc. We want everything to be above board, so before I write an email to my child's FA office, I wanted to see if anyone here had any suggestions or advice on the matter.</p>

<p>Thanks so much,
CCL</p>

2

<p>The biggest implication in this is that it should be reported on next year’s FAFSA as untaxed income to the student on line 44j. Here’s the description of that line from the FAFSA formula guide:</p>

<p>(44j. Money received. Enter the amount of any cash support you received from a friend or relative (other than your parents, if you are a dependent student). Cash support includes payments made on your behalf. For instance, if your aunt pays your rent or utility bill that you would otherwise be obligated to pay yourself, you must report those payments here.)</p>

<p>The FA implication is that, for next year, you can assume that any student income above the $5250 allowance against income, will be assessed at 50%. So, you could be seeing an increase in the student contribution of up to $5000 (assuming a $10,000 gift).</p>

<p>I really don’t see the need to contact the FA office. Getting money from a relative is totally legal/ethical, you just need to report it correctly on next year’s FAFSA.</p>

3

<p>Oh my. Well that’s pretty sobering. Thanks, Dukedad. So it would have been much better for him to give the money to us as a gift, since parents’ assets are assessed at a much lower rate. What if we pay him back? Ugh. I feel really badly now. A thoughtful gesture, is ending up costing my son up to 5K? :(</p>

4

<p>If it’s a loan, it does not have to be reported on FAFSA.</p>

5

<p>Student income is assessed at 50% after the $5250 allowance, so a gift of $10,000 would result in a $2375 marginal increase in EFC.</p>

<p>If the gift was made in January, it doesn’t need to be reported until the next year’s FAFSA is filed.</p>

6

<p>CapeCod - yes, it would have been much better for him to give you the money. If he paid directly to the school, I don’t think there’s much you can do about it now since paying him back won’t take that “gift” payment that he already made on your son’s behalf. As swimcat indicated, the other loan that you are already paying the uncle back for does not need to be reported on the FAFSA.</p>

7

<p>

I don’t recall any tax advantages for a non-parent relative…</p>

<p>But it will be better for your FA picture if the money is gifted to the parent, not the student, because gifts are not counted as income for the parents. Notice there is no corresponding line in the parents’ section to line 44j in the student section.</p>

<p>And if the money is not in your bank account on the day you fill out the FAFSA, it doesn’t get counted as an asset either. So if he gifts you money again, either pay the bill before you fill out the FAFSA, or have him delay giving you the money until after you fill out the FAFSA.</p>

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<p>Thanks for all your responses so far. I’ve researched some more and yes, indeed there are advantages for the giver, in terms of estate, etc. and the receiver, in that you can exceed the annual gift maximums.</p>

<p>Here’s one of the pages that I looked at, and also looked at Turbo Tax, etc. and other business sites.</p>

<p>[Pay</a> Tuition or Medical Bills to Lower Estate Taxes - Financial Web](<a href=“http://www.finweb.com/taxes/pay-tuition-or-medical-bills-to-lower-estate-taxes.html]Pay”>http://www.finweb.com/taxes/pay-tuition-or-medical-bills-to-lower-estate-taxes.html)</p>

<p>I’m not sure how much my son is going to earn this summer, so the ‘hit’ so to speak hopefully won’t be too bad and we will have to talk to my wonderful and generous brother-in-law about any future gifts.</p>

<p>If anyone has any more thoughts, please let me know ! </p>

<p>Thanks so much again. We are so grateful for his generosity, but also want to be sure we are doing the right thing. </p>

<p>CCL</p>

9

<p>Would it make sense for the uncle to “gift” money to the kid who is going to be a senior in 2011-12 school year? Presumably, he won’t need a FAFSA next spring anyway since he will be graduating.</p>

10

<p>I think if it was given to the senior, there’s no reason to report anything. </p>

<p>If it was given to the soph and not paid until after Jan 1, it wouldn’t affect anything until the senior year FAFSA.</p>

11

<p>Yes, he is a senior but going on to post-grad, so it will affect him. The gift was only to one of the students, the senior. Really wish we had realized all this at the time. Honestly, it was such a blessing not to have to write another equity check, we were not thinking! Oh well. Live and learn as they say. Hope we are masters at this before our soon to be high school freshman heads off to college. I cannot imagine what college tuitions will hit four years from now. I guess it’s okay, folks nowadays are not supposed to think about retirement anyway, right…aren’t we all working until our 70s or something, paying off mortgages and student loans? ;)</p>

12

<p>On the post-grad trail, if he is applying for PhD tracks, it should not be a problem, if he is applying to med/law school and you did not qualify for state aid at the undergrad level, then you likely would not get the small amount of need based aid offered.</p>

<p>Why can’t is be a loan if that is better? Write up a document showing the loan terms for the amount paid online. If Uncle chooses to forgive that in a future gift, that is fine, but for now pay it as a loan.</p>

<p>Also, I am not sure of Uncle’s tax situation, but unless he is gifting your son more than the annual gift allowed amount ($13k) then he does not need the ability to gift tuition or medical bills as extra allowance.</p>

13

<p>I think the rich uncle can give up to 13K to each you and your spouse. I also believe if he is married, both he and his spouse can give up to 13K to each you and your spouse without going over the allowed gift tax amount.</p>

14

<p>Somemom, we already do have such a loan and we are paying that back monthly like a car loan. This ‘gift’ was paid directly to the school as ‘other payer’, so it’s assessed differently and is required to be reported next year on FA forms/fasfa. It would have been much better to have given us a check personally! Making that phone call is going to be awkward, actually.<br>
My son is applying to Medical Schools so I have no idea how that works, only that the undergraduate school just told me last week that, yes, there are both financial need based and academic scholarships for med school. I had no idea, and honestly thought you were on your own. Not sure if it’s a fasfa you fill out. (I will have to research that now). I’ve also connected with a local college financial aid planner who is offering a free seminar next month. Not sure how much new info I’ll learn, but will bring questions.<br>
Thanks so much again! Will let you know how things progress. Of course, everyone wishes they had this predicament, “a rich uncle”, and honestly we are very appreciative and blessed to have had this happen. I just wish it wasn’t going to now hurt my son in terms of 5K for it, when it didn’t have to at all. Still, not looking a gift horse in the mouth here. Very, very grateful.</p>

15

<p>Med school-</p>

<p>Yes, you fill out FAFSA and the Need Access forms in addition to any school forms that are required. If your son wants access to institutional funds he will fill out the FAFSA as a dependent and will include your information, most (not all) med schools will want your info even if he is considered independent. Need Access form is for some of the med schools, is similiar to the CSS Profile.</p>

<p>It would behoove you to take a look at the Pre-med forums where there is a group of students and parents (like me!) who are currently going through the financial aid process for med schools or who have just completed it.</p>

<p>Covers FAFSA, sub and unsubsidized loans and scholarships for med schools. My son starts on Monday and he was awarded a full tuition scholie for said med school…still have to cover room and board though, that is what the loans are for!</p>

<p>Hope this helps…again look for the pre-med forum.
<a href=“http://talk.collegeconfidential.com/pre-med-topics/[/url]”>http://talk.collegeconfidential.com/pre-med-topics/&lt;/a&gt;&lt;/p&gt;

<p>Kat</p>

16

<p>Thanks so much, Kat. Will do! Full tuition scholarship! Wow. Congrats. Academic? I definitely want to check things out. My son has already applied to perhaps 21 schools and is working on secondary apps as they come in. As I mentioned, we had not gotten to the point of ‘how to pay for med school (if you get in)’ yet. Appreciate the information and link.
CCL</p>