What is the best way a relative can make a gift to a student's college cost...?

Paying for College
1

<p>... without adversely affecting the financial aid award already determined to the student ?</p>

<p>It is July, 2010, student is a rising junior at a LAC, and the LAC has already given a FA award to the student for the next school yr. A relative of the student has said that he would like to give a sizable amount to the student to pay for college tuition. He said he did not want to upset the financial aid situation. Not sure if this person wants to also retain a tax benefit for the current year (is this something a donor can possibly enjoy if contributing to the college costs of a student?). </p>

<p>Note: main breadwinner of the student's family has lost his job, the family's EFC went from $26,200 to $2,703, but the college's FA award has been the same except for a Pell grant; financial need has been addressed by the school via extraordinary loans to the student, including subsidized staffords, but loans nonetheless.</p>

<p>A related question is:</p>

<p>Can a college's financial aid award, once determined, be changed during the year in which the award was effective? Or would such changes occur the NEXT year since the gift might be considered income for the current year?</p>

2

<p>a good way would be to help pay loans after graduation.</p>

3

<p>Lend the money to the student and then forgive the loans after graduation. Draw up the loan papers, make it official.</p>

4

<p>Could the parents take out a PLUS loan in that amount and then the relative pays off the loan?</p>

5

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<p>FA packages are based on finances of the year before, so the FA for your rising jr would have been based on 2009. Contributions to the student or parents in 2010 won’t affect the current FA package, but could affect the following year. </p>

<p>I agree that since the student has loans, helping pay those loans would be a good way to help out without possibly affecting FA.</p>

<p>x-posted</p>

6

<p>Can’t a person give anyone a $13K gift (and that would be times two if the relative’s spouse gave that amount too) per year? I do not know the tax implications for the person receiving the gift. I also don’t know how much money is being considered.</p>

7

<p>A gift even if not taxed to the giver, becomes asset of the receiver and will affect next years aid. The important issue here is that giver should not be taxed. The best way for the giver to give the gift is to send it directly to the school and the student does not take loans of that amount.</p>

<p>I am not a tax professional but this is what I found on the turbo tax website and searching the web. I see two ways where the donor can give the aid. First way is to give the amount directly to the school, so the school gets the money without the student having to borrow.</p>

<p>[TurboTax®</a> - The Gift Tax](<a href=“http://turbotax.intuit.com/tax-tools/tax-tips/tax-planning-and-checklists/5533.html]TurboTax®”>http://turbotax.intuit.com/tax-tools/tax-tips/tax-planning-and-checklists/5533.html)</p>

<p>*Gifts not subject to the gift tax</p>

<p>Here are some gifts that are not considered “taxable gifts” and, therefore, do not count as part of your $1 million lifetime total.</p>

<pre><code>* Present-interest gift of $13,000 in 2009. “Present-interest” means that the person receiving the gift has an unrestricted right to use or enjoy the gift immediately. In 2009 you could give amounts up to $13,000 to each person, gifting as many different people as you want, without triggering the gift tax.

  • Charitable gifts
  • Gifts to a spouse who is a U.S. citizen. Gifts to foreign spouses are subject to an annual limit of $133,000 in 2009 ($134,000 in 2010), indexed for inflation.
  • Gifts of educational expenses. To qualify for the unlimited exclusion for qualified education expenses, you must make a direct payment to the educational institution for tuition only. Books, supplies and living expenses do not qualify. If you want to pay for books, supplies and living expenses in addition to the unlimited education exclusion, you can make a 2009 gift of $13,000 to the student under the annual gift exclusion.
    </code></pre>

<p>Example: In 2009, an uncle who wants to help his nephew attend medical school sends the school $15,000 for a year’s tuition. He also sends his nephew $13,000 for books, supplies and other expenses. Neither payment is reportable for gift tax purposes. If the uncle had sent the nephew $28,000 and the nephew had paid the school, the uncle would have made a taxable gift in the amount of $15,000 ($28,000 less the annual exclusion of $13,000) which would have reduced his $1 million lifetime exclusion by $15,000.</p>

<p>The gift tax is only due when the entire $1 million lifetime gift tax amount has been surpassed.</p>

<p>Payments to 529 state tuition plans are gifts, so you can exclude up to the annual $13,000 amount. In fact, you can give up to $65,000 in one year, using up five year’s worth of the exclusion, if you agree not to make another gift to the same person in the following four years.</p>

<p>Example: A grandmother contributes $65,000 to a qualified state tuition program for her grandchild in 2009. She decides to have this donation qualify for the annual gift exclusion for the next five years, and thus avoids using $65,000 of her $1 million gift tax exemption.*</p>

<p>The second way is for the donor to open a 529 plan in the name of the donor. They donor can give $13000 a year ($26000 with spouse) or $65000 (130,000) but if they give the $65000 (130,000) they cannot give for another 5 years. The student then can use the 529 plan to pay for college expenses and this could include loan avoidance. The beauty of this is that the amount in the 529 plan is in the name of donor and will not show up in the parents assets next year. Even if the 529 plan is in the name of the parents, only a portion of it will be used to calculate the EFC. If the donation is used in the same year that the donation was made, then the balance in the 529 plan will be zero. Some states give tax breaks for those contribute to 529 plans.</p>

<p>Again, I think these are legitimate tax avoidance strategies in the circumstances. I would not recommend anything illegal, so please correct me if I am wrong.</p>

8

<p>Best not to pay the money directly to the school without first finding out whether the school would consider that a resource of the student. (Some do and it will impact FA the following year.) Also, if the student is attending a school that uses the CSS Profile to determine aid, on that form any 529s held by someone other than the parent or the student are declared. (Not on the FAFSA, but yes on the CSS Profile.)</p>

<p>The tax advantage of the 529 is only the investment can grow without that growth being taxed, but the principal investment is after-tax income already. As for the untaxed growth, given the very short timeline you’re talking about there is not much benefit to be had there for the giver.</p>

<p>As far as the FAFSA-only situation, the giver could also just give the money to you (the parents) and you could use it pay college costs. If it’s spent before you’re preparing next year’s FAFSA, it will not be sitting in the bank as an asset that you must declare. There is a place on the FAFSA where students are asked about “bills paid on their behalf” but that question is not asked of the parents, so there is no where for you to declare that gift. (Even if you have some of it still in the bank at next year’s FAFSA filing, it may fall under your protected asset allowance. That figure is based on the oldest spouse’s age. For us po’ folk with few assets it’s pretty likely it will fall under the protected amount - ours is over $50K --not counting the house-- and we’ve never had anywhere near that much in assets.)</p>

<p>I agree the other good options are to give the money to the student later to help pay off loans, or loan it to the student directly then forgive the loan. Either of these options could happen at any point in 2011 after the student’s senoir year FA aid applications have been filed.</p>

9

<p>Money given to the student is reported on the student portion of FAFSA. There is no reporting that I can see for gifts given to the parents. This clause appears in the student section of the FAFSA instructions…but it does NOT appear to be under the parent instructions:</p>

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<p>So it seems that relative can gift the money to the parents, who then use it to pay junior’s tuition with no FAFSA implication. I would call the FAFSA help desk (800-4-FEDAID) just to make sure that parents aren’t required to report the cash gifts they receive.</p>

10

<p>If the money is spent BEFORE the filing of the next FAFSA, it is NOT an asset. It would be “money paid on the student’s behalf” however. I would suggest giving it to the parents who will use it to pay the bill. The parents can receive a “gift amount” of $13K per year. I would guess that any amount received would be considered a gift.</p>

11

<p>There are two issues here that need to resolved with a possible third issue: One is how to ensure any gift or payment does not affect next years EFC or this year’s school grants. The other issue is to ensure that none of the gift is taxed either to the giver or the receiver/s as that would mean the student will not get the full amount.</p>

<p>I think the OP or the person the OP is posting has a variety of options and need to explore it with the giver</p>

<p>The third possible issue is how can gift giver get a tax break. The only way I could see is if the giver gives to a 529 plan and the state gives a break. Here is a list of states that give breaks for 529 contributions.</p>

<p>[FinAid</a> | Saving for College | State Tax Deductions for 529 Contributions](<a href=“Your Guide for College Financial Aid - Finaid”>State Section 529 Deductions - Finaid)</p>

12

<p>To me, it looks like it would only be “money paid on the student’s behalf” if it went directly from relative to student,but it seems not if it went from relative to parents to student. Parents can pay money on the dependent student’s behalf with no FAFSA implications, as that is a specific exception to the Money Received line.</p>

13

<p>That’s how I understand it, too, sk8rmom. Money that’s a gift to the parents is theirs to use as they like, whether that’s paying the rent, taking a vacation, or paying for college. “Money paid on the student’s behalf” would be, for example, someone paying the student’s rent (but not the parents paying the student’s rent) or other bills or obligations.</p>

14

<p>How about if the relative pays directly to the school? Again, I would assume that since the parents are obligated by FAFSA to pay tuition, that that payment would not affect the FAFSA line item that asks whether anyone has paid a “bill” on their behalf. Discuss?</p>

15

<p>I don’t know why you are all making this so difficult. The relative can just draw up standard loan papers and give the money to the student. REpayment starts after graduation at which time the loan is forgiven. It should be put in a codicil to the person’s will that if he should die, the loan is forgiven.</p>

16

<p>Archiemom, some schools will consider money paid directly to them by third parties as a student “resource” and it will be assessed in the following year’s FA calculations. Not all schools have this policy, but it’s good to check first.</p>

<p>Cptofthehouse, I think just giving it to the parents is the easiest of all.</p>

17

<p>Giving it to the parent can be covered in some PROFILE questions. Lending it to the parents is a better way to go.</p>

18

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<p>There is a tax implication for that. IRS will expect either tax on the interest that should have been paid, or if the interest and principal is forgiven, the forgiven amount is considered as income to the student. Again, I am not an accountant, but there some rules that govern loans given to relatives. IRS will consider this as tax evasion strategy unless it is done right. Some accountants may want to weigh in on this topic.</p>

<p>Here is something that I found on the web</p>

<p>[Loans</a> Among Family Members - Personal Finance - Debt - SmartMoney.com](<a href=“Personal Finance Advice - Personal Financial Management - MarketWatch”>Personal Finance Advice - Personal Financial Management - MarketWatch)</p>

<p>Of significance</p>

<p>*
Set an Interest Rate
Interest-Free doesn’t mean hassle-free. Many loans among family members are interest-free. But be careful. If you don’t set an interest rate, the IRS, in its family-friendly way, will do it for you. And since that interest would be considered income for the lender, the IRS will happily tax the interest payments that were never paid. You have now entered the hideously complex world of “imputed interest.” Essentially, the IRS, eager to raise revenue, has decided that for a loan to be a loan, interest must be paid, and if interest is being paid, someone is making taxable income.</p>

<p>The IRS’s enthusiasm does not stop there. Not only does the agency place a tax on imaginary income, but it assumes that the borrower could not afford to make the interest payments (he had to borrow money, didn’t he?) and then acts as though the lender gave him the money to pay the interest. Enter the gift tax. So the money the lender never received but pays taxes on anyway could also count against the $11,000 annual tax-free gift limit, and if it exceeds that, then the gift and estate tax exemptions. This is not all as bad as it sounds, and in most cases these penalties can be avoided with good planning.*</p>

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<p>You can gift the interest. There isn’t going to be $11K of interest each year. The loan papers are not ones that need to be bandied about anyways. THere onlyif a question arises about source of the money. Chances are small that would happen. You can also gift the loan in increments of $11K as well. </p>

<p>The fact of the matter is that monetary gifts are not generally reported anyways. Who reports the haul they get at graduation? Or birthday money? It isn’t difficult to structure this in a way that isn’t a problem.</p>

20

<p>^^^^ Not knowing how much money we are taking about and what the financial situation of the donor is, I would be hesitant to say if the chances of the IRS getting involved are high or low. Colleges could ask for the source of money and they may want loan documents, the donor may be someone who has a lot of assets and income and needs to be careful about IRS audits etc.</p>

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<p>Yes, I agree that it not going to be difficult to structure the loan in a way that it is not a problem, but it may be advisable to have professional involved, especially if the donor is in a high income bracket and subject to IRS scrutiny.</p>