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report inheritance on fafsa? (=kills financial aid?)

sp3sp2sp3sp2 Posts: 6Registered User New Member
I am filling out my renewal FAFSA and am wondering if anyone has any experience with this: that is, does a small inheritance (30k) negatively effect grants/loans in any way?
As far as i can tell, inheritances even if small must be reported to them, cause its income.
thanks for any thoughts anyone .
Post edited by sp3sp2 on
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Replies to: report inheritance on fafsa? (=kills financial aid?)

  • FresnoMomFresnoMom Posts: 1,044Registered User Senior Member
    I believe it does.

    Is the $30K going to the parent or the student?
  • sp3sp2sp3sp2 Posts: 6Registered User New Member
    to student (me)
    (Thanks for the reply)
  • emeraldkity4emeraldkity4 Posts: 32,339Registered User Senior Member
    35% of student assets are available for tuition
  • FresnoMomFresnoMom Posts: 1,044Registered User Senior Member
    So does that mean his FA package will drop by $10,500 because of his inheritance?
  • sblake7sblake7 Posts: 1,691Registered User Senior Member
    That's correct.

    Inheritance doesn't count as income, but it does count as an asset if it still exists in liquid form on the day you complete the FAFSA. Student assets hurt the most, because the student doesn't get an asset allowance (parent's do), and students get hit at the 35% rate annually.

    So yes-- as it stands, the 30K inheritance will increase your EFC by $10,500 the first year, and thereby decrease your potential aid by $10,500 (this assumes that you'd be eligible for aid in the first place-- if your parents have very high income, it may be moot regardless).

    So:

    1. Try to discourage grandparents (and other family) from leaving assets in the name of kids bound for college, if financial aid is a consideration.

    2. If you're stuck at this point, remember that the FAFSA is a snapshot on the day you fill it out. If you have any expenses, spend the inheritance down before filling out the FAFSA. Planning on getting a computer or a car for college transportation? Get them before filing.

    Then-- spend the student assets down as much as possible your first year, before filing the FAFSA for your second year.
  • emeraldkity4emeraldkity4 Posts: 32,339Registered User Senior Member
    but don't spend down $10,000 on stuff you wouldn't buy anyway, just to gain $1,000 of finaid.
    Doesn't make sense.
    Hey I know, apply it to a down payment for a condo in the college town! ;) ( its more than I put down for my 1st house)
  • sp3sp2sp3sp2 Posts: 6Registered User New Member
    first of all thanks to all for the info.
    here is what concerns me: FASFA online form asks
    "As of today, what is the student's (and his/her spouse's) total current balance of cash, savings, and checking accounts (question 43)? (Do not include student financial aid.): Enter whole dollar amounts in this box, and do not use commas." my $$ is exactly that form --liquid. but if i spend it down, say buy a nice car, isn't the car an "asset" now? or isn't a house an asset for that matter? also, what about putting $$ into an CDs or money market or sumthing??thanks.
  • sblake7sblake7 Posts: 1,691Registered User Senior Member
    Only certain assets are counted.

    You liquid assets (checking and savings) count. A car, or a computer, doesn't. A house doesn't ( for FAFSA purposes-- colleges that use the Institutional Methodology require the Profile, and the Profile considers home equity).

    Putting it into a CD or Money Market won't help-- you'd have to report it the same as if it was in a checking or savings account.

    You can pay down debt, or pre-pay some payments, or buy something to convert it from a liquid asset to a non-liquid asset.
  • northeastmomnortheastmom Posts: 12,379Registered User Senior Member
    Sblake,

    Would the same advice apply to a school that requires the profile?
  • FresnoMomFresnoMom Posts: 1,044Registered User Senior Member
    sblake
    thanks for responding to this post. You have a way of explaining difficult things in an easy to understand way.
  • northeastmomnortheastmom Posts: 12,379Registered User Senior Member
    sblake, I reread your last post. It made more sense to me as I read it again. I am thinking that the advice you gave applies to a profile school as well (except as you clearly stated, for the house, which is an asset on the profile). This information is very important to know, so thank you very much.
  • sblake7sblake7 Posts: 1,691Registered User Senior Member
    NEMom:

    The principles are the same (as regards student assets) for the Profile as for the FAFSA. The forumulas are somewhat different, though. Profile assesses student assets at 25% instead of the 35% for the FAFSA. There are lots of other differences-- primary is the treatment of home equity, as you mentioned. If you're cash poor but house rich (as many in California are) you'll do much better under the FAFSA than the Profile in terms of aid eligibility.
  • worldshopperworldshopper Posts: 1,141Registered User Senior Member
    My mom ran into a similar problem. In 2004, she inherited some money in the form of an IRA. She cashed out in late 2004 and paid off debt with it in 2005. The debt she didn't pay off, she settled with the credit card companies. The inheritance doubled her income in 2004 and her tax liability was huge. The amount of debt that was cancelled in 2005 was reported to the IRS as income and she has to pay taxes on it. For the FAFSA, under "other income" she had to report the debt that was cancelled even though technically it wasn't income. She didn't know at first that the debt cancelled was going to be counted as income so when she first filed the FAFSA, our EFC was low. AFter having to report the cancelled debt, our EFC increased 4 fold. Mom's earned income is $15,000 a year, our EFC is $4,500. Mom also has to pay IRS $3,000 (on the cancelled debt) and $2,500 for a recent ER visit (mine) and wisdom teeth extraction. My mom is thinking of selling assets to pay for college tuition but says she will of course have to pay taxes on the income she receives from the assets she sells (jewelry, artwork, etc.). Bummer situation.
  • northeastmomnortheastmom Posts: 12,379Registered User Senior Member
    sblake, Thank you so much for your response. What I was inquiring about was if you would do the same thing with an inheritance when considering a profile school as you would when considering a fafsa only school. If the princples are the same, then I guess you would. Thanks.
  • sblake7sblake7 Posts: 1,691Registered User Senior Member
    shopper:

    That doesn't seem right to me, but I'm not a tax accountant. Inheritance generally isn't taxable-- and I don't know why 'canceled debt' would be treated as income. Seems to me that if it was received in '04 it would have to be reported on the FAFSA for that year ('05-'06 school year)-- and thereafter it wouldn't be a reportable income event, but possibly an asset. But if the asset is used to pay down debt in '05, it souldn't count as either an asset or income in '05 ('06-'07 school year FAFSA).

    I have no idea why she should have to pay the IRS on 'canceled debt'. Also, selling assets doesn't count as income, so she wouldn't owe tax on that, despite what she indicates.

    That's my understanding, anyway. Something sounds fishy-- suggest you get some good tax and financial planning advice.
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