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Settlement affecting FAFSA? Not sure how to move forward.

ACollegeHopeful3ACollegeHopeful3 448 replies11 threads Member
Hi guys,

About six months ago I was involved in an auto accident as a pedestrian while I was attending school out of state. The accident was clearly the other person's fault, and recently we settled out of court, and I'll be receiving an 8k lump sum settlement for personal (physical) injuries. While I know it isn't a lot, I'm concerned about the money affecting my FAFSA. I've read that the cash is non-taxable, but I'm concerned that if it just goes into my bank account, FAFSA will treat it like disposable money come October and take 20%. I file as a dependent, and my parents have two other kids to send to college and I'm planning on grad school so I don't really want this money to mess up my EFC, because I'm reliant on federal aid to continue my education. What's the best way to use this money so that FAFSA doesn't raise my EFC by a massive chunk? Is something like a 529 savings plan worth it when I have only 2 years of undergrad left?
edited May 20
23 replies
Post edited by CCEdit_Suraj on
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Replies to: Settlement affecting FAFSA? Not sure how to move forward.

  • cshell2cshell2 1063 replies11 threads Senior Member
    Won't you have Fall 2020 college bills to pay before that? How much will that burn up? You can delay doing FAFSA until after you pay Spring semester as well.
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  • thumper1thumper1 78033 replies3500 threads Senior Member
    Your settlement is not considered income... @BelknapPoint am I correct about this?

    But if that $8000 is in your bank account when you file the FAFSA, it will be considered an asset. For FAFSA purposes, you would be assessed at 20% towards your FAFSA EFC, so $1600. That would leave you with $6400.

    Or as noted...do you have any bills to pay?
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  • ACollegeHopeful3ACollegeHopeful3 448 replies11 threads Member
    I'm full ride for tuition and my housing is covered by my student loan and additional scholarship (plus federal and state grants). So no massive college bills, and no other bills that aren't easily managed by my summer income. I don't really want to waste it on something like a new vehicle since I'm considering graduate school. Since I don't want to put 1,600 towards my EFC, is something like a 529 worth it? Would that still be taken at a 20% asset with the FAFSA if I'm the one putting money into it and the beneficiary?
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  • BelknapPointBelknapPoint 4926 replies19 threads Senior Member
    I'm full ride for tuition and my housing is covered by my student loan and additional scholarship (plus federal and state grants). So no massive college bills, and no other bills that aren't easily managed by my summer income. I don't really want to waste it on something like a new vehicle since I'm considering graduate school.

    Do you have outstanding medical bills from the accident that the settlement is meant to cover (at least in part)? If yes, use the settlement money for that as soon as you have the funds and before you file another FAFSA. If no and there's nothing else that needs to be paid to make you "whole" after the accident, consider yourself fortunate. You have $8,000 more to spend as you wish. If your college bill goes up $1,600 because of the 20% hit to your FAFSA EFC, use $1,600 from the settlement to make up for the reduction in aid. That still leaves you with $6,400. This whole idea of spending $8,000 on something you don't need or necessarily want in order to save paying $1,600 more in school costs makes zero sense.
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  • BelknapPointBelknapPoint 4926 replies19 threads Senior Member
    Your settlement is not considered income... @BelknapPoint am I correct about this?

    In general it's not taxable income (can depend on the circumstances and how the settlement is labeled), but it's debatable as to whether or not it's reportable on FAFSA under question 44.i "Student's Untaxed Income." If the settlement funds are received this year, they might possibly be reported on the 2022-2023 FAFSA, when OP would presumably be a graduate student and it might not make any difference at that point.
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  • happymomof1happymomof1 30598 replies194 threads Senior Member
    If you have no further medical bills to spend it on, and if you don't need any specialized equipment as a result of your medical adventures that you would need the money for (even something as relatively simple as a different kind of shoe or long-sleeved shirts to cover up scarring or sun hats to shade your eyes/neck/ears), then run a sample version of the FAFSA to see how different choices will affect your numbers. Here is the most recent version: https://ifap.ed.gov/sites/default/files/attachments/2019-10/2021EFCFormulaGuideOct2019UpdateAttach.pdf

    Since you are planning on grad school, a 529 is a perfectly sensible place for you to park any extra money. While you are an undergrad, a 529 in your name is treated as a parental asset, not as your asset.
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  • thumper1thumper1 78033 replies3500 threads Senior Member
    edited May 18
    Does your college meet full need for all accepted students?

    Another thought...you could use some of this money to pay off part of the student loan you have. And/or you could use some of the money instead of taking the student loan to pay your fall bill.

    Adding...I don’t think paying $1600 additional for college is a massive chunk. You will still have 80% of that money in the bank.

    edited May 18
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  • ACollegeHopeful3ACollegeHopeful3 448 replies11 threads Member
    edited May 18
    I don't have further medical bills to spend it on, as the bills I do have will be significantly reduced if not wiped out by the hospital due to my income level (I'm uninsured).

    I'm uninterested in spending the money right now when I know I'll have massive expenses in graduate school and moving for graduate school in the next three years. It feels short-sighted to pay off my undergrad loans or not take out a loan for just one year when I'll need it my senior year, and almost certainly need it in my graduate school career. I won't have a fall bill, and if I do it will be negligible (under 1k, and something I've already saved for). My school isn't "need-blind" (I go to a state university that is very cheap), but they've met my full need through a combination of merit and need-based scholarships for tuition, plus the federal student loan and need-based scholarship for my housing.

    Though i understand I'd still have 80% of that money in the bank, $1,600 is a big chunk of money for someone with low income. Is a 529 account counted as a parental asset even if I'm the sole account holder? (i.e. I would be both the benefactor and beneficiary).

    @thumper1 @happymomof1 @BelknapPoint
    edited May 18
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  • BelknapPointBelknapPoint 4926 replies19 threads Senior Member
    Though i understand I'd still have 80% of that money in the bank, $1,600 is a big chunk of money for someone with low income.

    And the remaining $6,400 is an even bigger chunk, and is better than $0.

    Is a 529 account counted as a parental asset even if I'm the sole account holder? (i.e. I would be both the benefactor and beneficiary).

    For FAFSA, yes, but only if you are dependent for FAFSA purposes and are therefore reporting parental information on FAFSA. (You would be both the owner and the beneficiary.) Once you are a graduate student, a 529 account owned by the student is reported on FAFSA as a student asset.
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  • cptofthehousecptofthehouse 30280 replies59 threads Senior Member
    If your parents open a 529 for you and you contribute to it, it would be reported as a parental asset on FAFSA for undergraduate and would not show up at all on FAFSA as a graduate student. However, depending upon the the school , additional inquiries beyond FAFDA info could be made. Also, even if the 529 is on your behalf, if your parents are the owners, they could change the beneficiary and also would have access to the funds.
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  • Eeyore123Eeyore123 1878 replies23 threads Senior Member
    I'm uninterested in spending the money right now .....

    Who isn’t?
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  • BelknapPointBelknapPoint 4926 replies19 threads Senior Member
    If your parents open a 529 for you and you contribute to it, it would be reported as a parental asset on FAFSA for undergraduate and would not show up at all on FAFSA as a graduate student.

    Right, it won't show up on OP's graduate student FAFSA, until money from the 529 is used for OP's benefit. Then any 529 distribution will need to be reported as untaxed income to the student.

    Also, even if the 529 is on your behalf, if your parents are the owners, they could change the beneficiary and also would have access to the funds.

    Yeah, there's that, too.
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  • cptofthehousecptofthehouse 30280 replies59 threads Senior Member
    edited May 18
    These days, the 529 can be used to pay up to $10k of student loans, so OP can keep funds in beneficiary account through grad school, borrow for grad school expenses, and pay that money back with that 529. Or use the 529 money in the last year of grad school after last FAFSA is submitted.

    Everyone should explore all options with their benefits and drawbacks in terms of getting the most money and flexibility for education payments. I always encourage that. It is a fact of this process that when you get money through a windfall, most all of the time you are expected by the financial aid system to use a portion of it to pay for schooling. You are that much better off than others in your same financial predicament but without that windfall. I don’t think this system is unfair.
    edited May 18
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  • ACollegeHopeful3ACollegeHopeful3 448 replies11 threads Member
    I'm not arguing that the system is unfair necessarily, but I don't want a small amount of money to ruin the educational plan I have. I will probably utilize a 529 account and use the funds on student loans as @cptofthehouse mentioned. I understand that I'm in a pretty good situation, but I just want to maximize the funds to my benefit, especially for educational expenses, and who wouldn't right now??? So yes, while 6,400 is better than 0, there's not many scenarios in this situation where I'd end up with 0, but it's very hard for me to potentially let $1,600 go when that's half of what I make in an entire summer working, and the amount is equivalent to 20% of my yearly income, if not more.
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  • thumper1thumper1 78033 replies3500 threads Senior Member
    edited May 18
    You mention that your school isn’t “need blind”. Need blind is an admissions term that has nothing at all to do with your financial aid award. It means that your financial need wasn’t considered when you applied for admission.

    Did you mean that your school doesn’t guarantee to meet full need for all accepted students?

    It sounds like you have a plan...starting a 529 isn’t a bad thing...as long as you are sure you will be using it for your further education. You will still be assessed 5.6% of the $8000...so....about $450 or so will be added to your FAFSA EFC.

    But question....Your FAFSA for 2020-2021 should have already been filed a long while ago....was it? If you are talking about money you haven’t yet received...and will be getting in the near future...it won’t be on your 2020-2021 FAFSA at all if that FAFSA has already been filed. And if it hasn’t...get it done before you get that $8000.
    edited May 18
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  • happymomof1happymomof1 30598 replies194 threads Senior Member
    Aid for graduate school is not determined the same way as aid for undergraduate studies. Depending on your field of study, you might not have to pay one cent for that while in a different field of study you'd be responsible for every single penny. And of course there are other fields of study (and programs within a given field of study) where a student's aid only covers part of their expenses. None of the programs that I am familiar with offer need-based aid, so I'm not at all clear as to the purpose of filing a FAFSA for grad school. Maybe it is just so the student can legally access federal loans.

    It was my understanding that a student-owned 529 and a parent-owned 529 were both treated as parent assets for FAFSA purposes for dependent undergraduate students. I may be confused about that. So do verify the policy before you go through the hassle of setting up a 529.
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  • twoinanddonetwoinanddone 24573 replies19 threads Senior Member
    How much are you getting in NEED based FA? If you are getting merit grants, having the extra $8000 in your bank account may not change anything or change it by much (or having $8000 in a 529 account may change even less).

    FAFSA doesn't take the $1600, it just increases the EFC by that (or by $448 if in a 529). It may not make that much difference in your FA from the school.

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  • mommdcmommdc 11906 replies31 threads Senior Member
    There is no need based aid for graduate school anyway, right?
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  • cshell2cshell2 1063 replies11 threads Senior Member
    OP still has two years of undergraduate left.
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  • blossomblossom 10340 replies9 threads Senior Member
    OP- if you are uninsured, get online ASAP and price out health insurance. I cannot think of a better use of your windfall then to purchase health insurance.

    You have no idea if you will have residual effects from the accident. You many need more PT in a few months, you may get referred to a chiropracter for pain management, you may have some nerve damage which was undetected until your other wounds healed.

    My heart goes out to you- this sounds really traumatic, but get yourself insured. It is wonderful that your emergent care needs were covered, but you would not be the first person to discover that after the initial accident, there are long term health issues. I've had PT twice for the same injury and wow, it was expensive. It was completely covered the first time because it was right after the accident and I was referred by an orthopedic surgeon and I can honestly tell you that I don't know what it cost. I only had partial coverage the second time because the injury was supposed to have healed (I was in chronic pain) and boy, the sticker shock was incredible. For people who have to pay full freight- I cannot imagine it. Yes- my therapist had a doctorate degree and was highly educated and skilled, and the center I went to was clean and well stocked with equipment and maintained. But it is still expensive to treat a long term injury with PT. Meds are cheaper, but I wasn't interested in that as a solution.
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