Welcome to College Confidential!

The leading college-bound community on the web

Sign Up For Free

Join for FREE, and start talking with other members, weighing in on community discussions, and more.

Also, by registering and logging in you'll see fewer ads and pesky welcome messages (like this one!)

As a CC member, you can:

  • Reply to threads, and start your own.
  • Post reviews of your campus visits.
  • Find hundreds of pages of informative articles.
  • Search from over 3 million scholarships.
Share feedback related to your experience on College Confidential to help us shape future initiatives.

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

curiousparent555curiousparent555 Registered User Posts: 6 New Member
... without adversely affecting the financial aid award already determined to the student ?

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?).

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.

A related question is:

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?
Post edited by curiousparent555 on

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

  • emeraldkity4emeraldkity4 Registered User Posts: 35,861 Senior Member
    a good way would be to help pay loans after graduation.
  • cptofthehousecptofthehouse Registered User Posts: 26,432 Senior Member
    Lend the money to the student and then forgive the loans after graduation. Draw up the loan papers, make it official.
  • thumper1thumper1 Registered User Posts: 64,004 Senior Member
    Could the parents take out a PLUS loan in that amount and then the relative pays off the loan?
  • entomomentomom Registered User Posts: 23,662 Senior Member
    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?

    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.

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

  • MD MomMD Mom Registered User Posts: 6,728 Senior Member
    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.
  • mazewanderermazewanderer Registered User Posts: 1,399 Senior Member
    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.

    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.

    TurboTax® - The Gift Tax

    Gifts not subject to the gift tax

    Here are some gifts that are not considered "taxable gifts" and, therefore, do not count as part of your $1 million lifetime total.

    * 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.

    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.

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

    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.

    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.

    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.

    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.
  • 'rentof2'rentof2 Registered User Posts: 4,327 Senior Member
    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.)

    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.

    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.)

    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.
  • sk8rmomsk8rmom Registered User Posts: 5,746 Senior Member
    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:
    j. 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.

    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.
  • thumper1thumper1 Registered User Posts: 64,004 Senior Member
    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.
  • mazewanderermazewanderer Registered User Posts: 1,399 Senior Member
    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.

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

    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.

    FinAid | Saving for College | State Tax Deductions for 529 Contributions
  • sk8rmomsk8rmom Registered User Posts: 5,746 Senior Member
    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.
  • 'rentof2'rentof2 Registered User Posts: 4,327 Senior Member
    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.
  • archiemomarchiemom Registered User Posts: 1,616 Senior Member
    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?
  • cptofthehousecptofthehouse Registered User Posts: 26,432 Senior Member
    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.
  • 'rentof2'rentof2 Registered User Posts: 4,327 Senior Member
    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.

    Cptofthehouse, I think just giving it to the parents is the easiest of all.
This discussion has been closed.