We would like to help a niece cover the gap between her financial aid and her college costs. She is a Pell Grant recipient and her family has almost no financial means other than her summer job. If we give her a gift, could that result in a reduction of her aid? Is it better to structure as a loan?
I’m sure there will be people here that will know the best way to gift (I’m assuming to the parent because income/assets of the student are hit a lot harder on FAFSA). But what I do know is that because of the way FAFSA is done with prior, prior year info, anything you give for your niece’s last two years of college won’t effect financial aid at all as it won’t be reported.
Yes, if you give her money directly she’ll have to include in in her financial aid paperwork the next time she files. It may be excluded if she qualifies for simplified assets or automatic $0. If you trust the parents, you can gift the money to them and they can pay the school.
Gifting to the parents is not a viable option here.
You may want to consider paying the school directly. I believe I have heard that is the best solution on CC before. However, I am not an expert.
How much are you talking here as a gift?
If you pay the freshman bill directly to the college, I do believe it will count as “money paid on the student’s behalf” when the sophomore year FAFSA is completed.
Could you draw up a loan document, and loan this student the money? Then at some point, after graduation, you could forgive the loan.
@thumper1 that’s what I was thinking about. It will be about 5-7k per year depending on how much she can get from work study which is still to be determined.
You could also just pay off her loans when she graduates.
The gap is over and above the Stafford Loans she is already getting. To get a loan to cover the gap, she would need someone to co-sign. For a variety of reasons, we’d rather just give/lend her the money ourselves than co-sign.
Then just draw up a loan and cancel it after she graduates.
Be aware that a cancelled/forgiven loan may be reportable to the IRS as taxable income. A gift is not taxable income to the recipient. The choice here is between better financial aid treatment and better tax treatment.
Pretty sure loan forgiveness can count as a gift for IRS purposes.
Can she cover the gap for the first couple years with loans? If so, I’d have her take those and pay them off for her later. The last two years you can gift her as much as you want without it effecting aid. Just make sure she’s really going to graduate in 4.
Talk to the school’s FA office. They can talk through how they’ll interpret this aid and how it’ll play in their system.
Possibly; it depends in part on the intent of the loan maker. This is why I wrote “may be reportable to the IRS as taxable income.” (emphasis added)
But if the OP is lending about $5000 per year to the niece, about $20k total, and the debt forgiveness is that $20k, that is well under the amount per year that the OP and spouse could give an not have to report as a gift to the IRS. Or the OP could split up the forgiveness into several years.
The requirement to report amounts made by others doesn’t list tuition:
“The response indicates the amount of cash support the student (and his/her spouse) received from a friend or relative, if the student is a dependent student in 2017 and this support is not reported elsewhere on the application. The amount should include any money paid on the student’s behalf by someone other than the student (and his/her spouse) for rent, utility bills, etc., while the student attends school, unless the person making these payments is the parent whose information is reported on this application.”
To me, if they meant tuition, they’d have said tuition.
Not a financial professional or CPA. That said, I think the magic number for reporting to the IRS is $10k per year. A $5-$7k per year gift might be fine. The advice above to call the FA office is good. Both schools I have experience with (ASU and ND) have been very helpful in providing guidance.
@BelknapPoint two things…
1.could you please…again clarify the “gift” limit…so people understand…it’s not a yearly limit for anything but completing a form…
And
- Can you please explain the difference between a gift for IRS tax purposes and a gift as it might relate to financial aid. There is a difference!
I disagree. The “etc.” covers tuition, and pretty much anything else paid on the student’s behalf, under the conditions described. Using your logic, only money given or paid directly for rent or utility bills would need to be reported.
A gift of any amount is “fine,” as long as the gift giver is ok with it. The annual exclusion amount for gifts in 2018 is $15k. Gifts totaling more than that amount in any one year from the gift giver to another person must be reported on IRS Form 709. Any amount greater than the annual exclusion will count against the gift giver’s lifetime exemption amount, which in 2018 is $11.18 million. Any gifts from the gift giver that exceed the lifetime exemption will be subject to gift tax.