A lot of things are not income for tax purposes are so counted on FAFSA and by schools for financial aid. I do not know specifically how A student Getting an inheritance is reported. If the parent inherited the money, was gifted the money , no tax implications, not income on FAFSA, only assets if sitting there on. filing date and not sheltered. But a kid gifted money is supposed to report it on FAFSA. But rules don’t always make sense. If some one gifts you money, money no tax liability to you. You find it on the side of the road, it’s supposed to be reported and taxed ? Yeah.
@blossom, the student is certainly potentially in much much better shape with $100k dropped into his life. What I am addressing here is the best way to plan for the use of the money so the student gets the most out of it. In that situation, I would not immediately it sitting in an account fully paying school costs if some of it can be sheltered. It’s just smart financial planning. As I stated above, it’s unlikely that a young person that age is going to be able to make a qualified retirement plan contribution. Or get any tax benefit from State income tax if in the picture, by sticking it in a 529.
As long as it’s done legitimately, no reason why student shouldn’t try to keep as much student financial aid and shelter the inheritance. I don’t see the issue here. Smart planning.