My sister agreed to loan me money for my first year at college. I was wondering if that would decrease the amount of financial aid I will be eligible for in years to come?
It will only affect your future aid packages if you have the money sitting in your bank account on the day you file the FAFSA or other financial aid paperwork, and so need to report it as an asset.
Just be sure that you have a clear loan document drawn up so that you and your sister both know the repayment plan. Too many people end up in trouble about this kind of thing when they don’t recall what they had agreed to.
Well, I’m signing a note with her and the check will be titled as a loan. I’m very close with my sister and the repayment isn’t an issue- she knows I’ll give back what I owe.
Sounds like a good plan. Is the interest rate stated on the loan? As mentioned above, when you submit your next FAFSA after September, be sure none of the loan money is still unspent so that you don’t have to report it as an asset.
Thank you
There will be no interest, but we are signing a note so that the officials do not think I have money coming from nowhere.
Essentially, I was worried that the college would wonder where I got money from, and if they know my sister gave me a loan for a first year I was worried that my aid would decrease for the future years.
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If you insist on making a totally interest-free loan to a family member, the dreaded below-market interest rules may apply. If they do, you must follow complicated rules to calculate imaginary interest payments from the borrower to you. Then you get to pay real, live income taxes on the imaginary interest.
Thank you for the information. So, if I have to pay X amount for school and someone gives me X amount, will colleges see that and lower financial aid? If someone gives me X amount as a gift, will that change anything? Sorry, I’m just slightly confused.
Yes, a gift to the student will have an impact on the financial aid formula.
How so, if the gift is used towards tuition, how will it have an effect?
Have them give a gift to your parents.,then your oarents can pay your tuition.
So that won’t affect future awards? Thank you.
If it is a gift to you (rather than a loan) then you do have to report it on the FAFSA. If it is a loan, you don’t have to report it.
I don’t know how likely it would be for the tax guys to find out about this loan and then cause issues for you and your sister, but as suggested above, the two of you might want to look into that. I expect that it would be possible to write up the loan documents as charging minimum interest (the current federal fund rate is 0.5%), and write them as not accumulating interest until you have graduated (just like a subsidized federal loan). When you get to the point where you are ready to start repaying the loan(s), you could re-write the documents if you needed to to keep the tax guys happy.
I see, thank you all so much!
^ you could write the document with interest, and then after you’ve paid the original amount she can forgive the rest of the loan
Be careful with forgiving a loan. I think it can then become income to the borrower? The IRS has a clause about that as well I believe.