By Paul McCoy, CIMA®, AIF®
Each year, around 86 percent of college students obtain some form of financial aid.1 In order to receive financial aid from the government, all students must fill out the Free Application for Federal Student Aid, otherwise known as the FAFSA. The FAFSA determines the financial need of a student based on factors such as family income and the prior tax year’s income.
With these factors in mind, it’s important to note that large windfalls like an inheritance could affect the amount of financial aid a student receives. If you’re worried about how an inheritance could affect your college-age child or grandchild, here’s what you need to know.
How Can an Inheritance Affect Financial Aid Eligibility?
A substantial increase in a college student’s income may indicate to the government that they are no longer in need of financial assistance (or may be in need of less than before).
Because of the formulas used with the FAFSA, this scenario may occur if a family with a college-bound student receives a substantial inheritance or other financial windfall that adds to the family’s assets.
FASFA’s asset allocation allowance may exclude certain assets from its formula, depending on the ages of the college student’s parents or guardians. While it depends on a family’s unique circumstances, this threshold often hovers around $50,000 for eligible families.
Because of this, it is important to note that a smaller inheritance may not have too much of an impact on the formula, meaning your college student’s financial aid may remain intact.
How Can You Minimize The Effects?
Encouraging your beneficiaries to use the inheritance to pay down debts such as credit cards or car loans may help to minimize the impact. This is because the formula does not take debts into account when calculating how much financial aid a college student needs, and it may decrease the amount of funds used during FASFA's calculations. If you keep the inheritance money in the bank, the government will likely count it.
Managing how the inheritance is received may help to minimize the impact a large inheritance could have on a student’s financial aid. For example, you may decide to put the money into a trust fund and allow for smaller withdrawals to be made each year by your beneficiaries.
If left with no other option, your beneficiaries may be able to provide the government with documentation proving their inability to cover their family contribution, especially if that expected amount was raised in response to a large, one-time inheritance. If your documentation is accepted, they may be able to renegotiate their college student’s financial aid package.
If you’re worried about an inheritance decreasing the amount of money your child or grandchild receives in financial aid, there are strategies you can utilize to help prevent this from happening. Work with your trusted financial partner to explore these options as you continue the estate planning process.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.