Opinion: When loving adults want to help a student with college funding

No matter what the financial wherewithal of parents, they should always take the time to fill out the FAFSA (Free Application for Federal Student Aid). Depending on many factors, it is possible to get need-based financial aid even if your family is considered high income.

The vast majority of colleges and universities use the FAFSA to make financial aid decisions, but a small group of about 200 schools require a form called the CSS Profile.  

Let’s pretend your Susan wants to study engineering at the College of William and Mary (a university that requires the CSS Profile). Her parents have filled out both the FAFSA and the CSS Profile. Both say that she is going to have to pay “full-freight.”

At that point, a non-parental adult can give cash gifts up to $16,000 per person in 2022. To maximize the amount, an individual can write a check to Susan and each parent and the total ($48,000) can be used for college expenses. If the loved ones are a married couple, they can contribute up to $96,000 per year per student. Another option is that the outside adult can make direct payments to her college and exclude that payment from gift taxes. Also, Susan can still qualify for merit-based scholarships and awards no matter what her family’s financial background.

If the FAFSA and/or CSS Profile indicate that Susan qualifies for need-based aid, it gets more complicated.  

Let’s first talk about you writing a check directly to the college, that nifty tax trick we learned about above. If you can pay for the entire tab for tuition and room and board, go for it. If your budget allows for only a partial payment, proceed with caution. You won’t get nailed with gift taxes, but your student can have that payment treated as a “resource” which could reduce her potential needs-based scholarship money.  

I’m pretty sure you wouldn’t be very happy if your well-intentioned gift ended up costing your student more in the long-term. 

If a family applies for needs-based aid, it is also critical who the owner of the college savings account, called a 529 Plan, is. Grandparents or other adults can set up 529 Plans for the benefit of anyone. But when the funds are distributed they may adversely affect the financial aid formula and result in the family paying more out-of-pocket than if the accounts had been set up by the parents.  

There are strategies to grandparents owning the accounts and taking distributions, but it takes know-how to make sure you do it right to minimize the amount of out-of-pocket that all interested parties will pay.

Heidi Huiskamp Collins is the CEO of Huiskamp Collins Educational Planning LLC, Bettendorf. She can be reached at [email protected] or to learn more visit www.hhceducation.com.

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