Did you know about 86 percent of college students obtain some form of scholarship or financial aid. 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, here’s what you need to know.
How Can an Inheritance Affect Financial Aid Eligibility?
How does an inheritance affect college financial aid? A substantial increase in a college student’s income may indicate to the government (Federal Department of Education) 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. The type of asset is important and nuance makes a difference. For example, if your student inherits a retirement account like an IRA. The IRA itself is exempt for reporting on the FAFSA form as an asset. If you take money out of the IRA in a given year, then that money you withdrew must be reported.
A smaller inheritance may not have too much of an impact on the formula, meaning your college student’s financial aid may remain intact. It's still important think about decisions even after an inheritance is placed in your student's name that decisions could affect eligibility for scholarships or other opportunities.
The College Scholarship Service Profile (CSS) and Inheritance
While nearly every college bound family will encounter the FAFSA form, some students who apply for a private school will be ask to fill out the College Scholarship Service Profile (CSS) as well. The CSS questionnaire asks more questions than FAFSA and the questions/methodology differs as well. If your student plans to attend a university that requires CSS, make time to learn about how CSS counts (or doesn't count) assets your student could inherit.
"Therefore encourage one another and build one another up, just as you are doing." 1 Thessalonians 5:11 ESV
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. Keep in mind timing can make a difference as well.
If you’re worried about an inheritance decreasing the amount of money your child receives in financial aid, there are strategies you can utilize to help prevent this from happening. Work with a trusted financial advisor to explore these options as you continue the estate planning process.
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