non-parent giving college loan vs gift, for tax savings

[workburnout]

Lets say some non-parent relatives want to fund college for a kid. The kid will qualify for some need based financial aid, but not the full amount, based on her parents' assets and income. She has little income/assets of her own and is a full time student.

If the relative gives the college money outright, by either paying it to the college directly or to the student to use for costs (books, on campus housing, and/or other expenses), it will decrease the amount of the need based financial aid. It also may be taxed for the student and/or giver as income or a gift.

Wouldn't it be better for a non-parent (example aunt or grandmother) to give a loan, then later forgive the loan if the child completes college?
That way it would not affect the financial need based aid amount.
It would still be considered income when it is forgiven, but that may be better than giving it during college which would affect the financial aid.

What is the best way to give money to a college kid to minimize affect on financial aid?

A 529 plan held by a non-parent could affect financial aid, I think. So would it be better to not put all the money in the 529 - just enough to get tax savings which is putting in $2000 a year. Then, rather than putting a lot in a 529, instead the non-relative could give outright to the student, say $1000 a month, during college. However, if that $1000 is counted as income and reduces financial aid, might a loan (later forgivable) be better?

Not sure which way of giving is best so the student can keep her financial need based aid - based on her parents' assets and income.

 

[sengsational]

Why not have the relative stay on the side lines and have the student accept the full aid package, including the loans. They usually don't have interest due until after graduation. The relative can gift to the graduate to eliminate the loans.

Now, if you're talking about how to fund the EFC, and can that be done with a loan, I'm sure it can, but it won't matter to next year's EFC. Or by introducing another financial supporter, could make it worse. The FAFSA asks about parents' assets and income, the students assets and income. But I think it also is trying to dig into other supporters. You don't want them to start expecting even more people to buy your kid's education!

 

[gayl]

Here's how I'm doing it: I pay GS1s cell phone + small amounts throughout the year. He stays needs based minimally eligible but the school gives him a department grant. I pay 8k of SL on graduation + hand over the $500 in Series EE bonds my mom (his great grandma ) bought him. That way he graduates almost debt free. Will owe about $7500 -- yeah that's a summer gig

I gifted him the horn, computer (which he handed off to GS2), and a few gift cards. This year he hasn't asked for anything (junior) so he is truly spreading his wings

FWIW: He (+ mom/ brother/sisters) lived here until he went off to SFSU + they bought their mfg home so we're extraordinarily close

 

[workburnout]

Thanks for the great ideas. I guess the best thing to do is wait and see what financial aid she's eligible for. Then, if giving her money would cause her to lose that aid, I'll try to figure out the best way to proceed. Maybe I could give her smaller amounts through the year including buying her books/computer/other supplies, and/or wait until she's graduated to pay off SL.

I could pay her college outright and I want to do that, for any portion her parents do not pay. However, it makes no sense for me to do that if she can get some of her college paid for through free grant money based on her parents income. Her parents income is not low but it's not high either - she'd likely qualify for some money, maybe a few thousand dollars.
I just don't want to throw money away which is what I'd be doing if she loses aid due to my paying a huge amount.

She already has $20,000 in 529 plans from non-parent relatives. She has a few years to go before college so that money will likely grow and be added to, so will likely be over $40,000.
If she goes to an expensive private college that will not be enough but will be a good start.
I don't know whether adding more than that to the 529 is such a good idea. It seems it may end up causing her to lose grant money but then again it may already be too much - she may not get much grant money based on what is in there already.

 

[workburnout]

If she got loans and I paid them off later, it would cause her to be taxed, so I'm wondering if that would be a bad idea. Maybe it would be best just to give the money over time during her college for example $2500 a month tuition and living expenses, once we see if she has grants. If she ends up having a lot in grants, I guess we would need to calculate if it'd be better to give sooner or later. If it's only a little in grants, maybe would be better to go ahead and pay for the college and forget about the grants, since getting a loan then paying it off later would result in more taxes. However, if she has a lot in grants, it might be best to let her get loans and pay that off later, which would result in her being taxed - but would save money overall.

 

[MichaelB]

It’s not clear to me why helping pay college costs would impact / reduce the financial aid. The aid calculation does not take into consideration potential gifts by extended family members. The university will calculate an amount that the student is expected to obtain from parents or borrowing, and if some of that could come from a relative.

This would be a gift and treated as such by the IRS. The recipient is not taxed, it just counts toward the total estate exemption.

 

[SecondCor521]

A reasonably well known trick is based on the fact that 529 distributions on behalf of a student in a given year are counted as tax-free income on the next year's FAFSA and that the FAFSA now considers prior-prior year tax and income information.

So:

1. Contribute whatever amount of help you want to provide to a 529 with you as the custodian and the student as the beneficiary.
2. Wait until the student files their FAFSA for their junior year. (*)
3. Pay from the 529 to the school on the student's behalf.

There are some advantages and drawbacks to this approach:

1. The aid you're providing is weighted towards the last two years of college. This may be good or it may be bad, depending on the circumstances. Bad if the student really needs the aid to get through the first two years; good if you want to incentivize finishing over starting a degree.

2. You'd be limited to providing support for 529-qualified expenses. Not all college-related expenses qualify for 529 reimbursement.

3. You'd probably be getting a nice tax deduction when contributing to the 529.

(*) Doing the math, it seems to me like you can actually start paying for stuff in January of their sophomore year, because their senior year FAFSA should be based on their spring-freshman+fall-sophomore calendar year, but you should probably doublecheck my math and the rules.

 

[SecondCor521]

It’s not clear to me why helping pay college costs would impact / reduce the financial aid. The aid calculation does not take into consideration potential gifts by extended family members. The university will calculate an amount that the student is expected to obtain from parents or borrowing, and if some of that could come from a relative.

This would be a gift and treated as such by the IRS. The recipient is not taxed, it just counts toward the total estate exemption.

From an income and estate tax point of view, a gift from a non-parent to the student is non-taxable (provided it remains under the annual gift amounts or claimed against the lifetime exclusion, of course).

However, from a financial aid point of view, FAFSA does ask the student about untaxed income, which includes gifts from relatives. See here for example:

https://thechoice.blogs.nytimes.com/2013/01/16/guidance-office-fafsa-3/

Untaxed income to the student is considered student income, which adds to the student portion of EFC, which adds to overall EFC, which reduces financial need, which usually reduces financial aid.

The same site provides a workaround, though: You can give the money to the parents instead.

(I mentioned an additional workaround in my previous post, which is to do the gifting late enough that it doesn't get reported on the applicable student's FAFSA.)

 

[MichaelB]

From an income and estate tax point of view, a gift from a non-parent to the student is non-taxable (provided it remains under the annual gift amounts or claimed against the lifetime exclusion, of course).

However, from a financial aid point of view, FAFSA does ask the student about untaxed income, which includes gifts from relatives. See here for example:

https://thechoice.blogs.nytimes.com/2013/01/16/guidance-office-fafsa-3/

Untaxed income to the student is considered student income, which adds to the student portion of EFC, which adds to overall EFC, which reduces financial need, which usually reduces financial aid.

The same site provides a workaround, though: You can give the money to the parents instead.

(I mentioned an additional workaround in my previous post, which is to do the gifting late enough that it doesn't get reported on the applicable student's FAFSA.)

Thanks for the clear explanation. So, cash gifts to help pay college costs can be made, but need to be given to the parents.

Another option is helping pay a loan. I did this with my son. He had a very low interest rate, though, otherwise it wouldn’t have made sense.

 

[gayl]

If she got loans and I paid them off later, it would cause her to be taxed

only quoting the part that confuses me. How?

 

[sengsational]

I think we clarified that gift taxes might have been the concern, but not warranted at the probable funding level.

 

[gayl]

sorry .... missed that.