How college gifts can hurt financial aid

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Q. My parents want to help to pay for college for my two kids, 15 and 10. I know how a grandparent helps can make a difference for financial aid. What’s the best strategy?
— Help!

A. Considering the high cost of college, it’s wonderful that the grandparents are willing and able to help.

And you’re right, it’s important that you understand how they can help in the most effective way.

A common pitfall is directly gifting the money to the student, said Steven Sirot, co-founder of College Benefits Research Group (CBRG) in Roseland.

He said the current gift threshold to avoid tax ramification is $14,000 per year to each person.

“The issue is that the gift is treated as untaxed income to the student, which can significantly lower financial aid eligibility,” Sirot said.

He said it would be a better option to gift the money to the parents, which would not be reported as income on the Free Application for Federal Student Aid, commonly called the FAFSA.

The timing of the gift is important.

He said the money may need to be reported as a parent assets, thereby reducing potential aid eligibility as well — although the impact is much lower than student income.

529 plans are also a common way grandparents can help fund college.

Sirot said even though the money is not counted on the FAFSA, the distributions are considered untaxed income – again possibly negatively impacting the financial aid award. Therefore, the timing of these distributions should be considered when looking at the full picture, Sirot said.

“The grandparents can also make tuition payments directly to the school, which avoids the any gift tax issues,” he said. “This would also keep it from being counted on the FAFSA as untaxed income, but be careful: particular colleges may factor this into the financial aid that comes directly from the institution.”

The bottom line is that the best way for a grandparent to help is not the same for every family, and the pros and cons of the alternatives should be considered with the family situation in mind.

Email your questions to moc.p1503306914leHye1503306914noMJN1503306914@ksA1503306914.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.