01 Aug Will tuition gifts hurt college financial aid?

Q. Two of my great nieces and nephews will be attending college next year. I have promised to pay their tuitions. Would it be best to make out the checks directly to the universities or put it in a special account? I would not want to jeopardize any scholarships or financial aid.
— Auntie

A. Your question is a smart one, and you’re correct — your college gift could have an impact on financial aid.

The impact on financial aid could be significant.

You should start by speaking with the student and their parents to determine how well they understand the financial dynamics at play, said Peter McKenna, a certified financial planner with Highland Financial in Riverdale.

He said that’s because the parent and student incomes and assets are critical to the decision on how to proceed and an oversight could cost the student grant or scholarship money.

McKenna said the key thing to determine on the financial aid front is whether the student will be eligible for need-based aid.

“While this can be a complicated question, it is worth the student completing an online Expected Family Contribution (EFC) estimator,” McKenna said. “If their EFC is materially higher than the cost of attending their desired schools, they are most likely ineligible for need-based aid and your gift shouldn’t impact that calculation.”

But if the EFC is below or close to the cost of the school, you need to be concerned that your providing assistance could cost the student need-based aid they would otherwise be able to receive.

“If they have a school in mind, I suggest reaching out to the financial aid office at the school to determine if the school is likely to provide need-based aid before even contemplating your offer of assistance,” he said.

Then there are gift taxes to consider.

For this, you should consult your tax advisor for specific advice on your situation. But generally, gifts of $14,000 per year and direct payments to medical or education providers are gift tax free, McKenna said.

“Any person can gift up to $14,000 per year to any other person directly without it having any gift tax implications,” he said. “A direct gift in excess of this $14,000 per year may trigger that you need to pay a gift tax on that money and/or keep track of it for your estate and gift tax planning.”

If the gift is less than $14,000 per recipient, a direct gift may be the easiest path to take, he said. If it is more than that, making a payment to the school on behalf of the student will keep the gift from impacting you tax situation.

Circling back to the financial aid discussion above, McKenna said, any assistance that the students receive from someone other than their parents could impact the EFC.

“While providing them with a $10,000 gift won’t subject them to income taxation on the gift, the EFC could consider that gift as student income and reduce any need-based aid,” he said.

Should you determine that your gift is likely to hurt their chances for financial aid, it may be best to delay your gift until they have graduated and help them pay off the loans incurred, McKenna said.

“You may also want to consider what happens to these students if something happens to yourself,” he said. “Putting the funds into accounts that are payable on death to the prospective student is an easy way to ensure that your demise doesn’t derail their education or leave them hopelessly in debt at graduation.”

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This post was first published in August 2016.