Whose money should be spent first on tuition?

[klmama]

I can't remember what I read about this. If parents, student, and grandparents all have saved money to help pay for college, in what order should it be spent (assuming it matters for some reason)? Do grandparent contributions need to be spread out so that parents can claim the student as a dependent? If you can link previous discussions on this or other helpful websites, I'd appreciate any suggestions.

[bettyandbob]

If the grandparent makes a direct payment to the school it should not affect tax issues. Direct payments to the school are not treated as gifts so they won't change the grandparents tax situation. paying for school does not change claiming someone as dependent whether or not in the form of a gift or a direct payment.

 

ETA I'm looking at this strictly from tax consequences not the EFC aspect. Gifts to one person totally over $12,000 in a single year have tax consequences. So, if a grandparent is helping out to that large extent it can make more sense for the grandparent to pay directly to the school. Or in the alternative grandparent should be less generous, so as not to hit the gift tax threshold. 

[creekland]

We've been warned by two of our three colleges that grandparents should NOT be sending $$ directly to the school to assist a student IF the student is getting any sort of federal financial aid (work study, grants, or loans) as the EFC needs to be met by the students and immediate family only.  If grandparents (or aunts/uncles/godparents/neighbors/strangers/whoever else) send $$ to the school for the student it becomes a "scholarship" and can decrease their aid (federal) if they are not meeting their EFC.

 

It is perfectly fine if any of these folks give the $$ to the student or family and then the student/family uses it to pay for college though.  The Feds don't care about the source of the family's $$.

 

If federal aid is not an issue, I can't see where it would matter.

[FaithManor]

We've been warned by two of our three colleges that grandparents should NOT be sending $$ directly to the school to assist a student IF the student is getting any sort of federal financial aid (work study, grants, or loans) as the EFC needs to be met by the students and immediate family only.  If grandparents (or aunts/uncles/godparents/neighbors/strangers/whoever else) send $$ to the school for the student it becomes a "scholarship" and can decrease their aid (federal) if they are not meeting their EFC.

 

It is perfectly fine if any of these folks give the $$ to the student or family and then the student/family uses it to pay for college though.  The Feds don't care about the source of the family's $$.

 

If federal aid is not an issue, I can't see where it would matter.

This is accurate. My parents had to tell my grandparents to give money directly to me so I could go into the business office and make a payment to my balance due. If they had sent it directly, they would have reduced my humanities department scholarship. As it was, they didn't know where the money came from and didn't ask.

[Lori D.]

Echoing Creekland and FaithManor about NOT having grandparents directly sending money to the college for the student due to the negative effect on scholarships / grants to the student.

 

Betty: Can generous grandparents gift an amount larger than the tax-free limit without tax penalty by gifting up to the limit to the student -- but then gift money to each parent? And then each parent can choose to use their gift towards the student's education?

 

klmama: As far as whose money to spend first; unless the student has sizable assets (like, more than $20,000), it probably doesn't matter FAFSA-wise and tax-wise which order the money is spent. The only other situation I can think of is if some of the college money is in educational bonds or Educational Savings Account that is still earning interest -- the longer you can delay pulling out that money, the more interest it will earn for the student. So in that case, if grandparents had planned to give $10,000 total towards college, I would use that first, which would give the bonds/ESA another 4 quarters to accrue interest.

 

The only other thing I can think of about order of spending money, is that you might be thinking of how FAFSA determines the Estimated Family Contribution number. To determine EFC, FAFSA looks at the family's financials in this order, with the first 3 being the biggest percentage of factors:

1. student's income
2. parent's income
3. student assets
4. parent's assets

 

FAFSA looks at the previous year's income tax return information (both student and parents) for the income aspect and plugs that info into their formula, along with current asset information. Because they already "see" money earned from student and parent jobs, there's not much you can do about that. All you can do is spend or move assets before filing the FAFSA. If your student has considerable assets (savings, stocks, property, etc.), you might want to see if there's a way that can be temporarily moved out of the student's name into a younger sibling's name who will not be going to college and so their financials will not show up on FAFSA.

 

You may find this article excerpt helpful:

 

Before you start shifting assets around, use a financial aid calculator to evaluate the impact on your expected financial contribution (EFC). Often assets have a negligible impact on eligibility for student aid. For example, families earning less than $50,000 a year who could have filed an IRS Form 1040A or 1040EZ may qualify for the simplified needs test, which disregards all assets.

 

There’s also an asset protection allowance that shelters about $50,000 in parent assets. Money in retirement plans, the family home and small businesses owned and controlled by the family have no impact on federal aid. As a result, parent assets affect the EFC of less than 4% of dependent students.

 

You should, however, save money in the parent’s name, not the child’s. Child assets have a much more severe impact on the EFC. If you’ve mistakenly saved in the child’s name, you can fix this by moving the money into a custodial 529 college savings plan. Even though the child will be the account owner, such a 529 college savings plan is treated as though it were a parent asset on the FAFSA.

 

The federal need analysis formula is more heavily weighted toward income than assets. If your assets are enough to eliminate eligibility for federal student aid, chances are your income would have eliminated the eligibility even if assets were ignored entirely."

 

— excerpt from a 2011 Q&A article by Mark Kantrowitz, FinAid.org

 

So, the few thousand $$ a student saves from a summer or part-time job will likely have little effect as an asset on  the EFC number.

 

And if that is more the case, and the order of how money really didn't matter, then I would probably spend it as "shares" each year, so the student contributes some of their own money each year, and all 3 participants (student, parents, grandparents) are still earning a little interest on the remaining money earmarked for college.

 

If in doubt, it's best to talk to a tax accountant who specializes in college financial aid. :) Warmest regards, Lori D.

[bettyandbob]

 

 

Betty: Can generous grandparents gift an amount larger than the tax-free limit without tax penalty by gifting up to the limit to the student -- but then gift money to each parent? And then each parent can choose to use their gift towards the student's education?

 

 

 

 

gift taxes are a per person thing. So, yes, the generous grandparent can give the max to each parent and to the child and all three could then choose to use the gift on education.

[klmama]

If money is in a 529 account, does it have to be paid directly to the college or can it be given to the student to cover the bills?

[regentrude]

It is perfectly fine if any of these folks give the $$ to the student or family and then the student/family uses it to pay for college though.  The Feds don't care about the source of the family's $$.

 

The feds may not, by the school will if there is aid given by the college. We were specifically asked when filling out the CSS profile whether grandparents or extended family members would contribute to the cost of college. We would have been obliged to disclose such support and it would presumably lower the amount of aid the school would give. Now I know some people will say since they can't check that anyway, why not lie...  I feel that this would be unethical. Yes, we are stupid like this.

 

ETA: I forgot whether the FASFA also asks this... at least one of the two did.

[creekland]

The feds may not, by the school will if there is aid given by the college. We were specifically asked when filling out the CSS profile whether grandparents or extended family members would contribute to the cost of college. We would have been obliged to disclose such support and it would presumably lower the amount of aid the school would give. Now I know some people will say since they can't check that anyway, why not lie...  I feel that this would be unethical. Yes, we are stupid like this.

 

ETA: I forgot whether the FASFA also asks this... at least one of the two did.

 

It's good that you pointed this out.  We don't have grandparents contributing at all, so it's a non-issue with us.  I'm only repeating what two of the three colleges pointed out at their financial aid group sessions.

 

Being ethical is not equal to being stupid in my world...

[klmama]

Just found some info on 529 accounts here:http://www.savingforcollege.com/college_savings_101/ and http://www.fafsaonline.com/fafsa-questions/how-do-529-plans-affect-financial-aid.php Maybe it will help someone else.

[Lori D.]

If money is in a 529 account, does it have to be paid directly to the college or can it be given to the student to cover the bills?

 

 

Just found some info on 529 accounts here:http://www.savingforcollege.com/college_savings_101/ and http://www.fafsaonline.com/fafsa-questions/how-do-529-plans-affect-financial-aid.php Maybe it will help someone else.

 

 

Hmmm… I'm probably being blind (lol) but I'm not seeing the answer to your question (first quote) in the links (second quote). We don't have a 529 account, but rather, some educational bonds and Coverdale Educational Savings Accounts.

 

In case it is of help to anyone else: For those two options, we pay out of our bank account, and then reimburse ourselves with the bonds and ESA. There is no signing over of funds directly from those two options to the college. We do have to be careful how we reimburse, as the bonds ONLY cover tuition and fees, and the ESA covers both tuition & fees and books & certain educational supply expenses. Neither covers housing, food, or transportation costs.

 

The tricky bit comes in if we decide to pay at the end of December for the spring semester, then we have to scramble to get to the bank to cash the bonds or make the ESA transfer before Dec. 31. If we wait and pay in January, then we have much more time for reimbursement.

[Sebastian (a lady)]

The feds may not, by the school will if there is aid given by the college. We were specifically asked when filling out the CSS profile whether grandparents or extended family members would contribute to the cost of college. We would have been obliged to disclose such support and it would presumably lower the amount of aid the school would give. Now I know some people will say since they can't check that anyway, why not lie...  I feel that this would be unethical. Yes, we are stupid like this.

 

ETA: I forgot whether the FASFA also asks this... at least one of the two did.

 

I read something a few months ago (probably in Wall Street Journal) where the recommendation was if grandparents wanted to help, they should hold off until after graduation and then help in paying off student loans. The idea was that this would not impact possible financial aid and could be used to pay down loan principle early, resulting in less interest to pay over the length of the loan. Sort of like paying down a mortgage early by putting extra money towards the principle each month.

 

Of course, that is predicated on having the money/aid/loans to get through college in the first place.

 

ETA: Looks like it was a USA Today article from early March.