3 Questions That Can Provide A Spark For Your Financial Plan
If you are struggling to follow your financial plan or just need some help prioritizing your goals, take some time to consider these important questions:
Source: Forbes
Financial Lessons From Jake Paul's Lamborghini
My nine-year-old son recently announced that he plans to drive a Lamborghini Aventador to school when he earns his driver’s license. Luckily for him, that’s about eight years away, so he’s got some time to save up.
Source: Forbes
How To Fill The Income Gap If You Delay Social Security
Fortunately, making a few little changes to your retirement spending plan in the near term could result in some big benefits in the long run. Let’s compare a few options:
Source: Forbes
What Documentation can a College Financial Aid Administrator Request?
I’m an independent student who filed a 1040A last year so I was not
required to answer questions about assets on the FAFSA application. I
had very little income last year and have a zero EFC. I reported taxes
on capital gains and now my school is asking for information about my
investment assets (which are about $40,000). Can they use this to
lower my federal grant amount? I guess they can use whatever rules
they want about their own grants, but I want to be sure that this will
not impact my eligibility for Pell Grants.
— Ethan G.
Federal law and regulations grant college financial aid administrators
the authority to request information and documentation from financial
aid applicants. Assuming that the information reported on the
financial aid application is accurate and that there is no unreported
income, this is unlikely to affect eligibility for federal student
aid. It may affect eligibility for the college’s own grant funds,
depending on the college’s policies.
The college is asking for more information as part of a process called
verification. Verification is designed to detect and resolve
errors and discrepancies on the Free Application for Federal Student
Aid (FAFSA). Previously up to 30 percent of all FAFSAs were selected
by the US Department of Education for verification. College financial
aid staff can select additional FAFSAs for verification at their
discretion. Some colleges even select all FAFSAs for verification.
The US Department of Education is transitioning to a targeted
verification system where specific data elements on the FAFSA are
selected for verification based on a risk model. There will no longer
be a minimum or maximum number of FAFSAs selected for
verification. College financial aid administrators can continue to
choose to verify additional FAFSAs, even every FAFSA.
There are several possible reasons why your FAFSA may have been
selected for verification. FAFSAs are often selected for verification
when there is an apparent discrepancy involving income and assets. For
example, a potential discrepancy arises when capital gains,
interest and dividends are reported on the federal income tax return
but no assets are reported on the FAFSA. FAFSAs can also be selected
for verification when the applicant appears to have insufficient
income to pay for basic living expenses. These FAFSAs are selected for
verification because of the likelihood of unreported assets and
income.
The mismatch between capital gains on the federal income tax return
and the lack of assets on the FAFSA may have been caused by the
simplified needs test.
The simplified needs test causes assets to be disregarded on the
FAFSA. To qualify for the simplified needs test, the income reported
by the student and the student’s spouse (if the student is
independent) or the student’s parents (if the student is dependent)
must be less than $50,000. Income is based on adjusted gross income
for tax filers and earned income for those not required to file a
federal income tax return. In addition, they must each have filed or
been eligible to file an IRS Form 1040A or 1040EZ (or were not
required to file an income tax return), or one of them must have been
a dislocated worker, or someone in the household size must have
received certain federal means-tested benefits during the past two
years (e.g., SSI, Food Stamps, Free and Reduced Price School Lunch,
TANF, WIC).
This apparent discrepancy can be explained by the simplified needs
test, since the applicant is not required to report assets. Often the
models that trigger verification look for simplistic mismatches, such
as an amount of assets reported that seems inconsistent with the
capital gains and interest/dividend income reported on the income tax
return. This also potentially explains the lack of income, since an
applicant with assets can survive off of the assets and student aid
funds.
Authority to Request Documentation
Regardless of the reason for selecting a FAFSA for verification, the
college has the absolute authority to request such documentation as they
see fit in connection with the FAFSA. If a student or parent refuses
to provide this documentation, the student will be denied financial
aid.
The authority to request documentation comes from multiple
sources. First, the signing statement on the FAFSA provides this authority:
If you are the parent or the student, by signing this application you
certify that all of the information you provided is true and complete
to the best of your knowledge and you agree, if asked, to provide
information that will verify the accuracy of your completed form. This
information may include U.S. or state income tax forms that you filed
or are required to file. Also, you certify that you understand that
the Secretary of Education has the authority to verify information
reported on this application with the Internal Revenue Service and
other federal agencies.
Section 479A(a) of the Higher Education Act of 1965 also grants the
college financial aid administrator the authority to request documentation.
In addition, nothing in this title shall be interpreted as limiting
the authority of the student financial aid administrator in such cases
to request and use supplementary information about the financial
status or personal circumstances of eligible applicants in selecting
recipients and determining the amount of awards under this title.
The regulations also grant authority to the college financial aid
administrator to request documentation. For example, the regulations
at 34 CFR 668.51(b) states “Applicant responsibility. If the Secretary
or the institution requests documents or information from an applicant
under this subpart, the applicant shall provide the specified
documents or information.” The regulations at 34 CFR 668.54(a)(5)
also state that “An institution or the Secretary may require an
applicant to verify any data elements that the institution or the
Secretary specifies.”
The college financial aid administrator is
required to request documentation if he or she believes that the
information reported on the FAFSA is inaccurate. For example, the
regulations at 34 CFR 668.54(a)(3) state “If an institution has
reason to believe that any information on an application used to
calculate an EFC is inaccurate, it shall require the applicant to
verify the information that it has reason to believe is inaccurate.”
The regulations at 34 CFR 668.16(f) require colleges to have an
adequate system for identifying and resolving discrepancies in all the
information available to the college about a financial aid applicant,
including discrepancies between the income tax returns and the FAFSA.
If the application fails to provide the documentation within a
reasonable time period as specified by the college, the regulations at
34 CFR 668.60(b)(1) and 34 CFR 668.60(c)(2) prohibit the college from
disbursing any further federal student aid to the student, including
grants, loans and student employment. The student will also be
required to repay any federal student aid already disbursed. The
regulations at 34 CFR 668.60(d) also preclude processing any
subsequent year’s FAFSAs until the applicant provides the requested
documentation.
Source: Fastweb
How Can One Shelter Parent Assets on the FAFSA?
My daughter is going to college next year. We have to file the
FAFSA in October. We have money in our savings account that we
saved for emergency reasons and some for my daughter’s college. Will
this affect her chance in getting grants or loans? What should we do?
— G.N.
Money in a savings account counts as an asset on the Free Application
for Federal Student Aid (FAFSA) and may affect eligibility for
need-based student financial aid.
Most personal finance experts recommend keeping 3 to 6 months salary
in an
emergency or rainy day fund.
The size of the emergency fund is based on the average duration of
unemployment. During the current economic downturn, some people
recommended increasing the size of the emergency fund to 6 to 12
months salary.
The FAFSA does not have an exclusion for money in an emergency
fund. This is in contrast with the CSS Financial Aid PROFILE Form,
which subtracts an allowance for emergency reserves from assets. The
PROFILE is a supplemental form used by about 250 mostly private
colleges for awarding their own institutional aid funds. This is one
of the few areas in which an institutional need analysis formula may
yield a lower expected family contribution than the federal need
analysis methodology.
Despite the lack of an exclusion for emergency funds on the FAFSA, the
impact of parent assets on the student’s eligibility for need-based
aid is often small. If the parents qualify for the simplified needs
test, all assets will be disregarded on the FAFSA. To be eligible for
the simplified needs test, the parents’ adjusted gross income must be
less than $50,000 and the parents must have been eligible to file an
IRS Form 1040A or 1040EZ. (There are other ways of qualifying for the
simplified needs test, such as by qualifying for certain means-tested
federal benefit programs.) Even if the family does not qualify for the
simplified needs test, the FAFSA ignores the net worth of
the family’s principal place of residence, the value of any small
businesses owned and controlled by the family, and assets in qualified
retirement plan accounts. There is also an asset protection allowance
based on the age of the older parent that shelters about $40,000 to
$50,000 of parent assets for most parents. (The asset protection
allowance is based on the present cost of an annuity which would, at
retirement, supplement Social Security benefit payments to a moderate
living standard. The asset protection allowance can vary significantly
from one year to the next based on changes in the Consumer Price
Index.) Any remaining reportable parent assets are assessed according
to a bracketed scale, with a top bracket of 5.64 percent.
Approaches to Sheltering Money Often Backfire
There are ways of reducing the impact of parent assets to zero, but
each method has its own flaws. Most approaches involve saving or
investing the money in a non-reportable asset, such as a qualified
retirement plan account. (Investing the money in a small business or
using it to pay down the mortgage on the family home may work for
federal and state student aid, but not for money from the college’s
own need-based financial aid funds.)
The flaws in these approaches do not make them suitable solutions for
sheltering an emergency fund.
One approach is to save the money in a Roth IRA, which is not reported
as an asset on the FAFSA. Given the low annual
contribution limits on a Roth IRA, using this strategy will take
several years to implement. So long as one does not take a
distribution from the Roth IRA while the student is enrolled in
college, it will have no impact on need-based aid eligibility. But the
family cannot take any distributions from the Roth IRA, not
even a tax-free return of contributions. A tax-free return of
contributions will be reported as untaxed income on the
FAFSA. Regardless of whether the distribution is taxable or not, it
will reduce aid eligibility by as much as half the distribution
amount.
Another approach involves saving the money in a whole life or cash
value life insurance policy. These are not reported as assets on the
FAFSA because they are treated like qualified retirement plan
accounts. (Note, however, that there has been so much abuse of this
provision that the favorable treatment of these life insurance
policies may be eliminated in the future.) Any distributions from
such a life insurance policy will count as untaxed income on the
FAFSA, and may also involve high surrender charges. One could borrow
from the life insurance policy’s cash balance, but then the interest
payments merely substitute for the income the money would have earned
had it remained invested. Any unpaid interest will be added to the
loan balance, causing the borrower to be charged interest on
interest. This accrued but unpaid interest will eventually be treated
as income by the IRS. The interest payments also cannot be deducted on
the borrower’s federal income tax return, unlike the interest on
student and parent education loans. Even if the family does not take a
distribution or loan from the cash balance, the return on investment
after commissions and expenses is lousy, among the worst available. These
products are more to the benefit of the salesperson than to the
insured.
Both of these approaches suffer from a critical flaw, in that they
tend to limit access to the investment. A rainy day fund must be saved
in an easy-to-access liquid form, such as a savings account or money
market account. If an emergency arises, the family will need quick
access to the money. Most methods of sheltering money from need
analysis are not very liquid and will result in a significant penalty
by reducing the student’s eligibility for need-based financial
aid. This will hurt the family even further at a time of severe
financial distress.
Source: Fastweb
How to Minimize the Impact of a Student's Brokerage Account on Financial Aid
We have an UTMA mutual fund for our son who is a senior in high
school (17 years old). It is approximately $19,000 and was intended to
help pay for college costs. When we opened it we weren’t aware of the
impact it could have on financial aid. I realize it’s too late to fix
anything for his freshman year next year, but will it help him any for
his sophomore year if we take it out prior to the end of this tax
year? His other school money is in an educational IRA and won’t ding
him as much.
— D.G.
Custodial bank and brokerage accounts, such as UTMA and UGMA accounts,
are treated as a student asset on the Free Application for Federal
Student Aid (FAFSA). This has a more severe impact on eligibility for
need-based financial aid than parent assets. Student assets reduce aid
eligibility by 20 percent of the asset value. Some parent assets are
sheltered from the need analysis formula. The remaining parent assets
will reduce aid eligibility according to a bracketed scale, with a top
bracket of 5.64 percent.
Parents can fix such a situation by moving the student’s money into the
custodial version of a 529 college savings plan. Even though a
custodial 529 plan is technically the student’s asset, federal law
since 2009 has treated custodial 529 plan accounts as though they were
a parent asset on the FAFSA. (Prepaid tuition plans and Coverdell
education savings accounts are also treated as parent assets, but are
more likely to be affected by contribution limits.)
Parents can also spend the student’s money for the student’s benefit,
so long as the expenses are not normally considered parental
obligations, such as food, shelter and medical care. For example, if
the student will need a car or computer for college, the parent could
buy it with the student’s money. Parents can also spend the
student’s money for college costs, such as tuition and fees, room and
board, and books and supplies.
Since assets are reported on the FAFSA as of the application date,
parents can address the harsher treatment of student assets at any
time prior to filing the FAFSA, not just before the prior tax
year.
(Practically speaking, any changes in assets should occur at least a
month before filing the FAFSA. During verification, college financial
aid administrators may ask for copies of bank and brokerage account
statements, especially if the interest and dividend income on the
student’s income tax return is high compared with the student assets
reported on the FAFSA. Accordingly, any changes in the student’s
assets should occur early enough to be reflected in the most recent
statements prior to filing the FAFSA.)
However, contributions to a 529 college savings plan must be made with
cash, not securities. So to roll a student’s brokerage account into a
custodial 529 plan account, the parent must first liquidate the
brokerage account. If the stocks, bonds or mutual funds held in the
brokerage account have appreciated significantly, liquidating the
account will result in capital gains. Capital gains are treated as
income on the FAFSA. Student income received during the prior tax year
will reduce need-based aid eligibility by as much as half of the
amount of income. To prevent capital gains from affecting eligibility
for need-based financial aid, realize them before October 1 of the
junior year in high school.
Once the student is a senior in high school, however, there’s no room
to liquidate the brokerage account without having the capital gains
affect aid eligibility on the subsequent year’s FAFSA. It then becomes
a tradeoff between the treatment of the capital gains as income and
the treatment of the account as an asset. The student’s need-based
financial aid package will be reduced by 20 percent of the asset value
each year until the brokerage account is liquidated. If the money is
rolled over into a custodial 529 plan account, the financial aid
package will be reduced by up to 5.64 percent of the asset value each
subsequent year until the money is spent. When the brokerage account
is liquidated, the student’s need-based financial aid package during
the subsequent year will be reduced by up to 50 percent of the capital
gains.
Regardless of whether the money is spent on the student’s college
education directly or rolled over into a custodial 529 plan account,
the brokerage account must be liquidated. So realizing capital gains
is unavoidable. (One could avoid liquidating the brokerage account
until after the FAFSA is filed for the student’s senior year in
college. But then the student’s asset will reduce aid eligibility by
20 percent of the asset value each year, or a cumulative total of 80
percent of the asset value. That is not a cost-effective solution.)
This suggests that the optimal strategy for a student who is already a
high school senior is to liquidate the brokerage account immediately,
spend as much as possible of the student’s money on the student’s
education this year, and put the rest of the money in a custodial 529
plan account for subsequent years. The parent should not tap into any
of the parent’s money until the student’s assets are spent down to
zero.
Source: Fastweb
What Income is Listed on the FAFSA when Separated Parents File a Joint Tax Return?
I am praying that you may be able to advise me on the FAFSA
application. I am a senior in high school and will file the FAFSA in
October. I live with my mom. My dad moved out almost 2 years ago. As part
of my parents’ agreement, my dad is paying for our rent and
utilities. My mom and dad are still married, and not legally separated. They
plan to continue to file jointly for tax purposes. My mom is a
dislocated homemaker. I know that for FAFSA purposes, I do not have to
put down my dad’s info since he is not the custodial parent. But,
since they file jointly, do I still go ahead and list his info?
Since my dad filed jointly (he is the only one that works, and his
income is about $44,000, and we are a family of 5, not including
my dad, then we would be 6) doesn’t that mean that my mom filed too
and that I need to report my dad’s income as well?
— Blanca
A student’s parents do not need to have a legal separation or divorce
decree to be considered separated on the Free Application for Federal
Student Aid (FAFSA). An informal separation can count as a
separation for federal student aid purposes. In an informal
separation, one parent has left the household indefinitely. Living on
separate floors of the same house is not sufficient. The parents
cannot cohabit in an informal separation. Temporary absences for work,
education or military service also do not count.
IRS rules are different, so it is possible for a couple with an
informal separation to file federal income tax returns as married and
the FAFSA as separated. (Parents who are divorced or who have a legal
separation cannot file federal income tax returns as married. However,
if the divorce or legal separation occurred after the end of the tax
year but before filing the FAFSA, it is possible for there to be a
joint return in the prior tax year.)
If the parents are separated, only the parent with whom the student
lived the most during the 12 months ending on the FAFSA application
date is responsible for completing the FAFSA. The other parent’s
income and assets are not reported on the FAFSA. The other parent is
also not counted in household size.
If the student’s parents are separated but filed a joint federal
income tax return, the custodial parent will have to figure out their
share of the income and taxes paid on the joint return.
If the parents live in a community property state, the income is split
evenly. Otherwise the parent’s income should be based on their IRS W-2
and 1099 forms, plus any income that can be extracted from the joint
return. Income and dividends from joint accounts and investments
should be split evenly. Taxes paid can be calculated using one of two
methods. The preferred method is to use the IRS Tax Table or Tax Rate
Schedule to calculate the amount of taxes that would have been paid
had the parent filed a separate return, taking into account the
deductions and exemptions the parent could have claimed. The other
approach is to split the joint taxes paid in proportion to the
parent’s share of the joint AGI.
If the custodial parent receives any support from the non-custodial
parent, this should be reported as untaxed income on the
FAFSA. Likewise for any support received by the student from the
non-custodial parent. For example, if the non-custodial parent is
paying bills that the custodial parent would otherwise have to pay,
such as rent, utilities, insurance and food, that counts as untaxed
income to the custodial parent.
Parents who are separated but file a joint federal income tax return
will not be able to use the IRS Data Retrieval Tool to transfer
information from the federal income tax return to the FAFSA. Such a
FAFSA is more likely to be selected for verification.
Source: Fastweb
Must the Student's Child Live with the Student for the Student to be Independent?
I’m 23 and have a 4-year-old child. Last year I received
independent status for my financial aid because I supported my child
more than 51% of his needs. This year the financial aid office asked
for the same documents as last year but told me that I couldn’t be an
independent student because I didn’t have enough documented proof. I
explained and provided documents showing that the mother doesn’t work
and I pay $100 a week in child support. I also presented a document
from the mother stating that I am the custodial parent. I also claim
him as an exemption on my income tax return. In reality I pay probably
90% of his expenses. Last year the only problem was that he wasn’t
living with me but I helped pay rent on the home with his mother. This
year he is living with me but the financial aid office deemed that
there wasn’t enough documentation showing that. I asked if the mother
were to apply for this, they then told me it would have been a quick
process and she would have been approved because she is the
mother. Because I’m the father I have to jump through hoops. They
asked me to bring a different document every week for 6 weeks before
they told me I had to apply as dependent. What can I do to fix this
problem? I don’t receive any money from my parents and they already
paid for my education when I was 18 before I had a child and they
don’t want do that again.
— Jeremy B.
There are several ways for a student to be independent for federal
student aid purposes. The most common ways are to be over age 24 as of
December 31 of the award year, to be married, to have dependents other
than a spouse, to be a graduate student, to be an orphan, to be a
veteran or to be serving on active duty in the Armed Forces for other
than training purposes.
To be an independent student by virtue of having a legal dependent
other than a spouse, the student’s child must receive more than half
of his or her support from the student. The student’s child does
not need to live with the student.
Dependents other than a child must live with the student and receive
more than half their support from the student for the student to be
considered independent. Dependent children must receive more than half
their support from the student, but do not need to live with the
student for the student to be considered independent.
Confusion often arises because of ambiguity in the statutory
definition. In 20 USC 1087vv(k)(2), the term “dependent of the
student” is defined as “the student’s dependent children and other
persons (except the student’s spouse) who live with and receive more
than one-half of their support from the student and will continue to
receive more than half of their support from the student during the
award year.” Some people incorrectly interpret the phrase “who live
with” as attaching to both “the student’s dependent children” and
“other persons”. However, it is clear from the similar language in the
definition of “dependent of the parent” in 20 USC 1087vv(k)(1) that
the phrase “who live with” attaches only to “other persons”.
The Application and Verification Guide
clarifies this by repeating the half-support requirement for both
children and other persons and by not repeating the live-with
requirement. The Application and Verification Guide is a source of
subregulatory guidance from the US Department of Education to college
financial aid administrators.
“Children and legal dependents (50 and 51). Students who
have legal dependents are independent. Legal dependents comprise
children (including those who will be born before the end of the award
year) of the student who receive more than half their support from
the student, and other persons (except a spouse) who live
with and receive more than half their support from the student as
of the FAFSA signing date and will continue to do so for the award
year. The same criteria apply to household size.”
Even so, there is still some confusion, so further guidance explicitly states in a discussion of household size for
independent students that the children do not need to live with the
student.
“The student’s children, regardless of where they live, if
they will receive more than half of their support from the student
from July 1, 2017, through June 30, 2018. This includes the student’s
unborn children who will be born during the award year and will
receive more than half their support from the student from birth to
the end of the award year. Foster children do not count in household
size.”
Moreover, the guide gives a clear example in the context of a
discussion of sources of support. For the purpose of the half-support
requirement, support includes any cash or other assistance provided to
the child from sources other than the student’s parents. This includes
child support and government benefit programs, such as TANF and SNAP,
not just support provided by the student. The example highlights a
common scenario in which both the child’s mother and father can each
be dependent by virtue of having a dependent child.
“For example, if a student who lives alone with her child
receives cash from her boyfriend that amounts to more than 50% support
for her child, then she would be able to count the child as a
dependent and in her household size, and she would be independent. If
the boyfriend is the father of the child and a student himself, then
he would also be able to count the child as a dependent and in his
household size, and he would be independent too.”
Sometimes front-office financial aid staff are unaware of these
nuances, and insist that the child is presumed to be a dependent of
the mother and that the father must rebut that presumption. They also
insist that the child can be a dependent of either the mother or
father, but not both. They sometimes also insist that the child must
live with the father to be a dependent of the father. There is no such
presumption in the statute, regulations or subregulatory guidance. The
child does not need to live with the father to be a dependent of the
father, and the child can be counted as a dependent of the father and
also as a dependent of the mother.
Source: Fastweb
Must a Trust Fund be Reported on the FAFSA Even If Access to the Trust is Restricted?
I have a friend whose mother passed away two years ago, and left her
some money from an insurance policy. The money is currently in trust
for her with her grandmother as the trustee. Does she need to claim
this as an asset on her FAFSA? She is unable to touch it until she
turns 21.
— Karen A.
In most cases the beneficiary of a trust must report the trust as an
asset on the Free Application for Federal Student Aid (FAFSA). The
FAFSA instructions, for example, state that “Investments include real
estate (do not include the home you live in), trust funds, UGMA
and UTMA accounts, money market funds, mutual funds, certificates of
deposit, stocks, stock options, bonds, other securities, installment
and land sale contracts (including mortgages held), commodities, etc.”
The beneficiary must report the trust as an asset even if the
beneficiary’s access to the trust has been restricted. The only
exception is when the restrictions on access to the trust are
involuntary, such as a trust that is restricted by court order. Such a trust would not be reported as
an asset on the FAFSA. All other trust funds must be reported as an
asset on the FAFSA.
If the creator of a trust placed restrictions on access to the trust
by the beneficiary, such restrictions are considered voluntary. The
restrictions may be involuntary from the perspective of the
beneficiary, but the restrictions were established voluntarily when
the donor created the trust. Examples of trusts with voluntary
restrictions on access to the trust include a Crummey Trust and a
Section 2503(c) Minor’s Trust.
After all, if people could shelter money from need analysis simply by
placing voluntary restrictions on access to the money, the need
analysis process would be ineffective at assessing the family’s
ability to pay. A trust is still a source of financial strength,
regardless of whether access to the trust is restricted or not.
Unfortunately, restrictions on access to the trust can backfire,
reducing or eliminating the student’s eligibility for need-based
financial aid. An asset in the student’s name will reduce eligibility
for need-based aid by 20% of the value of the trust. Moreover, since
the beneficiary cannot liquidate the trust, the trust will continue in
existence, affecting eligibility for need-based aid every year.
However, sometimes trusts aren’t as restricted as one might
believe. The trust document may allow the trustee to spend the money
for the benefit of the beneficiary. Some states have laws that allow
trustees to spend trust funds for the medical care and education of
the beneficiary even if access to the trust is restricted.
Source: Fastweb
Paying the College Directly to Avoid Gift Taxes
Under current IRS rules, a payment made directly to an educational
institution to pay for the tuition of a student does not count as a
gift to the student for gift tax purposes. For example, a grandparent
can avoid gift taxes by writing a check to the college for their
grandchild’s tuition instead of giving the money to the student or the
student’s parents. But such a payment may result in a significant
reduction in the student’s eligibility for need-based financial
aid.
Accordingly, this strategy should be avoided if the student expects to
qualify for need-based financial aid. In such a circumstance, a better
strategy is to contribute the money to the student’s 529 college
savings plan. One could also wait until after the student graduates
from college and help the student pay down his or her student loans
as a graduation gift.
Gift Tax Exclusion
Section 2503 of the Internal Revenue Code of 1986 discusses gift
taxes. A donor may give gifts to any person without incurring gift
taxes in any calendar year so long as the amount of the gift falls
below the annual gift tax exclusion. The annual gift tax exclusion was
$14,000 in 2017 and is indexed for inflation. If the transfer exceeds
the annual gift tax exclusion, the donor may elect to use part of the
donor’s lifetime gift tax exclusion instead of paying gift taxes. The
gift tax exclusion is per donor, so a couple can together give
twice the annual gift tax exclusion ($28,000) without incurring any
gift tax liability.
In certain cases a transfer for the benefit of a person will not be
considered a gift even if it exceeds the annual gift tax exclusion. In
particular, section 2503(e) of the Internal Revenue Code of 1986
provides for the exclusion of payments for tuition and medical care
from gift taxes.
Exclusion for certain transfers for educational expenses or medical expenses(1) In general
Any qualified transfer shall not be treated as a transfer of property by gift for purposes of this chapter.
(2) Qualified transfer
For purposes of this subsection, the term “qualified transfer” means any amount paid on behalf of an individual —
(A) as tuition to an educational organization described in section 170(b)(1)(A)(ii) for the education or training of such individual, or
(B) to any person who provides medical care (as defined in section 213(d)) with respect to such individual as payment for such medical care.
Impact on Need-Based Financial Aid
However, while a payment directly to the college for tuition will
avoid gift taxes, it may significantly reduce the student’s
eligibility for need-based financial aid. There are three possible
ways in which such a payment could be treated for student aid
eligibility, each with a different impact on eligibility for
need-based aid: (1) payment on account (no impact), (2) cash support
(reduce aid by up to 50% of the amount paid) or (3) resource (reduce
aid by 100% of the amount paid).
The tuition payment cannot be reported as a payment on the account
because the source of the payment is someone other than the student or
the student’s parents. The correct treatment is as cash support, which
will be reported on the FAFSA as untaxed income to the student. This
reduces aid eligibility by up to half of the payment. But some
colleges adopt a harsher treatment, identifying the money as a
resource. Resources reduce aid eligibility dollar for dollar.
When a grandparent or any other third party pays a student’s college
bills, including distributions from a
grandparent-owned 529 college
savings plan, that is considered “cash support” and must be reported
as untaxed income to the student on the student’s FAFSA. For example,
in the 2017-18 FAFSA, this would appear in the answer to question 45j:
“Money received, or paid on your behalf (e.g., bills), not reported
elsewhere on this form.”
The subregulatory guidance of the 2017-18
Application and Verification Guide confirms this interpretation:
j. Money received (45 only). The student reports any cash support he
received, but if dependent he does not count his parents’ support, with
one exception: money from a non-custodial parent that is not part of a
legal child support agreement is untaxed income to the student. Cash
support includes money, gifts, and loans, plus housing, food, clothing,
car payments or expenses, medical and dental care, college costs, and
money paid to someone else on his behalf. For example, if a friend
or relative pays his electric bill or part of his rent, he must report the
amount as untaxed income. If he is living with a friend who pays the
rent and the student’s name is on the lease, the rent paid on his behalf
counts as cash support because he is responsible for payments that his
friend is making. Note that this item does not appear in the parents’
question-only the student reports this information.
As the last sentence in this paragraph suggests, a possible workaround
is for the grandparent or other third party to give the money to the
parents, who can then use to the money to pay the college bills
without having to report it as cash support on the FAFSA. There is no
similar question about cash support for parents on the FAFSA because
the definition of “Untaxed income and benefits” in the Higher
Education Act of 1965 [20 USC 1087vv(b)(1)(F)] is restricted to funds
paid to the student or on the student’s behalf, and does not include
funds paid to the student’s parents:
(F) cash support or any money paid on the
student’s behalf, except, for dependent students,
funds provided by the student’s parents;
Cash support provided to or on behalf of the student will reduce
need-based aid eligibility by up to half of the amount of the
support. Some colleges, however, will treat a direct payment by the
grandparent or another third party to the college to pay for tuition
as a resource, instead of cash support. This is a harsher treatment,
which reduces need-based aid dollar for dollar. This interpretation is
a consequence of the IRS gift tax rules for qualified transfers. Since
the gift tax exclusion depends on the funds being restricted for
tuition, the colleges argue that the payment satisfies the requirements to be considered a
resource.
The regulations at 34 CFR 673.5(c)(1)(xiii) specify that resources
(also described as “estimated financial assistance”) include “Any
educational benefits paid because of enrollment in a postsecondary
education institution, or to cover postsecondary education expenses.”
However, a payment by a grandparent or other relative is not
considered an educational benefit, and as such is not considered a
resource. Instead, it should be treated as cash support.
Easy for Colleges to Detect Such Cash Support
It is easy enough for a college to detect such tuition payments
because the check that is applied to the student’s account will be
written by a payor whose name is different than the names of the
student and parents as listed on the FAFSA and other
applications. (Note that in a divorce case, only one parent’s name
will be listed on the FAFSA. But the noncustodial parent is not
considered a parent for federal student aid purposes.)
Some institutional financial aid applications also ask explicitly
about contributions from relatives. For example, the CSS/Financial Aid
PROFILE form has a question that asks about other resources: “Amounts
expected from relatives, spouse’s parents and all other sources.”
There’s also a question about contributions from the noncustodial parent:
“How much does the noncustodial parent plan
to contribute to the student’s education for
the ####-## school year?”
Other Benefits of Making Direct Tuition Payments
Sometimes there are other benefits of making a payment directly to the
college that will offset some or all of the loss in eligibility for
need-based financial aid. For example, a few colleges provide a
discount for prepayment of multiple year’s worth of tuition, such as
allowing the donor to pay for subsequent year’s tuition at current
rates. This can yield significant savings, since tuition rates tend to
increase each year, yielding senior year tuition rates that are about
one fifth higher than tuition rates during the freshman year.
Direct Payments are Not Charitable Contributions
Note that direct payment of tuition to a college or other educational
organizations does not count as a charitable contribution because the
payment is earmarked for a particular student.
Source: Fastweb
8 Ways To Access Cash In A Pinch
Here are eight ways to get cash quick (although some may be preferable to others):
Source: Forbes
Financial Aid and Scholarships for Foster Care and Adopted Children
I adopted a special needs foster child when he was 11 years old. I
have been told he does not qualify for any aid. I recently learned
that if I would have adopted him at age 13 he would of received a full
scholarship. My son wants to attend a private college at
approximately $43,000 per year. Do you have any information on
grants or scholarship for former special needs foster children?
— J.A.
You are to be commended for adopting a foster child. According to the
US Department of Health and Human Services, more than 100,000 children
in foster care are waiting for adoption, but only about 50,000 are adopted
each year. Visit AdoptUSKids.org
for more information about foster care and adoption.
It is unlikely that a foster child adopted after reaching age 13 would
have qualified for a full scholarship at a private
college. Rather, students who
are in foster care, aged out of foster care or were adopted out of
foster care after reaching age 13 are considered automatically
independent on the Free Application for Federal Student Aid
(FAFSA). Often this means that such children have a zero expected
family contribution (EFC), which qualifies them for a full Pell
Grant. But a full Pell Grant falls short of covering all college
costs, except perhaps at a community college. In most cases a foster
child will graduate from college with significant amounts of student loan
debt.
Independent student status is defined by section 480(d)(1) of the
Higher Education Act of 1965 [20 USC 1087vv(d)(1)]. The College Cost
Reduction and Access Act of 2007 (P.L. 110-84) and Higher Education
Opportunity Act of 2008 (P.L. 110-315) changed the definition of
independent student to include any student who “is an orphan, in
foster care, or a ward of the court, or was an orphan, in foster care,
or a ward of the court at any time when the individual was 13 years of
age or older.”
This is in contrast with the previous statutory language, which did
not mention foster care explicitly, just orphans and wards of the
court. The previous statutory language also required the student to
either currently be an orphan or ward of the court, or to have been
one through age 18. The law was changed to allow teenage foster care
children to be adopted without losing eligibility for federal student
aid.
Foster care students face special challenges and are less likely to
enroll and graduate from college. For example, only 0.6% of
undergraduate students identified themselves as orphans or wards of
the court in 2007-08, based on data from the 2007-08 National
Postsecondary Student Aid Study (NPSAS). This suggests that they are
half as likely as other students to enroll in college. Almost a third
(32.7%) of students who were orphans or wards of the court under age
24 in 2003-04 graduated with an undergraduate degree or certificate by
2009, compared with almost half (49.6%) of all other undergraduate
students, based on data from the 2009 follow-up to the 2003-04
Beginning Postsecondary Students (BPS:04/09) longitudinal study.
While foster children face many challenges on their way to a college
education, it is possible to succeed.
Derrius Quarles, who spent 9 years in the foster care system in the
Chicago area, won scholarships from the Horatio Alger Association of
Distinguished American Scholarship Program, Coca-Cola Scholarship
Foundation, Dell Scholars Program and Gates Millennium Scholars, among
others, earning him the title
Million Dollar Scholar.
His success should be an inspiration to all foster care youth.
Most private scholarships for foster care students are restricted to children
who are currently in foster care or who aged out of foster care. There
are some for students who were adopted out of foster care, but these
generally have geographic restrictions or are limited to students who
are enrolled at specific colleges. For example, the
Kansas Foster and Adoptive Children Scholarship Fund
from the Greater Kansas City Community Foundation is limited to
students who are or were foster children in the state of Kansas.
Students should use the free Fastweb scholarship matching service to
find scholarships that match their background situation. Fastweb
enforces the scholarship’s geographic and other restrictions, ensuring
that the student sees only the scholarships for which he or she is
eligible. Be sure to answer the optional questions, some of which
relate to adoption status. Fastweb will also match the student to
other relevant scholarships, such as the
Horatio Alger National Scholarship
for high school seniors who have “faced and overcome great obstacles
in their young lives”.
There are also several national scholarships for former foster
children and adopted children. The
Fostering a Future Scholarship
is restricted to children adopted out of foster care after reaching
age 13.
Foster Care to Success
administers the
Casey Family Scholars Program,
which provides scholarships to former foster youth.
The
National Foster Parent Association
sponsors the NFPA Youth Scholarship.
The Orphan Society of America
provides college scholarships for individuals who were orphaned by violence.
Some states provide student financial aid or other assistance to
children who spent time in the foster care system or who were adopted
out of the foster care system. These scholarships and tuition waivers
are usually restricted to students who enroll in the state’s public
colleges and universities. Funding may be restricted to students whose
families previously received
adoption assistance.
Some programs are limited to students who are in foster care or aged
out of foster care, excluding students who were adopted out of foster
care.
Source: Fastweb
Impact of a Gift Trust Account on Eligibility for Need-Based Financial Aid
My daughter turned 18 recently, and received a $25,000 mutual fund
statement with her name on it. Her aunt had put $10,000 away in 1995
in a gift trust account for a minor. This was a mutual fund account in
which the interest was reinvested each year and therefore no IRS
interest statements were generated. We were unaware that her aunt had
opened this account and let the money grow for 17 years. My daughter
will be applying for financial aid for her sophomore year in college
and must fill out the FAFSA and CSS Financial Aid PROFILE forms. How
will this $25,000 mutual fund affect her financial aid for next year?
She does not have any assets and works a part time job for income.
What is the smart thing to do in reducing the affect of this asset for
financial aid? Can she put the mutual fund in my name? I do not not
own a home due to a recent foreclosure and do not have much assets.
— A.K.C.
A gift trust account is an irrevocable trust fund. It is structured so
that the amount contributed to the trust by the trust’s creator is
not subject to gift or estate taxes. To qualify, the gift must be
irrevocable, meaning that the creator cannot change his or her mind
about the gift or change the beneficiaries. The amount contributed
must fall under the annual gift tax exclusion at the time of
contribution. The trust terminates at a future date or when conditions
specified in the trust document are satisfied, such as when the
beneficiary reaches the age of majority, at which time the beneficiary
will receive the gift trust account.
In addition, the contributions to the gift trust account must
represent a present interest to the beneficiary, not a
future interest. This means that the beneficiary must have
been able to withdraw the funds from the account. As with a Crummey
trust, the beneficiary should have been informed about the
contribution to the trust at the time of the gift and then had the
opportunity to withdraw funds for a limited period of time, typically
30 days.
But since the beneficiary was a minor at the time, the minor’s
interest in the gift trust account would have been structured as a
custodial account. The notice of the gift would have been provided to
a custodian on behalf of the minor. It is likely that the creator of
the trust also served as the custodian.
This is a clever way of giving money to a minor in a tax-advantaged
manner that precludes the child’s parents from having access to the
funds. It also protects the money from the parent’s creditors.
If the student and parents are unaware of the existence of a gift
trust account, they have no obligation to report it as an asset on the
Free Application for Federal Student Aid (FAFSA) or other financial
aid forms. So the failure to report the gift trust account as an asset
during the student’s freshman year, before she reached the age of
majority, does not present a problem.
But even if the creator of a gift trust account for a minor serves as
custodian for a minor beneficiary, it is unclear how the creator would
have been able to hide the existence of the trust from the child and
the child’s parents. Although trusts can have a separate taxpayer
identification number and file their own annual tax returns, in most
cases the benficiary must pay income tax on the trust’s annual
income. (A major exception occurs when the creator of the trust has a
legal obligation to support the beneficiary, in which case the creator
of the trust would pay income tax on the trust’s income.) The
automatic reinvestment of the interest in the account is irrelevant,
as the interest must still be reported as income to the beneficiary.
The most likely scenario is one in which the gift trust account was
invested in US savings bonds. US savings bonds are exempt from state
and local income tax and the federal income tax obligation may be
deferred until the bonds are redeemed or reach maturity. The average
annual return for a $10,000 investment worth $25,000 after 17 years is
5.5%, consistent with the rates for savings bonds issued in 1995.
Another scenario could involve having the trust invest in stocks or
other securities that do not pay dividends. So long as the investments
do not pay dividends, there is no taxable income from the
investments. So long as the investments are not sold, there would be
no taxable capital gains either.
But once the family becomes aware of the existence of the gift trust
account, they must report it as an asset on the FAFSA and other
financial aid forms. Since the account is owned by the student, it
must be reported as a student asset, reducing need-based aid
eligibility by 20% of the asset value. Thus a $25,000 student asset will
reduce aid eligibility by $5,000. (The annual income from the account
must also be reported as student income, reducing need-based aid
eligibility by as much as 50% of the amount of income.)
The simplest solution is for the student to contribute the money to a
529 college savings plan with the student as the account owner and
beneficiary. Even though the student is the account owner, a 529
college savings plan owned by a dependent student is reported as a
parent asset on the FAFSA. Parent assets have a much more favorable
treatment on the FAFSA, reducing aid eligibility by up to 5.64% of the
asset value. A portion of parent assets, typically $40,000 to $50,000,
are also sheltered by the financial aid formula. Thus a $25,000 parent
asset will reduce aid eligibility by at most $1,410, and in many cases
by a lower figure.
Another solution is for the student to spend the money on her
education or other expenses. This can reduce or eliminate the negative
impact of the account on her eligibility for need-based financial
aid. Assets are reported based on the account value on the most recent
statement received before the FAFSA is filed.
It is unclear whether the student can gift the money to her
parents. Legally the account is owned by the student. Before she
reaches the age of majority in her state, she lacks the capacity to
make such a gift and it would be a breach of the custodian’s fiduciary
responsibility to transfer the money. It may also be illegal for the
custodian to transfer the money, since the creator of an irrevocable
gift trust cannot change the beneficiary. After the student reaches
the age of majority, she may still lack the maturity to rationally
gift the money to a parent, given her likely lack of financial
sophistication and the dependent nature of the relationship between
child and parent.
Source: Fastweb
2017-18 FAFSA Changes: What Prior-Prior Year (PPY) Means for You
During his Presidency, Obama made some significant changes to help simplify the FAFSA, one of which will was the ability for students and their families to report tax income information from an earlier tax year, rather than just the prior tax year.
Under the former FAFSA, a person was only able report prior year (PY) tax income information. Under the PY policy, many students were not able to fill out the FAFSA until near April in order to wait for taxes to be filed, even though the form was made available on January 1.
The change allows students to report tax information from a prior-prior tax year (PPY) allowing tax information from two years ago.
It also allows students and their families to fill out the FAFSA form earlier than ever before in hopes to have their financial aid packages before making college decisions.
It’s easiest to understand these two terms by breaking them down and comparing them with one another to see the benefits of the switch.
Here’s a quick comparison between the former FAFSA, which operated with prior year data, or PY, compared to October 2016’s FAFSA change to prior-prior year or PPY, which is in effect now:
Prior Year (PY)
Prior-Prior Year (PPY)
• Available spring semester; January
• Available fall semester; October
• Only allows taxes from previous year
• Allows taxes from two years ago
• File FAFSA & must make corrections to data once taxes are filed
• Taxes already filed & data is correct from previous year
• Incorrectly aligned with college application calendar
• Better aligned with college application calendar
• Makes it difficult to meet priority filing deadlines, which must be met to qualify for some forms of financial aid
• Removes conflicts with priority filing deadlines, which must be met to qualify for some forms of financial aid
• Financial aid information available nearing college decision deadline dates
• Financial aid information available further in advance of college decision deadlines
• Forced more stressful and less-informed college & financial aid decisions
• Allows for more at-ease, informed college & financial aid decisions
If curious, you can learn more about the details of the new FAFSA changes on the FederalStudentAid website.
As always, we’ll keep you up-to-date on everything FAFSA on Fastweb, too!
Source: Fastweb
Finding Funding on Campus
By now, you’re probably fully geared up for second semester. But, are you fully prepared to pay for this – not to mention future semesters – as well? Probably not.
In fact, most students shudder at hearing “financial aid” and why wouldn’t you? It’s confusing, intimidating and, as a result, you likely avoid the topic at all costs. However, avoiding the topic only makes it that much worse in the long run.
Which is why, at Fastweb, we prefer to tackle financial aid head on and help you understand financial aid and all it entails so you can make smarter decisions.
Fortunately, there are also simple solutions that college students can utilize to find both financial aid assistance and scholarships right on campus, in addition to using Fastweb!
Available October 1 of each year, the Free Application for Federal Student Aid, does take some effort but is well worth it!
The form is the key to determining your eligibility for need-based financial aid and some colleges require it to be qualified for need-based scholarships as well.
Get all the help you need filling out your FAFSA forms here.
Seeing as the world of financial aid can be confusing, it can behoove you to make friends with the experts within your school’s financial aid office.
Their sole job is to help you figure out how to pay for school, find opportunities and discuss different options so you’re not stuck with a pile of debt upon graduation.
Creating a relationship with a financial advisor in your school’s financial aid office means they’ll keep your situation in mind for new awards and opportunities and, trust us, it pays to have someone on your side.
Utilize this resource and, while you’re in there, take the opportunity to negotiate your financial aid package. You’d be surprised how often this works and how few students actually make an attempt to do this. Become of the few who make the smart decision to do so!
Majors are a great resource for scholarships because they are often funded by alumni and other school patrons.
Once you’ve declared your major, you’ll qualify for all sorts of scholarships within your department so be sure to check with your advisor regarding scholarship opportunities specifically tailored to your major.
Generally, the more specific or unique the major, the less competition there is, so depending on your area of study, this may be a strategic goldmine!
If you attend a larger university or are working towards a higher degree, you’re most likely enrolled within a specified college (such as the “College of Arts and Sciences” or “College of Engineering”) within the larger university.
Check for scholarships within your specific college. Often times, similar to scholarships for certain majors, there are plenty of scholarships provided by alumni and other college benefactors.
Your advisor, as well as the department’s main office, should be able to point you in the right direction for college-specific scholarships.
Chances are all of the scholarship opportunities are also listed on your school’s web site as well, though you may have to do some digging, so it may be worth a quick stop on your way to or from class.
Source: Fastweb
Top 5 Common FAFSA Mistakes
It’s that time of year again – FAFSA season! That probably doesn’t incite much excitement, but the FAFSA is so vital to financial aid that it can’t be overlooked. Rather, it must be embraced.
With so much riding on the FAFSA, you can’t afford to get the application wrong – literally. Yet, so many students and parents make costly mistakes each year. Fortunately, the U.S. Department of Education encourages FAFSA filers to learn from the mistakes of others by highlighting common FAFSA mistakes. By avoiding these, you can increase your chances of getting a better financial aid deal if you qualify.
1. Giving Up
The U.S. Dept of Education states that one of the biggest mistakes is not completing the application. Students and parents encounter a section that seems difficult or they don’t know the exact answers to, and they sign off. But trouble filling out the FAFSA or not having enough time is not an excuse. The FAFSA supplies plenty of help along the way, from helpful tips on the actual application to representatives that can help over the phone to weekend workshops in communities around the country.
Oh – and the Department of Education says that thinking you wouldn’t qualify for financial aid anyway is the worst excuse for not filling out the form.
2. Being Unprepared
First, you need to know where to go. There are many websites out there that seem like the FAFSA site – even some that would steal your information or make you pay to file the FAFSA – but there is only one place online to fill out and complete the FAFSA: www.fafsa.ed.gov.
Second, you need an FSA ID in order to begin and complete a FAFSA application, and this needs to be set up ahead of time. Don’t wait until your state deadline to sign up for one because the process takes a few days.
3. Missing Deadlines
Speaking of deadlines, the FAFSA is not technically due until June 30 of the year after it’s released, meaning it has an 18-month cycle. However – and this is a big however – state and school deadlines fall in February through June of the year it’s released. In order to get the maximum amount of financial aid you can receive if you qualify – from both the federal and state governments – you need to have your FAFSA completed and submitted as soon as possible after October 1.
The new date also means you don’t wait until your income taxes are filed in April. Rather, you can submit last year’s tax information. Keep in mind that financial aid is disbursed on a first come, first serve basis. So, again, don’t miss deadlines, and try to have the form filled out as close to the October 1 release date as possible.
4. Inputting Incorrect Information
The U.S. Department of Education provides common places on the form for which applicants input the wrong information. Many times, a parent filing the FAFSA will insert their information where the application says “you” or “your.” While the application does have areas where parents’ information is required, any time the application mentions “you” or “your,” it’s asking for the student’s information.
Other ways in which applicants input the wrong information are writing in nicknames instead of the full name, entering the wrong social security number and substituting income for income tax. Essentially, it’s so important to read (and reread and reread) instructions on the FAFSA in order to complete it successfully.
5. Not Signing the Form
Finally, the Department of Education says that a big common mistake is forgetting to sign the form. If the form is not signed, it’s not complete. If the form is not signed by a parent or legal guardian, it’s not complete. Applicants must sign the FAFSA with their FSA ID so don’t lose that number. In addition to needing it to start the form, you need it to finish the form too.
Good luck – and complete your FAFSA as soon as possible!
Source: Fastweb
Could You Be Giving Away Too Much on the FAFSA?
The FAFSA is perhaps one of the most invasive questionnaires you and your family will ever complete. It asks about your private financial situation, special family circumstances and everything else in between. When it’s all said and done, many families feel as if they didn’t get enough financial aid to cover the cost of college. So imagine that colleges may be taking further advantage of you on the FAFSA by reading into the information you provide, according to U.S. News and World Report.
Really?! How?!
There is a lot to be inferred by the order in which you list schools you have applied to on the FAFSA, states U.S. News and World Report. Many students indicate their preferences in order, placing their top choice first on the list. The article cites a study by Noel-Levitz which found that students enrolled at the first school listed on their FAFSA at a 64% rate.
Colleges around the country are reading into this, but the news is good for students. They’re actually awarding more merit and financial aid to those students who have selected that college as their first choice. So remember: as you’re filling out your FAFSA in January, indicate your preferred schools in order; it may benefit you financially.
But wait a second…
If you don’t have the grades or the test scores to get into your top choice, you can forget about this strategy. Listing Harvard on the top line when you’re a C-average student won’t get you admitted, implies U.S. News and World Report. At the same time, not all schools use this portion of the FAFSA as another tool in which to woo potential students.
Admissions Officer, Jon Boeckenstedt, at DePaul University told U.S. News and World Report that, “We [at DePaul] have never, ever, ever used FAFSA position for any reason other than to project enrollment patterns of the group. We have never used it to award more or less aid; we have never used it to decide whether or not to admit anyone.”
The Final Word
While this all seems like good news for students, you shouldn’t depend on this methodology for getting into your top choice college. Rather, you’re going to have to get in the good, old fashioned way: your grades and test scores. However, listing your school preferences in order may impact how much financial aid you receive, making it more plausible for you to attend your first choice. This subtle detail could mean the difference between you just be accepted to your top choice and actually attending there.
Source: Fastweb
Which Parents are Responsible for Completing the Financial Aid Application Forms?
Both of my daughters’ parents have re-married. Whose income is
counted for financial aid? Just biological parents or their spouses
too? Does primary parent fill out the paperwork or the parent with the
lowest (or highest) income?
— M.J.
When a student’s biological/adoptive parents are divorced, only one of
the two parents is responsible for completing the Free Application for
Federal Student Aid (FAFSA). Both may be required to complete the
CSS/Financial Aid PROFILE form, a form used by about 250 mostly
private colleges.
[gate]
The parent who is responsible for completing the FAFSA is often
referred to as the custodial parent. This is not necessarily
the same as the parent who has legal custody of the
student. The custodial parent is the parent with whom the student
lived the most during the 12 months ending on the FAFSA application
date.
It is possible that the student lived with neither parent more than
the other. This is rare, since there are an odd number of days in the
year. However, it can happen during a leap year or a recent divorce,
especially if the parents share joint custody. It can also happen when
the student is living with neither parent. For example, the student might
be living with a relative other than the parents or the student might be
living at school for the entire year.
If the student lived with neither parent more, the custodial parent is
the parent who provided more support to the student during the
12-month period ending on the FAFSA application date (or the most
recent calendar year during which support was received if that does
not distinguish the parents). Multiple support agreements, in which
the parents trade off who claims the student as an exemption on their
federal income tax returns, are irrelevant since the definition of
support in the Higher Education Act of 1965 differs from the
definition used by the Internal Revenue Code of 1986.
If neither parent provided more support, the family should consult
with the financial aid administrator at the college before filing the
FAFSA. In most cases the financial aid administrator will require the
parent with the greater income to complete the FAFSA.
Divorced parents may have some flexibility in determining the
custodial parent by controlling the student’s living
arrangements. Generally, need-based financial aid will be greater if
the custodial parent is the parent with the lower income. However,
college financial aid administrators will question the arrangement if
the student attended secondary school in a school district that does
not match the custodial parent’s address. The college financial aid
administrator may ask for a copy of the divorce decree or separation
agreement to resolve the conflicting information. So it is generally a
good idea to seek a court modification to the custody agreement
corresponding to the actual living arrangements.
If the parent responsible for completing the FAFSA has remarried, then
the step-parent’s financial information must also be reported on the
FAFSA. Prenuptial agreements are irrelevant, as the requirement to
include step-parent information is established by federal law (section
475(f)(3) of the Higher Education Act of 1965).
Approximately 250 colleges require families to file a supplemental
form called the CSS Financial Aid PROFILE in addition to the
FAFSA. The PROFILE is used to apply for financial aid from the
college’s own funds. The rules for determining the parent responsible
for completing the PROFILE are similar to the rules for the
FAFSA. However, the non-custodial parent is require to complete a
Non-Custodial Parent CSS PROFILE form (NCP). Potentially all four
parents could be required to supply financial information on the
PROFILE and Non-Custodial PROFILE forms, if both biological/adoptive
parents have remarried.
Sometimes divorced parents are unwilling to complete the Non-Custodial
PROFILE form or even the FAFSA because they fear that their ex-spouse
will be able to see their income and asset information. The Family
Educational Rights and Privacy Act (FERPA) prohibits revealing parent
financial information to the student. Colleges also cannot reveal
parent financial information to anybody other than the parent who
provided the information.
Source: Fastweb
Are UGMA and UTMA Accounts Reported as Investments on the FAFSA?
After submitting our FAFSA for my son, we got back an EFC of 23207
on the SAR. I have been told by admissions that that is extremely
high. The FAFSA says I have to include child support payments we
received for him last year, even though the payments will end this
year before the start of his freshman year. The amount was
approximately $6,000. Also the FAFSA says I have to include UTMA
accounts in net worth of investments. My son has a $30,000 UTMA
account that he is listed as secondary on and his grandfather is
primary. My son does claim the dividends on his personal tax return,
but we haven’t decided if we will use any of that money toward college
expenses. I contacted the school and they tell me I can submit a
change of income form through the school for the child support issue
and that I don’t need to include the UTMA information at all on my
FAFSA because my son is not primary on the account. The FAFSA form
instructions say quite the opposite. Can I make the necessary
correction on the FAFSA that they (admissions) say? I am trying to not get
myself in trouble. What should I do?
— Dave B.
College admissions staff do not necessarily have the expertise to
answer questions about financial aid. Address questions about
financial aid to a college financial aid administrator, not a college
admissions officer.
College admissions staff also do not have the authority to make
adjustments to data elements on the Free Application for Federal
Studnet Aid (FAFSA). Congress specifically delegated the authority to
make adjustments only to the college’s financial aid administrators.
Some colleges have set up one-stop shops that combine the customer
service operations of admissions, financial aid, bursar and
registrar. These streamlined hub operations can be convenient, saving
the student from having to run around campus to visit multiple
offices. They can answer simple questions about financial aid and hand
out forms. But they don’t always have the depth of expertise to answer
technical questions about financial aid. Unfortunately, it isn’t
always possible to tell whether the answer to a question requires
technical expertise. But if an answer conflicts with information
available from other credible sources, such as the FAFSA instructions,
and the front office staff are unable to resolve the conflict, ask to
speak to a financial aid administrator.
Tip: When asking a question about financial aid, write down the name
and/or ID number of the person answering the question. This will allow
supervisors to provide additional training to staff who answer
quesions incorrectly.
The college’s change of income form is used to initiate a professional
judgment review by a financial aid administrator. It is not uncommon
for child support payments to end before or during enrollment. Most
college financial aid administrators will make adjustments when the
previous year’s income is not reflective of ability to pay during the
award year. The $6,000 in child support payments received may account
for as much as $3,000 of the $23,000 EFC.
But the admissions staff are wrong about the UTMA account. An UGMA or
UTMA account is a custodial account, where the account is owned by a
minor. As noted in the FAFSA instructions, custodial accounts must be
reported as investments on the FAFSA and are reported as assets of the
account owner, not the custodian. The titling of an UTMA account
established by a grandparent for a grandchild will be “[Grandparent’s
Name] as custodian for [Grandchild’s Name] under the [Grandchild’s
State of Residence] Uniform Transfer to Minors Act” or something
similar.
This is in contrast with a Totten Trust, which is typically titled as
“[Grandparent’s Name], in trust for [Grandchild’s Name]”. A Totten
Trust is a revocable transfer that passes to the beneficiary without
probate upon death of the account owner.
The terms “primary” and “secondary” have no legal meaning when
referring to the custodian and account owner of a custodial account
and may be ambiguous as to which is which.
Since families sometimes get confused about the difference between
custodial accounts and Totten Trusts, an experienced financial aid
administrator will always try to clarify who legally owns the
account. In most cases the child is the account owner, especially when
the parent refers to it as an UGMA or UTMA account or custodial
account. When in doubt, a good rule of thumb is to follow the
taxes. If the child reports the interest and dividends on his income
tax return, the child is the account owner.
A $30,000 custodial account contributes $6,000 of the $23,000 EFC.
There are a few ways to reduce the impact of a custodial account on a
student’s EFC. But these strategies will not affect the student’s
eligibility for need-based financial aid for the fall, since the FAFSA
has already been filed. The FAFSA uses a snapshot approach with regard
to reporting assets, measuring the asset value as of the date the
FAFSA was filed. The FAFSA may be changed to correct errors in the
information reported as of the date the FAFSA was filed, but may not
be be updated for subsequent changes in the nature or value of the
assets. For example, if the applicant transposed two digits in the
account balance, the applicant can correct the error on the FAFSA. But
the applicant cannot update the asset value because some of the money
was spent after the FAFSA was filed. So any steps taken now will
affect the treatment on the subsequent year’s FAFSA but not the
current year’s FAFSA.
One solution is to spend down the balance in the UTMA account to pay
for the student’s college education. This will reduce the impact of
the UTMA account on eligibility for need-based financial aid next
year. The family should spend the student’s assets to pay for the
student’s education before using any parent assets. If the family
spends down the UTMA account balance to zero, it will reduce the EFC
by as much as $6,000.
Another solution is to roll the money into a custodial 529 college
savings plan account. A custodial 529 plan is titled the same as the
original UTMA account that was used to fund the 529 plan. Even though
the student is the account owner (and beneficiary) of a custodial 529
plan, federal law treats such accounts as though they were parent
assets on the FAFSA. This yields a much more favorable treatment on
the FAFSA, reducing the impact of the $30,000 account from at most
$6,000 to at most $1,700.
(Note that some financial planners have encouraged families to set up
529 plans with a grandparent as the account owner, as opposed to the
student or parent, because accounts owned by a grandparent are not
reported as assets on the FAFSA. However, if a 529 plan is not
reported as an asset on the FAFSA, any distributions from the 529 plan must
be reported as untaxed income to the beneficiary on the subsequent
year’s FAFSA. That usually results in a much greater increase in the
student’s EFC than a 529 plan owned by the student or
parent. If a 529 plan that is reported as an asset on the FAFSA,
distributions are not reported as income on the FAFSA.)
Addressing the child support and UTMA account issues will reduce
the EFC to about $14,000. This is still too high an EFC for the
student to qualify for a Pell Grant, but the student might qualify for
a subsidized Stafford loan and perhaps some other aid from the
college’s own funds, depending on how much the college costs.
Source: Fastweb
