What Do You Do When Income or an Asset Isn't Really Your Money?

What Do You Do When Income or an Asset Isn't Really Your Money?

I am a disabled parent who hasn’t worked since 2007. I am

currently on long term disability and have been ruled disabled by the

Social Security Administration. My child is heading off to college in

the fall and we are working on his FAFSA. My Social Security came

through in late November in a large lump sum due to back dating.

However, my long term disability has a clause that says I must give

this SSDI sum to them as an offset and therefore it isn’t really an

asset of mine. I am just waiting for them to send me my determination

letter so I can transfer the funds, which are currently in my savings

account. How do I account for this on the FAFSA? I don’t want them to

think that the sum is extra money cause it isn’t.

— H.R.

In most cases where a family argues that income or an asset isn’t

really their money, they actually do hold legal title to the money. For

example, when a grandparent transfers ownership of their home and

other assets to the parent in order to qualify for Medicaid, the

parent often argues that the money isn’t really theirs. But the parent

owns the assets and can use them for any purpose, even if the parent

feels a moral obligation to use the money for the benefit of the

grandparent. The grandparent wouldn’t be able to qualify for Medicaid

if the money was being held in trust for them. The family can’t claim

that the money isn’t the grandparent’s for Medicaid purposes and then

also claim that the money is really the grandparent’s for federal

student aid purposes.

Most college financial aid administrators will insist that the assets

be reported on the FAFSA because the parents hold legal title to the

money. They often look to see who is responsible for paying taxes

associated with the asset, such as property taxes on a home or income

taxes on the interest and dividends. Financial aid administrators

might allow a professional judgment adjustment for eldercare expenses

paid by the parents, but the asset must still be reported.

But when there is a legal or contractual obligation against the money,

it really isn’t the family’s money. For example, most long-term

disability insurance policies include clauses that treat SSDI payments

as an offset to the disability payments and require repayment if the

insured receives a retroactive lump sum payment of SSDI benefits.

Section 480(g) of the Higher Education Act of 1965 (20 USC 1087vv(g))

acknowledges this in its definition of net assets (emphasis added):

“The term ‘net assets’ means the current market value at the time of

application of the assets (as defined in subsection (f)), minus

the outstanding liabilities or indebtedness against the assets.”

So not only is the value of an asset reduced by the amount of any debt

secured by the asset, but also by any liabilities against the

asset. If an insurance company has a legal claim on the money, the

amount of that claim will offset the value of the asset.

There are two approaches one can take to address such a situation,

since the FAFSA doesn’t provide the applicant with an opportunity to

explain any liabilities against an asset. One is to report the net

asset value on the FAFSA (i.e., after subtracting the liability to the

disability insurance company). The other is to report the savings

account balance on the FAFSA and ask the college financial aid

administrator for a professional judgment adjustment to compensate for

the liability to the disability insurance company.

Either approach carries some risk.

If the applicant reports the net asset value on the FAFSA and the

FAFSA is selected for verification, the college will question the

mismatch between the savings account balance and the amount reported

on the FAFSA. The applicant must be able to clearly document that the

money must be repaid to the long-term disability insurance

carrier. Even so, the college might still decide to disallow

it. College financial aid administrators like to see offsetting

transactions occurring in the same year. It is also a bit problematic

if the money was commingled with other funds, as opposed to being

deposited in a dedicated account.

If the applicant reports the savings account balance and asks for a

professional judgment review, it is possible that the college may deny

the request. Professional judgment reviews are subject to the

discretion of the college financial aid administrator, and decisions

to grant or deny an adjustment can sometimes be a bit arbitrary.

Either way it is possible that the college financial aid administrator

will disallow treating the liability to the insurance company as an

offset to the value of the savings account. But asking for a

professional judgment review may put the college’s financial aid

administrator in a more positive frame of mind than having the

financial aid administrator note a discrepancy during

verification. When a discrepancy is identified during verification,

colleges tend to be more suspicious and less likely to be

accommodating to the family.

The best approach, however, is to report the net asset value on the

FAFSA, consistent with the statutory requirements and the FAFSA

instructions. When in doubt, follow the rules. The family should also

call the college’s financial aid office and/or the Federal Student Aid

Information Center at 1-800-4-FED-AID (1-800-433-3243) before filing

the FAFSA to ask how to report the money. This will help allay

suspicions that the family was trying to hide the money. The family

should write down the response along with the date and time of the

call and the name of the person with whom they spoke. If the FAFSA is

selected for verification, the family should include a copy of these

notes along with an explanation that documents the calculation of the

net asset value and the liability to the insurance company.

Source: Fastweb

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