One of the great rites of spring is the new crew of young adults graduating high school and heading off to their futures. When I'm not at Wynn at Law, LLC, I teach at Marquette University Law School, so I may see a few of them further in their academic journeys.
For students, parents, and grandparents, the issue of affording tuition is best tackled a few years before high school graduation. If you're blessed with a full-ride scholarship or a generous gift from family, the Free Application for Student Aid (FAFSA) is a challenging hurdle you'll skip. For families planning to apply for financial aid, here are a two estate planning things to keep in mind long before commencement.
Inheritance – Inherited income impacts a student’s eligibility for certain amounts of financial grants (which don't have to be repaid) and can affect the amount of loans (which have to be repaid after graduation). The FAFSA looks at finances of the entire family including the previous tax year’s income. Inheritance or gifted money, even to a parent, can affect the amount of financial aid for the student.
Generally, one-time events, like inheritances, are handled by adjusting the income and counting the sum as an asset. The asset protection allowance (APA) allows a certain amount of money in retirement and non-retirement accounts, like an inheritance, to be spared assessment. But the federal government does expect parents to use a percentage of their unprotected assets to pay for their child’s education. The APA looks at the age of the oldest parent to determine the amount spared from assessment, assuming a younger parent has more time in the workforce before they'll need the assets.
For parents, a way to legally lower the total amount of assets recorded on the FAFSA is to use any gift or inheritance to pay off credit card debt and auto loans because consumer debt is not considered when a student applies for financial aid. Paying off that high interest revolving debt in an important part of avoiding bankruptcy, a frequent topic at Wynn at Law, LLC.
Savings and investments – We all hear about the tremendous burden of student loan debt new college grads have to repay. Saving up a ton of money on a summer, minimum wage job isn't likely to reduce the amount borrowed by much. However, keep in mind two things: 1) reducing any amount they'll have to borrow is a good thing, and 2) If they do save summer earnings, the government expects that 20 percent of it be used for college, so make sure savings are set aside for the teen.
On that note, if parents wish to transfer to their accounts assets held in a child’s name it’s best to do so at least two years before the FAFSA. Moving assets like this could trigger other issues when it comes to both financial aid and taxes so be sure to contact professionals for seasoned money management advice.
*The content and material in this original post is for informational purposes only and does not constitute legal advice.
Photo by Monkey Business, used with permission.