Increasingly, Overman Capital is receiving more questions about saving for a child's or grandchild's education. It's no wonder; the average cost of college in the US has tripled in just the last 20 years, an annual increase of 6.8%.1 During our research on financial aid, Rob and I discovered some intriguing education-related statistics. Here are two that jumped out at us:
- 86.4% of first-time, first-year undergraduate students receive financial aid in some form.2
- The percentage of students receiving financial aid has increased 18.8% over the last 20 years, or an annual rate of 0.9%2
Though the cost of secondary education is increasing, the data mentioned above reflects that more students are receiving more financial aid. We were pleasantly surprised to see this increase in aid. However, parents need to understand how to access that aid and what factors impact the aid their children receive.
As a quick refresher, all students must fill out the Free Application for Federal Student Aid (FAFSA) to receive the government's financial aid. The FAFSA determines the financial need based on family income and the prior tax year's income.
With these factors in mind, we'd like to illustrate how wonderful things like an inheritance could affect the amount of financial aid a student receives. If you're one of the fortunate students that have grandparents who can support their retirement and help with your college costs, here's what you need to know.
Financial Aid Eligibility: How Does An Inheritance Impact Me?
If your college-bound student receives an inheritance, thus increasing her income and or assets, the government may assume she is no longer in need of financial assistance (or may need less than before).
This inheritance adds to the family's assets and directly impacts your Expected Family Contribution (EFC) due to the FAFSA formulas. It's critical to note that colleges expect students to use about 20% of their assets to pay for college vs. 5.64% of their parent's "unprotected" assets. In other words, you want to reduce the amount of assets the student has.
Depending on the ages of the college student's parents or guardians, FASFA's asset allocation allowance may exclude certain assets from its formula. While it depends on a family's unique circumstances, this threshold often hovers around $50,000 for eligible families.
Because of this, be aware that a smaller inheritance may not have too much of an impact on the formula, i.e., your college student's financial aid may remain intact.
How Can You Lessen The Effects?
We encourage beneficiaries to consider alternative uses of an inheritance, such as paying down debts like credit cards or car loans. If you keep your inheritance in a checking or savings account, the government will likely count those assets, and your EFC could increase.
Additionally, managing how the inheritance is received may help minimize its impact on a student's financial aid. For example, it may be worthwhile to put the money into a trust account and allow for smaller withdrawals to be made each year by your beneficiaries.
If you don't have any other options, your beneficiaries may be able to provide the government with documentation proving their inability to cover their family contribution. You might want to pursue this route if the EFC increased in response to a large, one-time inheritance. If your documentation is accepted, they may be able to renegotiate their college student's financial aid package.
Finally, wrestling with the numerous strategies to lower your EFC can be complicated, stressful, and have tax repercussions. Inheritances can be a blessing for covering college costs, but you need to be strategic when employing these assets to get the most from them. We believe it's advantageous to work with your estate planning attorney, CPA, and financial advisor to explore these options as you prepare to send your children and grandchildren to college.
Click here to schedule a meeting with Rob Overman and Jay Rishel at Overman Capital.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.