Can a Cash Gift Affect Financial Aid?

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Giving Money to a Grandchild May Affect Their Financial Aid Eligibility Amount

One of the joys of being a grandparent is being able to see a grandchild grow and succeed. Helping out with costly college tuition is one way to see that come to fruition. But sometimes it can cause more harm than good. Learn what we found out and find some solutions that may help.

How Does a Cash Gift Affect Financial Aid?

The Free Application for Federal Student Aid, or FAFSA, uses set criteria to determine an EFC or expected family contribution. The EFC is the amount that a student is expected to pay for tuition and college expenses. It looks at several factors such as:

  • Household shelter assets
  • Income from parents
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  • Number of people in the household, including college students
  • The amount of money needed after other grants and monies are figured in

It hones in on reportable assets including funds that will pay for tuition. Part of this could be cash gifts from grandparents given to the student. It must be reported and can count against how much aid a student is eligible for. It’s used in calculating the Pell Grant and other institutional assistance grants and waivers.

Have a 529 Educational Trust?

To remain eligible for the maximum amount of grant money within a household income, students and parents must have minimal cash assets. A 529 Educational Trust puts a twist on things. It’s used to help pay for college and the first $20,000 does not count towards the EFC. On the contrary, grandparents who have created a 529 can reap their own tax benefits, but once the money is handed over to the student it’s counted as countable income toward the EFC.

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Another Solution? Give the Money to the Parents

While it may still have some impact on the student’s EFC, it won’t be as significant if you give the money directly to the parents with the caveat of making sure it is only used for education. This allows grandparents to help with college without making the money a direct gift.

Or, Wait Until After Graduation

An option where assets don’t have to be reported to FAFSA is after graduation. Instead of helping a grandchild before they embark on college studies, wait until after they graduate or after they’ve applied for their last year of FAFSA. This doesn’t count toward an asset, just a taxable gift. The grandchild can use the money to pay down their student loans or other post-college expenses.

Grandparents helping their grandkids is a positive financial move beneficial to the entire family. While help is welcomed, a reduction in financial aid can be a big blow to a student’s budget. Getting the most out of a college education is the main goal. Knowing a few tips ahead of time can help grandparents and students plan properly for the future.

~Here’s to Your Financial Health!

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