How Receiving An Inheritance Affects Financial Aid
By Preston Rosamond
Figuring out how to pay for college, including what federal aid and/or loans might be available to your family, can give you a headache. Though receiving an inheritance when your children are reaching college age may seem like perfect timing in helping you pay for tuition and other costs, it can also negatively impact the aid your family is eligible for. Let’s look at how an inheritance may affect your aid calculation and what moves, if any, you can make to avoid experiencing a cut in aid.
Financial Aid 101
Students and their families who are interested in receiving financial aid for college must fill out the Free Application for Federal Student Aid (FAFSA). The financial aid process takes several factors into account when deciding how much in aid or loans a family is eligible for, including your income, assets, and your recent taxes. A one-time event such as an inheritance can be considered an asset on the FAFSA form and thus reduce the amount of aid available.
The FAFSA does allow families to shield a certain amount of assets from the aid calculation and excludes assets such as the value of the family home, retirement funds held in accounts like 401(k)s and IRAs, and any small businesses that the family owns and controls. Also, the FAFSA has what is called an asset protection allowance. Depending on the age of the parents, a certain amount of assets are hidden from the formula. However, once that asset allowance is passed, the formula kicks in and starts assuming more parental financial contribution. (1)
So if your inheritance was modest or your family has little in assets or income, it’s unlikely it will impact your aid situation much. But what if the inheritance is more substantial? There are steps you can take to help prevent this one-time event from cutting into the aid amount for which you are eligible.
Minimizing The Impact Of Your Inheritance On Financial Aid
If you do receive an inheritance, and you’re applying for financial aid for your child, there are various strategies for minimizing the effect that an inheritance has on your child’s financial aid. Consider using the money to pay down a car loan or credit card debt because the FAFSA needs analysis doesn’t take consumer debt into account. Beyond helping your aid calculation, paying down high-interest debt can improve your overall financial situation. Also, consider putting the funds toward any large-scale projects you want or need to tackle, such as a home renovation or replacing your roof. Just be sure to leave enough assets in an emergency fund if you don’t already have one.
If you have a family member who you know is planning to leave your child money, consider asking them to put the money in your name, earmarked for your child, or open a 529 account for your child in your name. Here’s why: your child’s individual assets will count for 20% for aid purposes, but yours will only count for 5.64%. (2)
If the inheritance or other assets have already been given in your child’s name, make sure you use those assets first when paying for college expenses. This will increase financial aid opportunities in their subsequent college years.
Higher Education And Financial Aid
Navigating the financial aid process while also dealing with the intricacies of receiving an inheritance can cause some unexpected snags. If you’re worried about how an inheritance or any other assets will affect your child’s financial aid opportunities, your best bet is to speak with an experienced financial professional. We at The Rosamond Financial Group can help you create a plan to shield the inheritance from the FAFSA formula and maximize the aid your children receive. To get started, book a free introductory meeting online!
Preston Rosamond is a financial advisor and the founder of The Rosamond Financial Group Wealth Management, LLC with nearly two decades of industry experience. He provides comprehensive wealth management and financial services to individuals, professionals, and families who enjoy simplicity and seek a professional to help them pursue their goals. Preston personally serves his clients with an individual touch and a sincere heart, and his servant’s attitude is evident from the moment you meet him. Learn more about Preston or start the conversation about your finances with him by emailing firstname.lastname@example.org or schedule a call with our online calendar.