The Most Dangerous Gift to Avoid Giving a High School Senior
©2009 by Marc R. Hill, CCFC, RFC®, CCFC, CAFC
As the high school years wind down, parents begin contemplating how they will pay for their children’s college tuition. For those who are tackling this question for the first time, and for some who are tackling the question for the second, third, or fourth time, the mere consideration is enough to turn one’s head prematurely gray. But, for those who receive good advice, gray hair can be postponed for a few more years.
Many parents turn to the U.S. government and the federal financial aid system to help find additional money to assist with college expenses. To determine the extent and eligibility for this supplemental money, families are required to fill out the Free Application for Federal Student Aid or the FAFSA form.
The FAFSA is used to determine the Expected Family Contribution (EFC), which in most cases is the starting point or minimum dollar amount a college anticipates a family to contribute toward their child’s education in any given school year. Once a preliminary EFC is determined, financial aid packages are constructed for prospective students by the various colleges and universities.
The EFC calculation is primarily based upon an assessment of parental and student income and asset values. The income and assets attributable to the student are assessed at a higher rate than those of the parents. Families with more money have a higher EFC than those families that are less well -off who are not expected to contribute as much.
A higher EFC also indicates a student does not need financial help in the form of scholarships and other types of gifted aid, which do not require repayment. Instead, the student may only qualify for loans and other forms of assistance that require repayment and can result in thousands of dollars of interest charges.
Worried about skyrocketing college costs, parents of high school seniors often suggest that grandparents make donations to Junior’s college fund in lieu of holiday gifts.
If they’re financially able to do so, most grandparents happily comply. After all, one reason they’ve accumulated their wealth is to help younger generations achieve success, including going to college. Unfortunately, their generosity may devastate their family’s finances.
What most parents and even their financial planners don’t realize is the timing of financial gifts is critical in determining how much their family pays for college. Doing this incorrectly not only could cause your child to lose scholarship and other forms of gifted aid, but your family will also be expected to contribute more towards your child’s educational costs.
When cash gifts are given to high school seniors for Christmas or Hanukkah, the money is in the child’s name and bank account when the family completes the Free Application for Federal Student Aid (FAFSA) in January. Hence, this gift is assessed at the child’s higher rate.
The bottom line? The FAFSA considers the initial gift given in December as “untaxed income” and increases your Expected Family Contribution by fifty percent of the gifted amount. Additionally, since the money is in the child’s bank account on the day the FAFSA is signed in January, it is now considered an asset of the child increasing your EFC by an additional twenty percent of the gifted amount.
In total seventy percent of grandma’s generous gift is swallowed up by the financial aid system without you even knowing it. The good news is that you can avoid these painful consequences by ensuring that your gift is given at the right time and in the right way.
Saving money is only one consideration when putting a child through college. To fully leverage your educational investments, you have to understand how the financial aid formula will be affected by how and when you use your investments. The choices you make could cost or save your family tens of thousands of dollars.
