While gifts given directly to a college (or private elementary or high school) for tuition do not reduce the donor’s annual $15,000 gift tax exclusion [IRC Sec. 2503(e)], those gifts are considered a “resource” and therefore reduce the financial need of the student on a dollar-for-dollar basis. When the student is eligible for financial aid, this is the worst possible outcome regarding aid eligibility. If the gifts were made to the student, they would be considered income and would lower financial aid eligibility by 50% of the gift. Look for alternatives, like delaying the gifts until financial aid is out of the picture and using the gift to pay off student loans.
A student’s grandparents wants to give their grandchild $10,000 per year for four years of college expenses. The grandparents knowledgeable financial planner told the grandparents of 3 options: 1)make the gifts to the college each year which would reduce the students aid eligibility by $40,000 2)make the gifts to the student which would reduce the students aid eligibility by $20,000 or 3)make the gifts after college years with no effect on financial aid eligibility. The grandparents wanted to make the best use of their gift and did not want to reduce their grandchild’s financial aid eligibility and chose option 3. The student was able to keep his $40,000 of financial aid eligibility, pay off his student loan debt of $30,000 once he was done with college and save $10,000 for a down payment on his first home.
With proper planning, the students financial aid can be maximized and the gifts can be timed to help the student pay off college debt.