Review Your Will if Your Beneficiaries have Student Loans

We advise our clients to review their estate planning document regularly for many reasons. New babies need to be included, divorces should be taken into consideration, people who expected to be a trustee may move or have changed their mind. Another reason has to do with student loans for college students.

A student seeking a loan fills out the Free Application for Federal Student Aid, which includes reporting family finances and income. FAFSA looks at total family finances as well as the previous tax year’s income which means that inheritance or gifted money – to the student or the student’s parent -- can affect the amount of the financial aid the student will receive.

However, a one-time inheritance is considered an asset (not income) and the financial aid administrator has discretion about how to treat the inheritance.

In addition, FAFSA allows a certain amount of assets to be shielded from assessment based on the age of the older parent (asset protection allowance or APA). If the inheritance does not increase the parent’s assets so that the student’s assets are more than $50,000 the inheritance does not affect the financial aid.

If you plan to leave an inheritance to someone who may be in college when you die, there are some things to consider.

1 – Leaving funds to a 529 account will count against the student’s eligibility for financial aid.

2 – A properly structured trust will not affect eligibility. Your estate planning attorney can help you structure the payout from the trust in such a way that delays payments until the recipient is in his/her final year or college, for example. Because FAFSA looks at the previous year’s tax returns, a gift given in the student’s final year of college will not show up on the previous year’s tax statement.

3 – You may be able to allow the administrator of your estate to pay off debts of your beneficiaries prior to distributing the remaining funds. This would allow you to pay a college student’s debits and leave a smaller amount of money to him/her which might have a less dramatic impact on the student loans.

A qualified estate planning attorney can help you think through these options and others which may apply to your unique situation.