One in five college students gets money from relatives like aunts, uncles, or grandparents to help with college costs. Wow—wouldn’t you like to be one of those students!
Actually outright gifts and other financial distributions from retirement accounts, dividends, and 529s from relatives have a negative impact on need-based financial aid.
Relatives can contribute up to $13,000 per year (or $65,000 over 5 years in a lump sum) and avoid a gift tax as well as get tax deductions for the contributions to a 529 in some states. Monies withdrawn for higher education expenses are also tax free. If such monies are owned by the parents or the college students, they must be reported as an asset on the financial aid form, and financial aid is reduced by 5.64%. For $10,000 in a 529, aid will be reduced by $564. But, if the same is owned by a relative, as of 2009, that reduction is much higher,–50 cents on each dollar. That same $10,000 in the example above will be reduced by $5,000!
Does that mean relatives shouldn’t contribute? No, just be careful. Transfer monies to the student or his or her parents before they will be used. (If you have a 529 in a state that does not allow transfers, roll your 529 into a 529 in a state that does allow such.) Or, have the student use the assets for graduate school or use monies only after applying for financial aid in their senior year of college.