Parents and grandparents should realize that the standard federal college aid formula considers 35 percent of student assets and 50 percent of student income available to pay college tuition. Thus, if a grandparent give $20,000 to a grandchild, who holds it in a custodial account, $7,000 (35 percent of $20,000) is deemed available for tuition.
If the grandchild otherwise would have received $10,000 in financial aid, the extra $7,000 of expected family contribution reduces that aid from $10,000 to $3,000. Alternative strategies to consider:
* Hold the grandparent’s gift in the parent’s name. Under the financial aid formula, only 5.6 percent is deemed available to pay for college. The $10,000 aid package would be reduced by only $1,120 (5.6 percent of $20,000), so the child would get $8,880 in aid.
* Don’t give the student or the student’s parent anything. This will allow the student to qualify for maximum financial aid. Then the grandparent can pay the college tuition bill. Such payments will not be considered taxable gifts.
