If you have questions about the mechanics of investing, how it fits into your overall financial plan and what strategies can help you make the most out of your money, then you’re in the right place.
A reader recently wrote in with a question. “I make $75,000 a year and have two teenagers who will be heading to college soon. I have saved a little, but I was counting on getting a lot of help with financial aid. The thing is, my mom just died and I’m about to inherit some money — more than $250,000 — and it’s going to land in my account just about when we’re filling out the FAFSA for my oldest in the fall. To make matters more complicated, I’m divorced. My ex makes about the same as me, and doesn’t have much savings. I have the majority of custody and pay most of the bills.”
The reader continues: “I know I should feel lucky to receive an inheritance, but I feel sad about my mom and now it’s making me worried that college is going to be very, very expensive. Is there a way for me to receive this money and hide it so it doesn’t just go straight to paying tuition? I wanted to have a little left over for helping with my mortgage and my own retirement. The money is coming in cash, not an IRA or anything.”
Inheritances come with all sorts of tricky feelings, and sometimes they create financial complications rather than solving them. This situation actually happens in a lot of families.
Protecting Inherited Funds When Paying College Tuition
Losing a parent can be tough, and it’s even harder when dealing with financial concerns. It becomes more complicated if you’re about to pay for college tuition. If you’re in this situation, you might need to take action to protect the inheritance received before submitting Free Application for Federal Student Aid (FAFSA) forms.
Spending the Funds
One helpful strategy is to spend some of the funds for things you were already planning to buy, like paying off debts like car loans, mortgage, or student debt. It can also be a good idea to spend on large purchases you were already planning to make, such as a vacation or home renovation. After spending this money, it won’t affect your FAFSA forms anymore.
However, the financial aid algorithm does not expect you to spend all your inheritance on tuition fees. They’re going to look at your parental income as the primary criterion for financial aid. Parental savings and investments are valued at 5.6%, so if you declare that you have savings worth $250,000, expect that about $14,000 of it be allotted for tuition yearly.
Financial planning is crucial in such situations. Several financial advisers can offer insights on how to protect the inheritance while maintaining eligibility for financial aid. Evaluating your options, spending wisely, and avoiding common mistakes like investing can avoid hindering your chances in college financial aid.
Maximizing Financial Aid and Lowering College Costs
For divorced parents, filling out the FAFSA form can be tricky. Starting next year, only the income and assets of the parent who pays the majority of the expenses will be counted. However, for private colleges that use the CSS Profile, both divorced parents have to submit. But don’t worry, you don’t need to resort to subterfuge. Just accurately note your full inheritance on the financial aid forms for the 2024-2025 school year. You might still possibly get some financial aid, especially if you write a letter of explanation to the financial aid office.
If you don’t receive what you need from need-based aid, you can search for colleges that offer merit-based scholarships. This is where financial advisers like Walker and Sydlansky come in handy. They specialize in strategizing for higher-income families who still need to look for breaks off colleges that list at $80,000-plus per year. Choosing where your child applies to college matters a lot. However, advisers can help crunch the data based on each family’s financial situation and compare costs and aid amounts to help families make informed decisions.
Maximizing College Savings Through Merit Aid
One of the biggest anxieties parents face when it comes to college planning is how an inheritance will affect their child’s eligibility for financial aid. Scott Sydlansky, a certified financial planner in New Jersey, recommends researching and evaluating colleges that offer merit aid to mitigate this concern.
While this research will provide you with a good estimate, the final award will depend on each college’s financial-aid office; therefore, it’s advisable to confirm directly with them and inquire about other scholarships.
Suppose you are afraid that your inheritance may no longer cover the cost of college. In that case, you can always seek advice from financial advisers who suggest that you invest your inheritance in retirement and insurance accounts that do not factor in the aid formula. Although investing in IRAs or qualified retirement plans with large sums of cash may not be possible, annuities, life insurance products, and modified endowment contracts offer viable alternatives.
Walker, a Georgia-based financial advisor, once aided a family who invested their inheritance in a universal life insurance policy. However, navigating the rules around these products is complex. It’s recommended that you work with someone experienced in designing them to optimize the results for both you and your agent.
Rethinking Your Inheritance and Financial Aid
Are you considering using your inheritance to pay for education costs? Before you do, it’s important to understand how it could impact your eligibility for financial aid.
While there are ways to exclude an inheritance from the formula used to determine financial aid, the effort may not be worth it in the end. It’s best to weigh the potential impact on financial aid benefits against the benefits of using those funds to pay for education costs.
Financial advisor Sydlansky advises caution when considering whole life or universal life insurance policies as investment vehicles. These types of policies can be complicated to understand, often with high fees, and are designed primarily to protect you, not earn a significant return on investment.
Consider your options carefully before making any major financial decisions. It’s always best to speak with a financial advisor or other qualified professional to help guide you through the process.