by John Darer CLU ChFC MSSC RSP CLTC
Having independent resources to pay for college gives families more options. A settlement in a personal injury, wrongful death, medical malpractice lawsuit may provide those resources whether in cash or through deferred lump sum or annual structured settlement payments tailored to the years that a child is expected to attend college, trade school and/or graduate school.
Where financial aid is needed, it's important to understand asset disclosure requirements and how assets (and how the assets are titled) impact federal and institutional financial aid.
FAFSA [ Federal based financial aid]
Assets which do not impact FAFSA
- Home equity in the family home
- Retirement assets
- Conventional and Roth IRAs, 401(k), SEP, and other pension plans
- Annuities and life insurance
- Household possessions
- Small business if less than 100 employees/family farm
Assets which impact FAFSA (account balances at time FAFSA form is filed)
- Bank accounts
- CDs (no, not the "relics" with music on them!)
- Savings bonds
- Vested stock options
- Brokerage accounts (taxable investments)
- Commodities
- Assets in IRC 529 plans and Coverdell Education Savings Accounts
CSS Profile [Institution based financial aid]
Assets which do not impact CSS Profile
- Qualified retirement assets
- Qualified annuities in retirement accounts
Assets which impact CSS Profile
- Non qualified annuities
- Cash value of life insurance policies (varies by institution)
- Taxable assets
- College savings accounts (e.g. 529 and Coverdell)
- Value of family business or farm
In Terms of Financial Aid Eligibility, What is the Difference in Treatment Between Assets of Parents and Assets of a Child?
Parents Assets
- FAFSA
Assessed at 5.64%
- CSS Profile
Assessed at 5%
Student's Assets
- FAFSA
Assessed at up to 20% (i.e. each $20,000 in assets helf by the student will reduce financial aid eligibility by $4,000)
- CSS Profile
Assessed at up to 25% (i.e. each $20,000 in assets held by the student will reduce financial aid eligibility by $5,000)
Important Settlement Planning Point:
Assets in a trust that designates the child as beneficiary would be available for assessment even if the child has no ability to tap the money
Structured settlement are not specifically addressed in either FAFSA or CSS Profile. While structured settlement payments are not qualified retirement plans they are tax qualified when it comes to the taxation of periodic payments when such payments are damages excluded from gross income subject to IRC 104(a)(1), IRC 104(a)(2) and IRC 130 [translation workers comp, or on account of physical injury, physical sickness, wrongful death].
NSSTA could and should do some good public relations in this area.
At least for the FAFSA or CSS, it's safe to say that if structured settlement payments are issued by check, ACH deposit, or by electronic funds transfer, the amount of the payment may be available for assessment when the check is deposited into the student's bank or trust account.
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