How gifts to grad can affect financial aid, taxes
Dear Liz: Our grandson’s stellar high school performance and his family financial situation were such that he was admitted to his state university with grants sufficient to pay all school fees, including roomand board, with no loans orwork-study. His grandmother and I have a 529 account in his name that has enough money to pay about twice his estimated books and living expenses, given this level of financial aid.
His other grandparents gave him a high school graduation present of a check for four times the annual estimated books and living expenses. Does he need to amend this year’s financial aid form to reflect this generous gift? Should I suggest he put part of the gift aside for future years to diminish the effect on future financial aid?
Because of his unexpected gift, we plan to not use the funds in the 529 account until needed for his undergraduate or possible graduate school expenses. If he doesn’t need the money, we plan to transfer the balance to his younger sister’s 529 account.
Answer: Your grandson won’t have to amend this year’s financial aid forms but he will have to declare the gift on next year’s form. That could indeed reduce his financial aid package, since such gifts are considered to be the student’s incomeand thus will be counted heavily against him next year.
There’s notmuch that can be done about it now, but generous grandparents in this situation might think about holding off on their gifts until the student’s final year in college when financial aid is no longer a consideration. Paying that last year’s expenses, or paying down any student loan balances, would be a gift without repercussions.
Prioritizing financial goals
Dear Liz: Howdo you prioritize financial goals on a small salary? I am24 and a college graduate with about $ 40,000 in student loan debt. Because Iwork full time at a nonprofit educational organization, about half ofmy loans qualify for the Public Service Loan Forgiveness program, so I currently pay only the monthly payment on a private loan and two other small loans. I earn a small salary, but I have always been drawnto jobs in service- oriented, nonprofit fields, and I am perfectly fine with the fact that I’ll never have a career with a six- figure salary. My problem is that after rent, utilities, student loan payments, groceries and other such monthly bills, I have very little money left over to divide among my different financial goals. I make a small monthly contribution to my company-sponsored 403( b) plan, but I’m also trying to rebuild my savings after paying out of pocket for an expensive root canal. I occasionally earn some extra cash frombaby- sitting, and I live a fairly simple lifestyle— I own my used car, Iwalk towork— yet I feel like I’ve barely been making a dent in any ofmy goals— saving for retirement, rebuilding savings and paying off student loans. Howcan I leverage what’s left over at the end of the month to reach my goals? Would it be better to focus on one goal rather than all three?
Answer: Many people in your situation focus on a single goal hoping tomake faster progress. They don’t fully realize what their singlemindedness is costing them.
Prioritizing debt repayment over saving for retirement is particularly costly. Not only do you give up potential company matches, but the money you don’t contribute can’t earn future tax- deferred returns. At your young age, every $ 100 you contribute could grow to more than $ 2,000 by the time you hit retirement age, assuming8% average annual returns, which is the historical long- term average for the stock market. In fact, the younger you are, the more you give up by not contributing to a retirement fund. Ask any of your older co- workers if it gets any easier to save for retirement. They’ll probably tell you that they wish they’d gotten serious about retirement savings when theywere a lot younger.
Building up your emergency savings may seem prudent aswell, but you don’twant to do so at the expense of your retirement fund or instead of paying down high rate debt.
So here’s your gameplan. Instead of divvying up what you have left after paying bills, start by paying yourself first. Contribute at least 10% of your income to your company retirement plan. Then investigate the possibilities of consolidating your private student loan into a fixed- rate loan, since rates probably will rise in the future. If you can lock in a lowrate, itwould then make sense to start building up your emergency savings. If you can’t, you might want to divide your money between savings and debt repayment.
It will be tough to swing all this. You maybe able to make it easier by finding a roommate or a cheaper place to rent, or looking for more outside gigs such as baby- sitting until your income rises enough to allowyou to comfortably pursue all your goals. Questions maybe sent to Liz Weston, 3940Laurel Canyon, No. 238, Studio City, CA91604, or by using the “Contact” form at asklizweston.com. Distributed by No More Red Inc.