Most people wouldn’t think an inheritance could be a double-edged sword. After all, a gift that could provide financial assistance or comfort seems like a positive thing. However, if you are a parent who received an inheritance from one of your parents or some other loved one, that inheritance could have negative consequences if your child is a student who needs federal financial aid to pay for college.

Today, record-setting course fees have made it all but impossible for even the most impassioned students to pay tuition without assistance. While an inheritance may seem like an added financial resource, it has the potential to interfere with a student’s ability to get government aid. When a parent inherits from their parent or some other person, that windfall could jeopardize a student-child’s eligibility for assistance.  How inheritances affect college students

How the Government Determines Federal Financial Aid Eligibility

Before students can receive government-funded loans and grants, they must first complete and submit the Free Application for Federal Student Aid (FAFSA).

The FAFSA Can Help Students Obtain Assistance

  • The Federal Pell Grant
  • The Federal Supplemental Educational Opportunity Grant 
  • Federal Direct Loans
  • Federal Perkins Loans
  • Federal Parent Plus Loans

Under most circumstances, a student’s eligibility for federal financial aid is assessed in accordance with their income. However, for most students under the age of 25, the FAFSA requires that they input information about their parents’ income and assets, even if the student has a job and lives independently.

Why Your Inheritance Could Impact Your Child’s Federal Financial Aid Eligibility

If your parent receives an inheritance from their own mother or father, or another loved one, the gift’s value must be declared on Worksheet B of their Internal Revenue Service Form 1040 filing.

Since the FAFSA considers parents’ income and assets when determining award eligibility, an inheritance could be considered a contributor to the family’s overall income.

While the federal government allows parent asset allowances of up to $50,000, a significant inheritance could make a student-applicant ineligible for Pell grants and subsidized loan options.

Your Options for Reducing the Negative Effects of a Large Inheritance

The FAFSA considers the prior year’s tax returns of the parents and applicant. You could reduce the negative effects of a large inheritance by:

  • Using the inheritance to pay off existing debt, thereby decreasing the value of your reportable assets
  • Contributing a sizeable portion of your inheritance to a retirement account
  • Transferring the gift to another person such as grandparent, sibling, or another relative
  • Investing in a qualified college savings plan or educational trust

Contact a California Estate Planning Attorney

The Law Firm of Kavesh, Minor & Otis, Inc. has decades of experience helping Californians of all backgrounds invest in their children’s futures. Please send us a message online, or call us at 1-800-756-5596 to schedule your free, no-obligation consultation.


Philip J. Kavesh
Nationally recognized attorney helping clients with customized estate planning guidance for over 40 years.
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