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Questions about How to Handle an Inheritance and Scholarships for Cancer Survivors

Mark Kantrowitz

November 01, 2010

Our son is a sophomore in college. He receives both subsidized and unsubsidized loans. My husband and I have been paying the remaining balance for his education. I recently inherited approximately $100,000. I am aware that we should pay off high interest debt with this money. However, we want to save enough to pay for the rest of his college education (about $65,000). How will our assets be looked at by the FAFSA? We previously had assets under $5,000. We are both 51 years old. — Cathryn C.

All or part of your assets will be disregarded by the federal need analysis formula. The federal formula excludes the net worth of the family home, money in qualified retirement plans — such as a 401(k), IRA or 403(b) — and any small businesses owned and controlled by the family. If your income is less than $50,000 and you are eligible to file an IRS Form 1040A or 1040EZ (or you satisfy certain other criteria) all assets will be disregarded. There is also an asset protection allowance, based on the age of the older parent, that shelters about $50,000 for most parents of college-age children, including you. Ultimately, less than 4% of dependent children have any contribution from parent assets as part of their expected family contribution (EFC).

Any parent assets that are assessed by the need analysis formula are assessed according to a bracketed system with a top bracket of 5.64%. So $65,000 in assets would reduce his eligibility for need-based aid by at most $846, corresponding to the $15,000 above the asset protection allowance.

The federal need analysis formula does not count consumer debt, such as auto loans and credit card debt, but it does count cash in the bank. So you may be able to improve your son’s eligibility for need-based financial aid by using some of the inheritance money to pay off your credit cards.

There are also financial benefits to eliminating credit card debt and other high-interest debt. If you use the inheritance to pay for his education, you will not need to borrow from the Parent PLUS loan program, which has a 7.9% interest rate. But if you have some debt with a higher interest rate, such as credit card debt, it is better to pay of the higher-rate debt first. For example, if you’re paying 14.9% interest on $10,000 in credit card debt, using the inheritance to pay off the credit card debt will save you $1,490 a year in interest. You might then need to use the Parent PLUS loan to pay for your son’s college tuition, but that will cost you only $790 a year in interest on a $10,000 debt.

Moreover, you can deduct up to $2,500 in interest paid on federal and private student loans on your federal income tax return. The student loan interest deduction is an above-the-line exclusion from income, so you can take the deduction even if you don’t itemize. You can’t deduct the interest paid on credit card debt or auto loans.

Also, are you saving enough for retirement?

What kind of financial aid and scholarships are available for my daughter, who is a 7-year survivor of a malignant brain tumor. She is only a junior in high school but I want to see what kind of options I have next year. She has long term side-effects from the radiation and chemotherapy. Any information you can provide, would be great. — Marie S.

The free Fastweb scholarship matching service includes several types of cancer scholarships, including college scholarships for cancer survivors, scholarships for siblings of children affected by cancer and scholarships for children of parents who have or have had cancer. To find the cancer scholarships, login to the site and click on the “My Profile” link on the upper right hand corner of the page. There are two relevant characteristics in the Personal Info section of the profile and two in the Parent Activities section. In the Personal Info section you’ll find “Cancer” in the Disability menu and “Cancer, Siblings Diagnosed With” in the Personal Attributes menu. (There may also be other conditions that are relevant in the Disability menu.) In the Parent Activities section you’ll find “Cancer, Deceased due to” and “Cancer, Survivor/Living With” in the Parent Attributes menu. After you save the changes, any relevant cancer scholarships will be included in the list of matching scholarships.

You can also find information in the Cancer Scholarships page on the FinAid site at www.finaid.org/cancer. See, for example, the Pediatric Brain Tumor Foundation of the United States.


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