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What Do You Do When Income or an Asset Isn't Really Your Money?

Mark Kantrowitz

January 23, 2012

I am a disabled parent who hasn’t worked since 2007. I am currently on long term disability and have been ruled disabled by the Social Security Administration. My child is heading off to college in the fall and we are working on his FAFSA. My Social Security came through in late November in a large lump sum due to back dating. However, my long term disability has a clause that says I must give this SSDI sum to them as an offset and therefore it isn’t really an asset of mine. I am just waiting for them to send me my determination letter so I can transfer the funds, which are currently in my savings account. How do I account for this on the FAFSA? I don’t want them to think that the sum is extra money cause it isn’t. — H.R.

In most cases where a family argues that income or an asset isn’t really their money, they actually do hold legal title to the money. For example, when a grandparent transfers ownership of their home and other assets to the parent in order to qualify for Medicaid, the parent often argues that the money isn’t really theirs. But the parent owns the assets and can use them for any purpose, even if the parent feels a moral obligation to use the money for the benefit of the grandparent. The grandparent wouldn’t be able to qualify for Medicaid if the money was being held in trust for them. The family can’t claim that the money isn’t the grandparent’s for Medicaid purposes and then also claim that the money is really the grandparent’s for federal student aid purposes.

Most college financial aid administrators will insist that the assets be reported on the FAFSA because the parents hold legal title to the money. They often look to see who is responsible for paying taxes associated with the asset, such as property taxes on a home or income taxes on the interest and dividends. Financial aid administrators might allow a professional judgment adjustment for eldercare expenses paid by the parents, but the asset must still be reported.

But when there is a legal or contractual obligation against the money, it really isn’t the family’s money. For example, most long-term disability insurance policies include clauses that treat SSDI payments as an offset to the disability payments and require repayment if the insured receives a retroactive lump sum payment of SSDI benefits.

Section 480(g) of the Higher Education Act of 1965 (20 USC 1087vv(g)) acknowledges this in its definition of net assets (emphasis added): “The term ’net assets’ means the current market value at the time of application of the assets (as defined in subsection (f)), minus the outstanding liabilities or indebtedness against the assets.” So not only is the value of an asset reduced by the amount of any debt secured by the asset, but also by any liabilities against the asset. If an insurance company has a legal claim on the money, the amount of that claim will offset the value of the asset.

There are two approaches one can take to address such a situation, since the FAFSA doesn’t provide the applicant with an opportunity to explain any liabilities against an asset. One is to report the net asset value on the FAFSA (i.e., after subtracting the liability to the disability insurance company). The other is to report the savings account balance on the FAFSA and ask the college financial aid administrator for a professional judgment adjustment to compensate for the liability to the disability insurance company.


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