Paying the College Directly to Avoid Gift Taxes
September 27, 2012
Easy for Colleges to Detect Such Cash Support
It is easy enough for a college to detect such tuition payments because the check that is applied to the student’s account will be written by a payor whose name is different than the names of the student and parents as listed on the FAFSA and other applications. (Note that in a divorce case, only one parent’s name will be listed on the FAFSA. But the noncustodial parent is not considered a parent for federal student aid purposes.)
Some institutional financial aid applications also ask explicitly about contributions from relatives. For example, the CSS/Financial Aid PROFILE form has a question that asks about other resources: “Amounts expected from relatives, spouse’s parents and all other sources.” There’s also a question about contributions from the noncustodial parent: “How much does the noncustodial parent plan to contribute to the student’s education for the ####-## school year?”
Other Benefits of Making Direct Tuition Payments
Sometimes there are other benefits of making a payment directly to the college that will offset some or all of the loss in eligibility for need-based financial aid. For example, a few colleges provide a discount for prepayment of multiple year’s worth of tuition, such as allowing the donor to pay for subsequent year’s tuition at current rates. This can yield significant savings, since tuition rates tend to increase each year, yielding senior year tuition rates that are about one fifth higher than tuition rates during the freshman year.
Direct Payments are Not Charitable Contributions
Note that direct payment of tuition to a college or other educational organizations does not count as a charitable contribution because the payment is earmarked for a particular student.