How to give niece/nephew college scholarships/loans?

December 24, 2019 5:55 AM

I have a nephew and niece in college. I'd like to help them out financially with scholarships and/or loans. What's the best way to do this?

Nephew is mid-junior-year. Niece is mid-freshman-year.

Scholarships: I'd like to provide $2k per semester (Aug1, Jan1) for each (total of $8k per year).

Loan: Nephew is in a pinch for some reason this spring and needs a ~$5k loan to get by. . I'm expecting this to be a one-time loan. His next year FAFSA should be correct and he'll get his own loans up front. So, for this spring I'd probably give him a zero% loan since I don't want to have to deal with listing the taxable interest income. I'd probably defer repayments until a year or two after school (I think that's standard). Can I just draw this up on paper myself and have him sign it (assuming he agrees)? Typical repayment period is ?? years? Any gotchas I should be thinking of? Losing this money forever won't break me. I'm not in a particularly close relationship with him

Goal 1: I want to help them through college, but if my giving them money just means they get less financial aid (FAFSA process?) I'm less gung-ho about it. Anyone know how FAFSA works these days? I went to collge a long time ago.

Goal 2: Can I do this in a tax-deductible way (for me)? Is it too late for a 529 once college is started? Students are in Florida. I'm in Oregon.

posted by anonymous to Work & Money (9 answers total)

I'd probably give him a zero% loan since I don't want to have to deal with listing the taxable interest income.

You're under the limit that the IRS requires you to charge interest, but be aware that over $10k you would have to.
posted by Candleman at 6:38 AM on December 24, 2019 [1 favorite]

It’s not too late for a 529. Benefits: limited in what they can spend it on and earnings are tax exempt. Downsides: not tax deductible in your state (not federally tax deductible), I believe harder to hide on a FAFSA (usually have to reapply every year). If you trust them not to blow it on frivolous stuff, cash or contributing directly to their bursar account may be easier.

Loan: the normal mental strategy suggested here is to think of it as a gift, at least to yourself. If that makes you not want to do it, then it may be a bad idea. What’s the purpose of the paperwork? If you’re wondering whether it will stand up in court, you’ve sort of passed the point of doing him a favor. If he wants to repay and you’re just trying to lay out guidelines for him to follow, then whatever you agree to seems fine. Think of a workable monthly payment and base it on that.
posted by supercres at 6:38 AM on December 24, 2019

Clarification RE: tax deductibility in Oregon:

Contributions to an Oregon 529 plan of up to $2,435 by an individual, and up to $4,865 by a married couple filing jointly, are deductible in computing Oregon taxable income, with a four-year carryforward of excess contributions. The limits are to be adjusted each year for inflation. Contribution deadline is April 15th of the following tax year.

Effective January 1, 2020, the tax deduction will be replaced by a refundable tax credit. Oregon taxpayers will be eligible to receive a state income tax credit up to $300 for joint filers and up to $150 for single filers on contributions made to their Oregon College Savings Plan account.

Tax year 2019 is the last year contributions will qualify for a deduction. However, contributions made in 2019 and prior can still be carried forward up to four years. (Source)

posted by misterbrandt at 7:11 AM on December 24, 2019

I’m not sure about the taxes. Money given directly to the student should be reported as “untaxed income” on the FAFSA, according to the info I found when I did this, but money given to the parents doesn’t. Unfortunately in the gift-giving situation I ended up in, giving the money to the parents was a guaranteed way for the student to see 0$ of it, so I just sent a check to the student.

If there is a way to get a tax break on this money, it would definitely need to be reported on the FAFSA. (I didn’t try this and honestly I don’t know if the money was reported.) I suspect the same is the case for the 529 account.
posted by tchemgrrl at 7:16 AM on December 24, 2019

Here's another article from Marketwatch that seems pretty thorough on the tax details.

There are a few websites out there that focus on loans to friends & family, but I second supercres, I think you need to make this a binary choice. Is this a loan or is it a gift?

In my experience, things can get messy when the answer to that question is gray, as far as the IRS is concerned, if the loan is not in writing then it's a gift. Also, if you've never loaned money to friends/family before, there are some hidden minefields to be aware of (even if the relationship is not particularly close). I almost lost a good friend because I loaned him money and had a hard time dealing with the resentment when I heard he made a large purchase (not related to the reasons for my loan) before paying me back.
posted by jeremias at 7:18 AM on December 24, 2019

If you gift money by paying tuition directly, there’s no tax consequence for you. Not quite what you’re asking, but good to know.
posted by ShooBoo at 8:08 AM on December 24, 2019 [1 favorite]

I did this for my cousin and considered it a gift, not a loan. I paid directly to the University - he gave me his log in and I just typed in my credit card information.

In general, advice columnists advise family members to consider transfers of money between them as gifts and not loans. As to why? Read any advice column any day of the week anywhere in America to get your answer.

Why did I give him the money? I had it, and he didn't, and a mind is a terrible thing to waste. I anticipate that this will be paid forward to others in the future, and that works for me.
posted by Toddles at 12:16 PM on December 24, 2019 [3 favorites]

FAFSA does ask about money received / paid for on the student’s behalf. Whether or not it will make a difference depends on the situation, however. What might be simpler is to help pay off student loans after graduation.
posted by oceano at 12:59 PM on December 24, 2019

Askmefi is very much the wrong venue for this question. Hire a good accountant, and ask them if you need to set up a trust or something. If you've got money, you need an accountant, a trustee, not to mention someone to manage your investments. If you trust the people at your bank/credit union, ask them about recommendations for qualified people to do these jobs. If you don't, ask your most wealthy friend.
posted by Sterros at 9:46 PM on December 24, 2019 [1 favorite]