College tuition is one of the most significant expenses many families will face. A settlement arising from a lawsuit can further complicate a family’s ability to pay for college, as it may negatively affect financial aid eligibility. Here is a quick primer on savings options and financial aid considerations so your clients can make informed decisions.
529 Plans vs. Structured Settlements
Many states offer 529 Plans as a tax-advantaged college savings vehicle. While these types of plans provide valuable tax savings, if a structured settlement is an option, your clients may want to explore it.
Here is a brief comparison of the two:
529 Plan
- Income tax-free growth
- Funded with investments
- Returns are not guaranteed
- If funds are used for a non-eligible expense, they may be subject to a penalty and income tax
- No contribution limit, but could trigger gift tax
Structured Settlement
- Funded with an annuity
- Payments and interest earned are guaranteed1
- Can be timed to use for college tuition, trade school, to pay off college loans, and more
- No restrictions on uses
- No contribution limit
A major benefit of a structured settlement is guaranteed growth and the ability to use the payments without any restrictions. However, if the family wants to preserve the structured settlement payments for future needs, there are additional considerations when preparing to fund college tuition.
Structured Settlements and Financial Aid
If a settlement is accepted as a cash lump sum, some college financial aid administrators will count the cash as an asset.
Depending on when structured settlement payments are received, they may need to be reported on the Free Application for Federal Student Aid (FAFSA) as untaxed income. However, structured settlements can be arranged to begin paying out at a future date (i.e., after the anticipated college graduation date), making the settlement funds uncountable for financial aid purposes.
Anticipated Changes to FAFSA Requirements
The FAFSA Simplification Act of 2020 is scheduled to go into effect beginning with the 2024-2025 award year. The Act modifies the underlying methodologies for determining student financial aid. Among the changes will be removing the ‘cash support’ question, which is used to report untaxed income. In other words, income tax-free structured settlements will no longer be reported on the FAFSA. Taxable structured settlements will still need to be reported in the Adjusted Gross Income (AGI) section of the FAFSA.
Contact Your Sage Consultant Today
Paying for college takes a considerable amount of planning, especially if your client needs to preserve settlement funds. To learn more about college savings and structured settlement options for your clients, contact your Sage consultant today.
1Guarantees are subject to the claims-paying abilities of the issuing insurance company.