Every year, students who wish to receive financial aid need to submit the Free Application for Federal Student Aid (FAFSA). This form gathers information about the student's and parents' income and assets and uses it to calculate the Estimated Family Contribution (EFC), which is how much the family should be able to afford to spend on one year of college. Money given as a gift needs to be reported on the FAFSA.
Gift to Student
Students must report all cash gifts received in the untaxed income section of the FAFSA. The question asks the student to report, "Money received, or paid on your behalf (e.g., bills), not reported elsewhere on this form." Although it is difficult for the government to track cash gifts, failure to report them here could result in serious fines.
A student is expected to contribute 50 percent of his income each year toward college costs. This is regardless of whether it is taxed or untaxed income. Therefore, the formula adds 50 cents to the EFC for every dollar of untaxed income the student reports. This, in turn, reduces the amount of need-based aid the student is eligible to receive. In practice, this means that the student only gets to decide how to use the remaining half of the cash gift.
Gift to Parents
Parents do not need to report gifts as untaxed income as the students do. However, the gifts are included in the parents' assets section of the FAFSA. According to FastWeb, fewer than 4 percent of parents who fill out the FAFSA end up having a portion of their assets included in the calculations for the family contribution. Therefore, a gift to the parents will affect the FAFSA far less than a gift to the student.
People who would like to help with a student's college costs without affecting financial aid have a few options besides giving the money to the parents. One is to hold onto the money until the student graduates from college and then give it to the student to help pay off loans. Another option is to give the student a noncash graduation gift -- such as school supplies, a laptop, dorm furnishings or a car -- that will help with college.