Lori Meadows
Trust funds are a popular way to plan and pay for college, and they can significantly reduce a student's eligibility for need-based financial aid. The Higher Education Act of 1965 specifies that trust funds must be reported on the Free Application for Federal Student Aid (FAFSA) as an asset. This includes the net present value of the trust fund, which is the sum of the present value of future income and the present value of the future receipt of principal. If a trust fund is dedicated to paying for the beneficiary's education, it should be reported as an asset of the beneficiary. However, if a trust fund has multiple beneficiaries, they are treated as having equal shares unless the trust specifies otherwise. It is important to note that trust funds with court-ordered restrictions may be disregarded as an asset on the FAFSA. Additionally, blind trusts, when set up voluntarily, do not shelter the assets from the need analysis process. When it comes to repaying student loans, it is possible to use trust funds to pay off the debt directly or through income-driven repayment plans. However, it is essential to consider the tax implications and legal options associated with using trust funds for loan repayment.
| Characteristics | Values |
|---|---|
| Trust fund ownership | If the trust fund is in the name of the student, spouse, or parent, then it is reported as that person's asset. If the trustee can change the beneficiary, the trust may be reported as an asset of the trustee. If a trust is dedicated to paying for the beneficiary's education, it is reported as an asset of the beneficiary. |
| Trust fund reporting on FAFSA | Trust funds must be reported as the beneficiary's asset on the Free Application for Federal Student Aid (FAFSA), even if access is restricted. |
| Impact on financial aid | Trust funds can significantly reduce a student's eligibility for need-based financial aid. |
| Net Present Value | The net present value of a trust fund is used to value it as an asset on the FAFSA. It is the amount a third party would pay now to receive the future income. |
| Multiple beneficiaries | If a trust has multiple beneficiaries, they are treated as having equal shares unless the trust specifies otherwise. |
| Trust fund taxes | If a trust does not pay its own taxes, the individual who pays taxes on the trust's income is considered the owner. If the trust has multiple owners, each reports the part they own. |
| National Collegiate Student Loan Trust (NCSLT) | NCSLT loans are private student loans, not federal loans, and thus differ in borrower protections and repayment options. NCSLT must obtain a court judgment before garnishing wages or seizing assets. |
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What You'll Learn
Trust funds and financial aid
Trust funds are considered assets by the federal government and most colleges when determining financial aid eligibility. Trust funds must be reported as the beneficiary's asset on the Free Application for Federal Student Aid (FAFSA), even if access to the trust is restricted. This includes any payments received during the base year, which must be reported as income on the FAFSA.
The impact of a trust fund on financial aid eligibility depends on the type of trust. Revocable trusts, for example, are treated as parental assets, while irrevocable trusts are treated as student assets. The percentage of the trust's value that will be considered available for college expenses varies depending on the type of trust. Irrevocable trusts, for instance, may reduce financial aid eligibility as a larger percentage of the trust's value is considered available for college expenses.
There are strategies to optimize financial aid awards while preserving trust fund assets. One strategy is to delay trust distributions until after college, so the trust assets will not be considered available for college expenses and will not reduce financial aid eligibility. Another strategy is to use trust funds to pay for non-college expenses, such as private school tuition or summer programs, before applying for financial aid, thus reducing the trust's value and its impact on financial aid eligibility.
It is important to note that blind trusts, which prohibit the trustee from revealing individual investments to the beneficiary, do not shelter the assets from the need analysis process. Additionally, voluntary restrictions on a trust, such as restricted access, do not prevent it from being counted during the financial aid process. However, involuntary court-ordered restrictions on a trust can cause the trust to be disregarded.
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Trust fund ownership
A trust fund is a fiduciary relationship between a grantor, a trustee, and a beneficiary or beneficiaries. The grantor is the owner of the trust fund and the one who puts the assets into the fund. The trustee is the individual or entity that manages the assets. The beneficiary is the person who will receive the assets from the trust.
Trust funds are designed to provide financial support and protection for loved ones and can be an effective financial tool depending on your circumstances. They can hold a variety of assets such as money, real property, stocks, bonds, a business, or a combination of many types of properties or assets.
There are two broad categories of trust funds: revocable and irrevocable. Revocable trusts allow the grantor to alter terms or dissolve the trust at any time, while irrevocable trusts are more rigid but offer more protection. Irrevocable trusts are very difficult, if not impossible, to change or dissolve, and generally require the unanimous consent of all beneficiaries.
Trust funds can be established with different stipulations and can be designed for specific purposes. For example, a trust fund may be established to pay for a beneficiary's education. In this case, the trust fund must be reported as an asset of the beneficiary on the Free Application for Federal Student Aid (FAFSA). Trust funds can significantly reduce a student's eligibility for need-based financial aid.
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Tax implications
Trust funds are reported as the beneficiary's asset on the Free Application for Federal Student Aid (FAFSA), even if access to the trust is restricted. Trust funds can significantly reduce a student's eligibility for need-based financial aid. The Higher Education Act of 1965 specifies that trust funds must be reported on the FAFSA by including them within the definition of the term "asset" at 20 USC 1087vv(f)(1). The statute does not provide any exceptions. Any payments received during the base year (the prior-prior year) must be reported as income on the FAFSA.
The net present value (NPV) of a trust fund is used to value it as an asset on the FAFSA. The NPV of a trust fund is the sum of the present value of the future income and the present value of the future receipt of the principal. The trust officer or the bank or brokerage that manages the trust can calculate the present value for you. The FAFSA website also includes an NPV calculator.
If a trust does not pay its own taxes, the individual who pays taxes on the trust's income is often the owner of the trust. If the trust is owned by more than one individual, each owner reports only the part they own. If the trust does not specify the percentage ownership of each individual, ownership is divided equally by the number of owners. Some trusts assign ownership of the income and assets to different individuals. In that case, the value of the ownership rights is more complicated. If you own the income, you must report the current year's income as income on the FAFSA, and your right to future income from the trust as an asset. You must report the future income as an asset even if it accumulates in the trust and you won't receive it until a future date. The value of the future income is not the sum of the future payments, but rather the net present value of those payments.
In some cases, a trust fund can be disregarded as an asset on the FAFSA. If a trust has been restricted by court order, the student should not report it. For example, if a trust has been frozen by court order, the trust is disregarded as an asset until the court order is lifted. A trust fund can also be disregarded if the existence of the trust is unknown to the family. If the family does not and could not know about the trust fund, they are not obligated to report it as an asset on the FAFSA.
In terms of estate planning, irrevocable trusts offer more investment and distribution flexibility than 529 plans. Irrevocable trusts also offer tax benefits, such as asset protection and life insurance protection. Contributions beyond the annual exclusion will be applied toward the lifetime gift and estate tax exclusion, currently $11.4 million. However, using an irrevocable trust to fund educational costs can reduce future estate taxes. Qualified transfers from an irrevocable trust are made directly to the educational institution, not the student, so they are not counted toward the annual or lifetime gift exclusion.
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National Collegiate Student Loan Trust
The National Collegiate Student Loan Trust is a group of trusts holding old private student loans bundled and sold to investors. These trusts are not lenders or guarantors but instead act as "servicers" that engage with students to collect loan payments. The loans are "originated" by private banks such as JP Morgan Chase Bank or Bank of America, then transferred to The National Collegiate Funding, LLC, which deposits them into a trust. Each trust is separate, with its own loans, and each must prove it legitimately owns the loans before collecting.
NCSLT loans are not eligible for income-driven repayment plans, and loan forgiveness programs do not apply to them. While federal loans offer various deferment and forbearance options, private loans have limited or different provisions. NCSLT trusts often struggle to produce complete paperwork, including the student loan chain of title, which can be a borrower's strongest defence.
Borrowers cannot directly contact the National Collegiate trusts, as each trust works through various servicers, trustees, and collection agents. Companies like American Education Services (AES) handle routine matters, while collectors like Transworld Systems pursue overdue balances. Collection actions from NCSLT trusts escalate quickly and aggressively, so it is recommended to seek legal guidance.
Trust Funds and Student Loans
Trust funds must be reported as the beneficiary's asset on the Free Application for Federal Student Aid (FAFSA), even if access to the trust is restricted. This can significantly reduce a student's eligibility for need-based financial aid. The net present value of the trust fund should be determined and reported as an asset on the FAFSA. If a trust has multiple beneficiaries, they are treated as having equal shares unless the trust specifies otherwise.
Involuntary court-ordered restrictions on a trust can cause it to be disregarded on the FAFSA. For example, if a trust has been restricted by court order to pay for future surgery for a car accident victim, the student does not need to report it. If a trust has been frozen by court order, it is disregarded as an asset until the order is lifted.
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Irrevocable trusts
An irrevocable trust is a trust that is usually established as an irrevocable gift. The trustee has a fiduciary duty to uphold the terms of the trust, even after the grantor passes away. The grantor may include flexible terms to allow for the trust assets to be used for purposes other than education, such as medical expenses, maintenance, and support. This type of trust offers investment and distribution flexibility, allowing for a wide array of investment vehicles.
When using an irrevocable trust to pay for education, you can fund it by making annual exclusion gifts of up to $15,000 per year. You can then use the funds from the trust to make qualified transfers to cover educational expenses. These payments are made directly to the educational institution, not the student, and are not counted toward your annual or lifetime gift exclusion.
The net present value (NPV) of a trust fund is important when reporting it as an asset on the Free Application for Federal Student Aid (FAFSA). The NPV is the sum of the NPV of each payment, discounting each future payment according to a discount rate. It is calculated by determining the current cost of an annuity or a set of zero-coupon bonds that would provide the future income stream. The trust officer, bank, or brokerage that manages the trust can calculate the present value for you.
When reporting a trust fund as an asset on the FAFSA, it is reported as the beneficiary's asset, even if access to the trust is restricted. Any payments received during the base year must be reported as income on the FAFSA. The ownership of the trust fund determines who reports it as an asset. If the trust fund is in the name of the student, spouse, or parent, it is reported as that person's asset. If the trustee can change the beneficiary, the trust may be reported as an asset of the trustee. If a trust is dedicated to paying for the beneficiary's education, it is reported as an asset of the beneficiary.
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Frequently asked questions
A trust fund is an estate planning tool that holds property or assets for a person or organisation.
You can ask the trustee to pay off the student loan. Alternatively, you can put a paper check in an envelope and mail it to the lender.
Trust funds must be reported as the beneficiary's asset on the Free Application for Federal Student Aid (FAFSA). This can significantly reduce a student's eligibility for need-based financial aid.
A trust fund is similar to a taxable brokerage account and has its own identification number for tax payment purposes. The trust officer or bank that manages the trust can calculate the present value for you.
Loans held by the NCSLT are private student loans and differ significantly from federal loans in terms of borrower protections and repayment options. NCSLT must sue and obtain a judgment before initiating wage garnishment or other collection actions.
