Question: Could my child’s insurance settlement have an affect on how much Financial Aid they receive for college?

Answer: Absolutely!

Recently, you may have received a structured settlement proposal with benefit designs for your child. As your child may one day wish to attend college, it is important for parents to understand how proceeds from an insurance settlement affect financial aid awards.

Per the United States Department of Education FAFSA Help Desk, with regard to Federal Financial Aid programs, there is a distinct advantage to settling with a structured settlement versus taking the proceeds in cash.

As you know, eligibility for federal financial aid is based on the financial status of a student and his/her parent(s). The financial aid application is broken down into several financial sections including Income, Cash and Investments. Income is verified by tax returns, Cash is verified by bank statements and Investments are defined by their supporting performance reports.

Generally speaking, the Income and Cash sections are weighted more heavily than the Investment section by the Department of Education since Income and Cash are considered immediately available to the applicant and therefore, immediately available to be used for school expenses. An Investment, however, is considered an asset that is not immediately available for use by the applicant and therefore NOT immediately available to use for school expenses. When qualifying for financial aid, the more money that is immediately available to the applicant, the less financial aid they are entitled to receive.

As with cash proceeds from a personal injury claim, structured settlement proceeds are tax-free. As such, there is no tax reporting from the annuity company to your child or the IRS. Because of this, payments from a structured settlement are not considered income. Therefore, when completing the financial aid application, neither a cash settlement nor a structured settlement should be reported as income since they are not treated as income by the IRS. Inevitably, this leads to the question, “How are insurance settlement proceeds reported on the application?”

The answer to this question again comes directly from the US Department of Education: cash settlements must be reported in the Cash section of the FAFSA application. Remember however that cash has a potentially negative impact on the amount of aid since the Department of Education assumes the student has immediate and full access to all of the proceeds upon their 18th birthday.

Structured Settlements, on the other hand, get reported as an Investment on the application. Since the student is expected to receive a series of payments, not a single lump sum, they do not have access to all of the proceeds at once for school expenses. As a result, the student will likely be eligible for more financial aid since the Department of Education recognizes the student does not have immediate access to their entire settlement but rather a series of future payments.

As you can see, in addition to the other benefits of structuring minor’s proceeds (Probate reporting, tax-free gain, guaranteed pay out, secure, etc.), there is an additional significant benefit to structuring if your child will ever apply for financial aid.