The Pell Grant provides qualifying undergraduate students with up to $5,500 per year for college costs as of 2011. The federal government considers a wide variety of factors when evaluating whether a student qualifies for the Pell Grant, including whether the student or family has received any large sums of money during the previous year.
Effects on Estimated Family Contribution
When a student or parent receives a cash inheritance, it must be reported on the Free Application for Federal Student Aid as assets. The formula that calculates the estimated family contribution assumes that a portion of the assets will go toward college costs each year. The amount varies, but it is much higher for student assets than parent assets. Therefore, the inheritance will have a larger effect on the estimated family contribution if it is given to the student than if it is given to the parents.
Effects on Pell Grant
A student's Pell Grant eligibility is based on the difference between the estimated family contribution and the cost of attending the college. This is called the student's financial need, and greater need leads to more financial aid. A student with significant financial need is likely to receive a Pell Grant to meet part of that need. However, if the inheritance increased the estimated family contribution so it is close to the cost of attendance, the student will not qualify for much aid and might get only student loans rather than a Pell Grant.
One-Time vs. Ongoing
An inheritance will have a smaller effect if it is a trust fund or other type of inheritance with income spread out over time than a lump-sum amount given during one tax year. This is because inheritance is counted as an asset, so getting just a little bit each year that you can spend on college affect your total assets less than getting a lump sum. A very large lump sum might disqualify you from a Pell Grant in all subsequent years because it increases your assets so much, whereas smaller amounts might only lower your Pell Grant amount.
When you get an inheritance, it will have less of an effect if you convert it from cash into an asset that the FAFSA does not consider. For example, the FAFSA formula does not look at the money in a parent's retirement account when determining the estimated family contribution. Other options include using it to pay off consumer debt or putting it toward a house payment to build equity in the house, which also does not affect FAFSA results. If the student receives the inheritance, he should use this money for the full family estimated family contribution to reduce the amount of the asset for the next year. He could also make a student loan payment on a previous year's loan to increase future aid eligibility.