How Does an Insurance Settlement Paid Toward Tuition and Fees Affect the Student's Eligibility?

Scenario: As part of an insurance settlement, the insurance company is paying for future educational benefits and the settlement agreement requires the insurance company to pay tuition and fees directly to the college. It is not taxable income because no IRS Form 1099 is issued.

Answer: According to guidance NASFAA has received from the U.S. Department of Education (ED), an insurance settlement paid directly to the school for the express purpose of payment of the student’s tuition and fees should be reflected as other financial assistance (OFA) in the award year in which the payments are received. Refer to Volume 3, Chapter 3 of the FSA Handbook for a list of examples.

By contrast, general distributions from an insurance settlement would count as income received instead, and should appear on the FAFSA for the base year in which the distribution was received. Untaxed portions of such distributions are not reported on the FAFSA, are not considered in need analysis, and are not OFA when packaging the student.

For general distributions from insurance settlements, there is nothing in the Title IV statute or regulations that would preclude a financial aid administrator from choosing to exercise professional judgment (PJ) authority to add the distributions to the student’s current FAFSA as a resource available to the student to help pay for education. The school would not be expected or required to make such an adjustment; however, depending on the circumstances, the school might decide a PJ adjustment of this nature would be warranted to more accurately reflect the student’s present circumstances, especially if the student expects to receive a similar amount in a series of distributions over the course of the student’s educational experience.