To determine how much money a student needs for financial aid, the Free Application for Federal Student Aid, or FAFSA, is used to estimate how much money a student can put towards college. This amount is known as an expected family contribution, or EFC. Assets held by a student or his parents, including inherited money, must be reported on the FAFSA.

Inherited Money Reduces Financial Aid

When you inherit money, your assets will increase, and so will your expected family contribution. A higher EFC means that you will most likely be getting less financial aid than you would had you not inherited money. Twenty percent of a student's assets are considered to be available to pay for college, so a sizable inheritance could mean a sizable loss of financial aid.

Minimize Your EFC

Even if you inherit a sizable sum of money, there are ways to minimize any hit to your financial aid package. Because only between 2.6 and 5.6 percent of a parent's assets are considered towards your EFC, you could put the money in a parent's name. Alternatively, you could use a portion of the money to pay down debt, if you have any. Another option is to invest the money in an individual retirement account, or IRA, because these are exempt from consideration toward an expected family contribution.