The Gift Tax
If someone gives you more than $13,000 in cash, stocks or whatever in a year, then they are liable to report the gift to the IRS and pay a gift tax on the excess over the $13,000 annual exclusion. You don't want to pay gift tax or have your family pay the gift tax, trust me. The current gift tax rate is 35%.
Now let's say your family really wants to contribute $25,000 per year to your education. There are two ways around the gift tax. The first is to have your parents make gifts of $12,500 each to you. Each gift is under the $13,000 limit so no gift tax. But the better way would be to have your parents send a check directly to your school. Money sent directly to the school for qualified educational expenses is not eligible for the gift tax. This is an important distinction to make. $25,000 check to you from one person - gift tax. $25,000 check to your school for qualified educational expenses from one person - no gift tax. Got it?
Effect on Financial Aid
But wait, you're saying, won't the check from my parents reduce my financial aid? Depending on the amount and the school it definitely could. In fact, if the contribution is high enough that you're concerned about the gift tax it's very likely that the gift will reduce your financial aid. One way of looking at this is that it's unlikely that the school will reduce your aid dollar for dollar. Your parents may contribute $25,000, but the school may only reduce your grants by $20,000. You still come out ahead - less debt for you by $5,000. Schools typically have these policies to encourage students to find outside scholarships and reduce the school's financial aid burden. Their treatment of family money may vary.
So let's say you want to have your cake and eat it too - get money from your family AND keep your existing aid package. Well this is a tall order. Many schools will require you to disclose all sources of aid during your financial aid application and a big ol' check from your parents would definitely qualify in their eyes. But some schools don't ask and some only ask above a certain threshold, like $10,000. This is a gray area. Perhaps your school doesn't ask and you've decided it's okay and ethical not to tell. Maybe you want to keep it on the down low anyway. Your parents could give money directly to you or pay your rent but remember to keep the gift tax in mind.
The safest way to have your parents contribute would be have them help pay down your student loans after you graduate. At that point you've received any aid you're going to get and you no longer have an obligation to report outside aid. You can also still deduct the interest paid on your student loans even if your parents pay for it. The one downside here is that you're back to being concerned about the gift tax.
Count yourself lucky if you have family or friends who want to help with your education. Regardless of how they contribute and how much you're still better off than you were without their help. Watch out for the gift tax and properly report any financial help you get. Most of all make sure to thank them!