When you’re going through divorce, there are seemingly mountains of difficult decisions. If you have children, their college education is an important consideration that may not be top of mind. “I regret not having college assistance stipulated in the decree,” said CJ, who asked not to be identified to protect his daughter. CJ divorced his wife in 2001. His daughter Jen headed off to college last year. Since there wasn’t a plan in place, CJ’s ex-wife didn’t contribute.
That’s why it’s important for divorcing couples to discuss their expectations for college.
DISCUSS FINANCIAL AID
When you’re going through a divorce, you probably aren’t studying how financial aid works. That means you could miss out on opportunities to maximize aid for your children. For instance, when applying for aid, only the income and finances of the parent with whom the child primarily lived in the 12 months prior to completing the FAFSA is considered, notes Mark Kantrowitz, publisher and vice president of strategy for the popular college website Cappex.com. Because of this, “having your child live with the parent with the lower income will often yield more aid,” he says.
But not always. While there are advantages to having the parent with a lower income file the FAFSA, those could vanish if that parent has remarried. That’s because the stepparent's financial information must be included on the form. While the stepparent does not have to pay for college, his or her financial information will impact the aid that the child receives.
Plus, if your child ends up applying for one of the over 200 schools that require applicants to submit a CSS Profile form to qualify for financial aid (which the college itself distributes), both parents are required to fill out the form. This generally leads to the student qualifying for less financial aid.
DETERMINE WHO PAYS
In CJ’s case, his daughter earned a small scholarship and worked all summer. However, even after CJ’s contribution toward her college expenses, she had to take out significant student loans. “My daughter will be carrying that debt on her shoulders for a while,” he says.
Depending on the state you live in, the courts treat college differently. In some states, such as Illinois, a judge can order a parent to pay for college if the judge feels the parent has the resources to pay for it. But in most states, parents can’t be made to pay for college expenses, says Jeff Kash, a divorce attorney based in Pennsylvania. In those states, you would need to include college commitments in the negotiation of your divorce settlement or in a voluntary agreement.
However, Kash cautions couples who are considering adding college assistance to their divorce agreement to be careful about what they agree to. While some states allow for modifications to college support agreements if your financial situation changes, others do not. Kash recommends protecting yourself by clearly limiting the number of years of support and the percentage of the costs you each intend to cover.
DECIDE WHO SHOULD OWN EDUCATIONAL SAVINGS PLANS
The deposits in educational savings plans (like 529 Plans or Coverdell accounts) are typically owned by the parents — which means that parents will have to decide what to do with them during their divorce, says Kash.
Often, couples don’t realize the financial aid implications of assigning ownership of college savings plans. “If these plans are owned by the non-custodial parent,” says Kantrowitz, “it can have a severe impact on aid eligibility.”
Because of the way the FAFSA works, if the non-custodial parent owns the education savings, your child may wind up getting less aid that they would get if the parent who has custody owns it. That’s because the assets of the parent who files the FAFSA are assessed at up to 5.64 percent, while disbursements from an educational savings plan held by a non-custodial parent would be considered the student’s income and assessed by the FAFSA at up to 50 percent. This means that if the non-custodial parent gave a child $10,000 from a 529 Plan, the family could be expected to contribute up to $5,000 more toward college costs in a future year. If the custodial parent, however, gave the child $10,000 from a 529 Plan, that amount would have already been calculated into the financial aid formula and would have been assessed at only up to $564.
These are complex decisions, but having these conversations now will allow your children to focus on what’s most important when college rolls around: getting an education.
Having the child live with the parent with the lower income will often yield more aid.