Considering the Impact of Divorce on College Financial Planning
Divorcing parents have to manage a number of unique challenges when they plan for the financing of their child’s college education. If possible, divorced parents should cooperate and consider implementing a number of strategies to maximize the financial aid available to their college student. In doing so, they could potentially decrease the financial burden of a college education for the student and those assisting them financially.
During the course of a divorce, there are many financial decisions that must be made. Many of these financial decisions will impact what information ends up on your child’s FAFSA (the form submitted to apply for federal financial aid or the Free Application for Student Aid).
Before the Divorce is Final: College Financial Planning
Many couples overlook the need to discuss college financial planning in the divorce negotiations – this can be a costly mistake. Attempt to spell out as many of the college financing issues as you can right in the divorce agreement. Who will be responsible for paying tuition? Books? Room and board? Be specific in designating who is going to take financial responsibility for which specific items in connection to your child’s college education. How long will the designated party be responsible? How many semesters will financial assistance be provided? Or until what age will the party responsible provide assistance for the student? Will payments for college related expenses be dependent on behavior or academic success?
Asking these questions and defining the answers can avoid a lot of major confusion and conflict down the road.
Maximizing Financial Aid for Children Of Divorce:
With the appropriate strategy and a little bit of planning, children of divorced parents may be able to maximize their college financial aid. On the FAFSA, only the child’s custodial parent (the parent the child spends the most time with) reports their income and assets. This does not necessarily have to be the same parent who claimed the child as a dependent on their tax return. If the child spends equal time with both parents, it will make sense to designate the less financially secure spouse as the custodial parent in order to maximize financial aid. On the other hand, CSS (College Scholarship Service Profile) is an online application created and maintained by the United States-based College Board that allows college students to apply for non-federal financial aid. CSS schools look at income and asset data from both the custodial and non-custodial parent.
College Financial Planning Strategies During Divorce Negotiations:
Prudent college financial planning could have the custodial parent receiving more of the marital home, but less alimony or timing the receipt of alimony outside of the years that affect the FAFSA’s “Expected Family Contribution” (EFC). Some divorcing couples decide to set up education trusts to provide for their child’s college expenses, but it’s possible this strategy could backfire at a later date as this type of account is typically classified as a student asset and would be heavily penalized according to financial aid formulas. Similar penalties exist for assets of the child in UTGA or UGMA accounts. It is usually best to transfer these funds into 529s in order to have them classify as parental assets for purposes of financial aid assessment. Or the money could simply be spent on college related expenses first before other funds are accessed or on related expenses pre-college such as tutoring or computer equipment, etc.
529 Plan Strategies:
Consider carefully before deciding to fund your child’s college expenses through a 529 plan. It will probably be best for the non-custodial parent to hold this asset in order to minimize the impact it would have on financial aid formulas assessing need. Distributions from 529 plans can lower financial aid eligibility so many decide to hold off on using funds until the child’s Junior or Senior year (non-assessable years). When 529s are held by grandparents, distributions should also be delayed until the later years in college since they will be considered the income of the child under financial aid formulas. Grandparents who wish to contribute during the early college years should consider transferring 529s and other assets to the child’s parents or pay for items for the college student directly. Some grandparents avoid the dilemma simply by making the student’s loan payments down the road.
If you are attempting to include college financial planning in your divorce negotiations or if you need advice on how to minimize the negative affect of divorce on college financial planning that is already in place, please get in touch with one of the experienced California family law attorneys at The Maggio Law Firm today.