Divorce and Paying for College

Important Questions Answered for Parents and Mediators

01/21/2020 | IN MARITAL AND FAMILY MEDIATION

Submitted by Diana M. Longo, CDFA®

Divorcing families face several financial challenges. What was once just enough to cover one household must now cover two separate homes as you divide assets and split incomes. You (the divorcing parents) face increased pressure towards paying for college while possibly experiencing a higher sense of guilt for the lack of funds available.

As a mediator, CDFA® professional and divorce financial planner, divorcing parents inevitably ask me about their responsibilities towards paying for college. “How is this supposed to work given the change in our status?”  Here are the answers to their top questions:

Must I pay for the cost of my children’s education?

Each State has its own requirements and there is no direct answer to this question. New Jersey favors the rights of the child towards education. Its leading case is Newburgh v. Arrigo, 88 N.J. 529 (1982). The Superior Court determined that financially capable parents should contribute to their qualifying student/child’s costs for higher education. It has 12 considerations when evaluating someone’s obligation. Among them are:

  • Parental goals and values and their effects
  • The financial resources of both parents
  • The financial resources of the child
  • The amount expected and the ability of parents to pay that cost
  • Ability of the child to earn income while in school
  • Availability of financial aid, college grants and loans

What kind of scholarships are available for my children?

The main federal financial aid programs are Pell Grants, Supplemental Educational Opportunity Grants (SEOG), College Work Study, and Stafford Loans where no interest accrues while the student is at least a half time student.  There are two-types of Stafford loans – those subsidized by the government in case of default and those that are unsubsidized. Each has different financial-need requirements and benefits. Their interest rate through June of 2021 is 2.75% but this fluctuates annually. Other scholarships, loans or grants may be available through the college or other sponsors depending upon your child’s ability to qualify.

How do we apply for student aid?

Financial aid begins with the FAFSA (Free Application for Federal Student Aid). I suggest using a phone app or a computer so that the IRS can easily report your data to the U.S. Department of Education. Beware: The government electronically downloads your income tax information.  It will catch errors and reports of inaccurate numbers.

What do I need to report on the FAFSA?

The FAFSA requires an applicant’s family to list all income, including income from previous tax years. It requests information about investment accounts, bank accounts and trust funds.  In addition, it will calculate the net value (minus debt) of all investment properties.

To view a sample FAFSA worksheet, go to: https://bit.ly/3sH3auX. I also suggest doing an internet search for the FAFSA.gov website.

What assets are excluded?

FAFSA excludes student and parental savings in a qualified retirement account. This includes IRAs, Roth IRAs, and 401(K)s. The FAFSA does not consider the value of your primary place of residence, family vehicles, small businesses, personal possessions, or the cash value of whole life insurance policies.

How much aid can I get?

The FAFSA collects all the required financial information, including the income and assets for both the parents and the student. It then calculates the EFC (Expected Family Contribution) and notifies the student, parent, and application-listed colleges with the release of a SAR (Student Aid Report.) The results are often lower than anticipated.

You will receive only one EFC per family. It includes all matriculated students, including parent-students, who attend an accredited institution at least half-time. This may be a good opportunity if your divorcing spouse returns to college, as this timing may provide additional financial aid into the equation. I suggest filing your tax returns, FAFSA, and college applications early, if possible.

If already at school, how do we report the financial changes of our divorce, especially if we will not know its outcome for some time? 

Take a deep breath and call your financial aid office. Speaking about your divorce and personal finances to a stranger may not be something you feel comfortable doing. However, an experienced financial aid officer has worked with multiple families in a similar situation and will easily understand. Politely explain that you are now supporting two separate households. There will be a change in tax information as you will no longer be filing a joint return. Watch your tone of voice and ask if they can use their professional discretion towards adjusting the Expected Family Contribution. Be cooperative and supply what the school requests in a timely fashion.

Should the lesser-earning spouse submit the FAFSA using their lower assets and income as the determining data?

It is often a good choice, but you should also consider additional factors such as age or if their type of assets is exempt from the calculation. Some public colleges require only the FAFSA. They do not need information regarding the non-custodial income or assets. However, if your child goes to a private school, they will most likely require data from both parents, using other formulas to allocate aid from their coffers. For example, they may use the CSS/Financial Aid Profile form. It considers additional factors, such as home equity, annuities and income from stepparents and non-custodial parents. Contact the schools and ask what they use to determine eligibility for grants and scholarships.

This is not to say that you should restrict your child to a public school. A private school may have sufficient grants or scholarship aid to make their institution (and your child’s first choice) affordable.

How can I protect my family’s finances and increase my ability to pay for college?

This is best answered by a College Financial Planning Consultant. I’ve been totally amazed by their thoroughness and creative suggestions. For example, FAFSA calculates 50% of student income and 20% of student assets as eligible for college expenses. However, for the parents, it formulates between 22 to 47% of parental income and 5.64 of parental assets.  A specialist in college financial planning is best to advise you on multiple topics including: 1. Where, when, and how to place your assets, 2. Which of your assets to use first, 3. Grandparent gifting (if available) 4. Tax advantaged programs and credits, and 5.  How to be more efficient with your resources.

Author:

Diana M Longo, CDFA®

Innovative Divorce Services LLC
Parsippany, NJ

Click HERE to contact Diana Longo

https://njapm.org/find-a-mediator/diana-m-longo-cdfa/