how can divorce affect college savings

Divorce is never a pleasant subject, even in the most amicable of cases. No matter what your relationship may be, it can be deeply uncomfortable having to work with your ex for any length of time. However, planning for your children’s college requires a level of communication that can stress and strain everyone involved – but it’s also necessary. Divorce creates a few unique scenarios for college planning and savings that you and your family need to consider as far in advance as possible.

FAFSAs and Your Divorce

Filing the Free Application for Federal Student Aid (FAFSA) is a requirement to receive any sort of financial aid from the government or most schools. For married couples, you file this information jointly and apply together – with both your incomes appearing on the FAFSA. In the case of divorce, however, only one parent needs to apply, unless you are still living together. But which parent applies?

The custodial parent fills out the FAFSA – which may differ from other legal situations you’ve encountered in your divorce. Quite simply, the custodial parent is the parent the child has lived with the most during the last 12 months. This means that, even in joint custody, only one parent needs to put their information down. Note that this doesn’t mean the other parent can’t support the child financially, only the other parent doesn’t need to put down any financial information – potentially lowering your EFC.

Should the custodial parent remarry, the new spouse is required to apply for the FAFSA as well.

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How Divorce Affects 529s

divorce and college savingsDepending on how the divorce distributes ownership of any 529 plans you may have, your child’s financial situation can change drastically. First, try to keep 529 plans under the ownership of the custodial parent. Though this means it will be listed as an owned asset on the FAFSA, the alternative is noncustodial ownership, which will be listed as untaxed income, similar to grandparents’ contributions, potentially lowering future aid opportunities.

Expected family contribution accounts about 5.46% annually from your assets to pay for college – this is much lower than if the entire 529 distributions are untaxed income for your child. In the short term, having 529s on the noncustodial parent may help, but in the long run it will only cause more of a financial headache.

Understanding the Laws

Different states have different laws in place when it comes to paying for college in the case of divorce. Some, for example, explicitly state that divorced parents must help contribute to education expenses, even if they otherwise would not. At the same time, not all states have this on the books, and it’s possible that a two-income household expecting to contribute jointly to their child’s education will suddenly lose half their income as a divorce proceeds.

Applying for financial aid usually requires the custodial parent’s income – along with any stepparents from that relationship. If you and your ex split time half and half, the parent with the higher income is considered custodial. You may want to shift the balance ever so slightly in favor of the lower-income parent in these cases, if only to lower your EFC and allow for more financial aid.

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