Divorce and College – Four Tips to Pay Less in College
Julie Hupp, CDFA®, CFP®
November 9, 2017
Divorce is typically very costly for a couple. College is one area, however, where the family may come out ahead if planned properly. Through both tax savings and a higher calculated financial need, divorce may help the family unit.
College financial aid can either be need-based or merit-based. The need-based aid is calculated from filling out the Free Application for Federal Student Aid (FAFSA) forms which results in an Expected Family Contribution (EFC). If planned properly, the EFC can potentially be lowered post-divorce resulting in significant support.
What can you do to improve your college financial situation?
1. Assign custody to the better financial aid eligible household.
The lower income earning spouse will have a lower EFC. If this person is the one with custody, there will be more opportunity for a better financial aid outcome. Custody for the FAFSA and EFC purposes is defined by the person with whom the child spends more time with. Agreeing to a 50/50 custodial split will likely work against you as there is a tiebreaker rule which will require highest earner to file FAFSA.
2. Income is a big contributor to the EFC calculation.
If as part of the financial settlement, there is flexibility in assigning certain assets versus cash flow that would be counted as income, that is preferable. Depending on income, up to 47% could be counted as available for college funding.
“Depending on income, up to 47% could be counted as available for college funding.”
3. Strategically assign assets.
Certain assets are not counted for financial aid eligibility. These are retirement accounts, annuities, and home equity. (For FAFSA not Profiles) Using creative settlement options on these assets can make a big difference in what is seen as available funding for college.
4. Tax credits – Several tax credits are available for parents paying tuition.
Unfortunately, if you are a higher income earner, these credits may not be available. When income is split after a divorce, it may allow the lower earning spouse to take advantage of this credit. At $2,500 per year, this could be a $10,000 benefit over 4 years.
“Using a process like mediation and collaboration may allow you to craft a settlement agreement that is more advantageous to your family.”
5. Don’t get re-married.
If you remarry and you are the custodial parent, you will need to include the income and assets of the new spouse in the FAFSA. This may offset any of the previous planning done to increase your financial aid.
These creative solutions will typically only be available if you do NOT go to court to settle your divorce. Using a process like mediation and collaboration may allow you to craft a settlement agreement that is more advantageous to your family. Judges may not be your optimal solution if college is looming.
Please call us if we can assist in your creative settlement planning during your divorce.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual, nor intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor. There is no assurance that the techniques and strategies discussed are suitable for all individuals or will yield positive outcomes.
Aspire Divorce Solutions