You Are Getting Divorced. How Will You Afford College?
college is challenging enough for parents living under the same roof.
Therefore understanding and maximizing rules for qualifying for the most
comprehensive financial aid post- divorce is particularly crucial. State
universities rely on information provided in the Free Application for
Federal Student Aid (FAFSA). Private universities and colleges typically
rely on guidelines which are not nearly as generous as FAFSA, thereby
significantly increasing the family's expected financial contribution
well above the FAFSA limits.
Department of Education in creating the FAFSA has created a uniform
financial formula to equalize the expected family contribution
irrespective of a particular family's lifestyle or expense choices. In
other words, when completing the FAFSA, the government does not care what
particular or unique expenses and debts you took on to maintain your
lifestyle. The two crucial determinants of aid are income and assets, and
who earns the income and who owns the assets.
Asset Protection Allowances
are both income and asset protection allowances which provide a threshold
or a baseline of assets and income which are excluded when computing the
expected family contribution. For the academic year 2019-2020, a
dependent student can earn $6600 in the tax year without it being counted
in the expected family contribution. However, all income earned by the
student above this threshold is multiplied by 50% and that product is
deducted from any potential aid. Furthermore, the income protection
allowance under FAFSA (not the case for private colleges) is based
EXCLUSIVELY on the adjusted gross income of the custodial parent.
to Specify the Custodial Parent
custodial parent is the one with whom the student spends the majority of
his or her overnights. However, the university will accept whichever
parent the student identifies as the custodial parent. The admissions
office does not police this, and has no interest in inserting itself into
family dynamics. Therefore, if there is a big discrepancy in incomes
between the parents, which often is the case post-divorce, there are
major financial aid advantages listing the lower earning parent as
custodian. This is perhaps the single and greatest financial advantages
of divorce, and one that definitely involves planning and negotiation.
income protection allowance is based on the size of the family and the
number of other dependent college students who the custodial parent
claims. For the 2019-2020 academic year, if the custodial parent's
household includes herself and two college students, i.e. a family size
of three, then her income protection allowance will be just under
$20,000. Therefore, if her adjusted gross income for tax purposes is say
$68,000, then the approximately $20,000 will be deducted, resulting in an
adjusted, adjusted income for purposes of FAFSA of $48,000. This is
significant because if the custodial parent's adjusted gross income
combined with the income protection allowance is less than $50,000, then
like playing the game of Monopoly, she would pass go, and immediately
qualify for financial aid without having to count assets.
Asset Protection Allowance
is also a calculation of assets owned by the custodial parent which has
to be factored in along with the adjusted income formula to determine
aid. Assets which are excluded from this calculation include qualified
retirement plans such as 401k and 403b plans, IRAs, life insurance and
annuity policies, home equity, and the value of a business in which there
are less than 100 employees. All other assets over and above the asset
protection allowance are included. The asset protection allowance is
based on the age of the custodial parent. The asset protection allowance
has been decreasing monumentally since peaking in the 2009-2010 school
year. For the 2019-2020 academic year, the allowance for a single parent
age 45 is $5800. All countable assets above this threshold allowance are
considered "discretionary net worth". For the 2019-2020 school
year, when a parent's discretionary net worth reaches $33,601, then the
parent's contribution from assets equals $9097 plus 5.64% (47% of the 12%
discretionary net worth conversion rate) of all assets above the $33,600
calculation of aid is basically a combination of the parent's net
available income determined from the formula above, plus the
discretionary net worth derived from the formula above that are
determinants of the expected family calculation which provides a baseline
of family money that has to be used before financial aid will be
considered. It obviously gets complicated. What's more, it has to be
re-applied every year. The amount of aid can vary each year due to
changes with respect to assets and income as well as the changing pool of
applicants competing for aid each year as seniors graduate and a new crop
of freshmen matriculate.
Sticky Points, Including Remarriage
are a few other sticky points which need to be understood with respect to
FAFSA and college aid, particularly as they relate to divorce. In
addition to strategically identifying the custodial parent, it is
important to note that if the custodial parent remarries, the income of
the step-parent is factored into determining available income.
Consequently, college financial aid may very well have to be factored to
determine financially how practical it is to remarry, and more
importantly what is the most financially advantageous date to do so.
Also, child support and alimony even if it is not treated as taxable
income to the recipient will still be counted in the income calculations.
Furthermore, 50% of income distributions made directly to the student,
even if they are from a 529 college plan will be counted towards the
family contribution expectation. Therefore, it's best to have
distributions made directly to the school. In addition, aid will be
reduced by 20% of the value of assets owned in the student's name, and
this includes UGMA/UTMA accounts. So, while there may be some estate or
other tax planning reasons to amass assets in a child's name, for
purposes of qualifying for financial aid, it could be disastrous.
point is that how assets are titled and distributed is very important. To
further emphasize the point, if title to the student's 529 plan is held
with the custodial parent, then aid can be reduced by 5.64% of the
account's value, but distributions are ignored. However, if title is held
with the non-custodial parent, then it will not be deemed an asset of the
custodial parent, but distributions will count as income to the student
and can reduce aid by 50%. For this reason, the less-moneyed custodial
parent should own the 529 plan. Furthermore, strategically investing in
retirement accounts or other excludable investment accounts should be
considered beyond simple investment calculations to take into
consideration potential outside support for financing college.
have also made it challenging for parents who consider their offspring
emancipated after graduating from high school and seek for the student to
collect financial aid based on his or her personal financial status. This
is because to qualify as an independent student for purposes of
qualifying for aid under FAFSA, the student must be over age 22, married,
or in the armed services.
summary, planning for college funding is in itself a reason for working
with a professional financial planner. However, based on the complexities
divorce adds to the equation, irrespective of the age of their children,
parents should not legally bind themselves to a divorce decree without
seeking the counsel of a certified divorce financial analyst.
Content in this material is for general
information only and not intended to provide specific advice or
recommendations for any individual. LPL Financial and Gann Partnership do
not provide legal, tax, mediation, financial therapy or psychological
advice or services. You should discuss your specific situation with the
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