Don’t let college planning become an afterthought during the difficult time of divorce.
- Nearly half of all U.S. children will experience the breakup of their parent’s marriage and many the failure of a second marriage as well.
- Divorce is an emotionally charged life event that may cause many to leave college planning as an afterthought.
- High-net-worth families are not immune from the challenges of how to pay for college and completing financial aid forms properly.
Certain metrics on divorce in the United States are widely known. It is common knowledge that half of all marriages fail. But a deeper examination of Census data reveals that 41 percent of first marriages end in divorce while 60 percent of second-time nuptials and 73 percent of third marriages do not last. The average age of a divorcing party during their first marriage is 30 years of age, an age where children are often in the picture.
Nearly half of all U.S. children will experience the breakup of their parent’s marriage. In addition, half of these very same children will endure the failure of a parent’s second marriage. Although recent trends demonstrate that divorce rates are improving, there are many complexities that result from these breakups; among them are how to pay for college and the challenges of completing financial aid forms properly as a divorced family.
High-net-worth families are not immune from these concerns.
Specifying how to pay for college in the divorce decree
In cases where college funding is either voluntarily provided or issued as a result of a court or state mandate, a quality practice for high-net-worth families is the completion of a divorce decree or property settlement agreement that includes understandable terms of college costs. These agreements should include specific financial responsibilities for both parties in an effort to reduce confusion during the college years. More specifically, funding that defines tuition, room and board, books, and miscellaneous fees at a detailed level is critical to creating a clear expectation as part of the divorce proceedings.
Challenges arise when the decree or property settlement agreement are not specific enough in regard to the expenses, such as identifying the institution type (private or public schools) and the level of collegiate pursuit to be funded (undergraduate only, up to masters, or through doctoral study). It’s also important to account for inflation increases and future cost projections for any of these types and levels of college costs; this can be done by reviewing historic inflation data on tuition, fees, and room and board through the U.S. Department of Education.
Investment and trust considerations
The specific investment vehicles utilized and the titling and protection of assets are important planning considerations as well when defining costs. You should also be aware of other family members who have contributed to your children’s college funding so that the goals and mandates connected with college are not over or under funded. All of these variables can play a role and may have consequences on taxes, gifting strategies, and possibly financial aid.
To complicate matters further, high-net-worth families with minor children often have existing investment accounts designated for college at the time of the divorce. The ownership of these accounts, post divorce, could possibly have a financial aid impact on the student if the custodial parent will have a significantly lower income as compared to the non-custodial spouse. Before ownership on the existing investments is established within the decree or property settlement agreement, utilizing various college net price calculators is an important practice. Using the net price calculators will provide insight if the custodial parent will have any possibility of greater financial aid access in cases where he or she may either maintain or expunge ownership of the already established asset. Additionally, if there is a significant income disparity between the divorcing parties, consideration of a 51/49% custody split in favor of the lower-income parent would be favorable if joint custody is desired and financial aid maximization is a goal. Some colleges will use only the income of the custodial parent for their financial aid calculations.
Not only are there a variety of investment vehicles and considerations for existing and future investments, some families entertain the possibility of setting up a trust to fund education for existing and sometimes future generations. Trusts can be established in many different formats. Some trusts can be general in nature while others can be more restrictive, with specific parameters as to how the funds can be used for educational expenses. The type of trust and the state in which it is located and administered require careful consideration and should be discussed with an advisor to determine the strategy that is best for your family’s particular situation.
Filling out forms: Financial and merit-based awards
Moving forward to the college years, many high-net-worth divorced families will need to complete the Free Application for Federal Student Aid (FAFSA) and the College Scholarship Service (CSS) Profile even if they will not receive any need-based aid. Both the FAFSA and CSS Profile are financial aid forms that gather various pieces of information, including income and assets, and serve as the driver for need-based financial aid consideration and merit-based aid, respectively. All accredited colleges utilize the FAFSA and several hundred colleges use both the FAFSA and CSS Profile as the data portals that generate both need-based and merit-based award letters.
The two forms have variances when addressing families of divorce. More specifically, the FAFSA will only require that the custodial parent and student fill out the FAFSA. The income and the assets of the non-custodial parent are not included in the data entered by the custodial parent but any child support and/or alimony received by the custodial parent is submitted. For the purposes of the FAFSA, the custodial parent is defined as the parent with whom the child has resided most over the past 12 months as of the date of the FAFSA submission. If the custodial parent is remarried, the new spouse will be included on the FAFSA submission (even if there is a pre-nuptial agreement in place). Sometimes life’s circumstances do not neatly fit into a box on either the FAFSA or CSS—especially in the cases when a divorce is not complete and child custody is in flux. For these cases and questions, the parent should contact the financial aid department at the colleges under consideration for guidance and professional judgment.
The CSS Profile asks for more details than the FAFSA, and it also asks for the information from both the custodial and non-custodial parent (and their spouses if remarried). On the occasion that a non-custodial parent refuses to cooperate and complete the CSS Profile, the custodial parent can contact the financial aid department for guidance on how to proceed. Mandatory cooperation by both parents should also be required in the property settlement agreement or divorce decree.
Moments of divorce are often emotionally charged life events that many times leave the question of how to pay for college as an afterthought. To avoid the pitfalls of the afterthought, a quality divorce decree or property settlement agreement that addresses college funding in concert with an understanding of the financial aid process can go a long way to setting a child up for success during the college years.
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