Divorcing couples often say that the list of disagreements to resolve seems like it never ends. Some couples wage war over everything … but hashing out the finances of educational matters is one of the conflicts that can get surprisingly ugly.
How Will You Pick a School?
School choice regarding K-12 public school versus private school, or state versus private college can be a minefield. For many, the root of the disagreements has to do with what they feel is best for their kids, and how to fund it.
For example, even if you agree that private school is best for your child, the biggest hurdle for most parents is cost. Private K-12 schools can tick upwards of $25,000-$65,000 a year, rivaling the cost of college! And while some may dismiss the issue, judging the cost of private school as a First World problem, and not necessary, there are many situations when private school may be in the best interest of the child. What happens to children who have attended private school for their entire lives and are flourishing socially and academically, and are ripped out because their divorcing grown-ups cannot agree as to who is going to foot the bill for future tuition payments? Or the child who was matched to a specific school because of learning differences, who is now thriving with this extra support, and is not yet ready to return to a mainstream educational environment?
Even public school bills can add up when you factor in the mounting expenses of school supplies, lunches, field trips, teacher holiday and year-end gifts, as well as PTA fundraisers with entry tickets sometimes topping $100 each! The cost of public school for parents is ever increasing, as local school districts must grapple with smaller amounts of government funding per student, and must maintain academic excellence with an ever-dwindling budget. These costs may not approach the level of private-school expenses, but they still may create a hardship for families.
Will Contributions Toward College Costs Be Capped?
Once your young student is on the brink of successfully graduating from lower education, financial concerns about college are right around the corner. According to the College Board (opens in new tab), while the median tuition and fee price for full-time students attending private nonprofit four-year institutions in 2018-19 comes in at a hefty $36,890, 20% of students attend institutions charging $51,000 or more. In-state public colleges are more affordable, but still command a steep price. The average published tuition and fee price at public four-year institutions rose by 7%, to $10,230, in 2018-19. These estimates don’t include housing, meal plans, books, supplies, transportation and other expenses a student may incur, which can total tens of thousands of dollars more.
Matrimonial attorney at Barton LLP, Orrit Hershkovitz, shares that, "Some divorce agreements expressly limit the amount a parent is required to contribute toward a child’s college education. One such provision, known in New York as the “SUNY cap,” limits a parent’s college obligation to the amount he or should would have to pay if the child attended a state-funded public school in the State University of New York (SUNY) system, as opposed to a non-state-funded private college."
Whether or not the divorce agreement includes such a limitation, it should specify whether both parents must consent to the selection of a college. It is also advisable that the agreement lay out whether the parent who is obligated to pay child support is entitled to withhold his or her consent to a child’s attending a private college for financial (or other) reasons. If the agreement is silent on either issue, a parent could be required to contribute to a child’s college expenses notwithstanding his or her opposition to the child’s choice of college. In that instance, the contribution could be limited to the “SUNY cap” if the agreement provides for one. If not, the parent could be required to contribute to the child’s college expenses based on his or her financial ability, Hershkovitz states.
Divorced parents can use 529 savings plans to help defray the cost of college. Each state offers its own 529 plan with various investment options, and certain states even throw in the added gift of making your contributions tax deductible up to certain limits. The site SavingForCollege.com (opens in new tab) is an excellent resource for those wishing to compare the investment options between state plans. Keep in mind that the fees for each state’s 529 plan vary, as well.
A 529 plan is one of the only accounts that offer tax-free growth! If you believe your child might qualify for a full ride, or might not use all the funds, keep contributing. In the event of a scholarship, distributions up to the amount of the tax-free scholarship will not be subject to the 10% penalty tax, although the earnings portion would still be subject to income tax. Other easy options include changing the beneficiary to another child or qualifying family member, rolling over the funds to yourself for your own continuing education or saving the funds for a future grandchild.
Contributions to 529 plans can also be eligible for an annual state income tax deduction for contributions up to $5,000 ($10,000 if married filing jointly) per year. However, not all states have adopted this favorable tax treatment. For example, contributions to the California and Florida 529 plan are not tax-deductible on state income tax returns. On the positive side, 529 plans have recently gotten even better thanks to the Tax Cuts and Jobs Act. These plans can now be used to fund eligible expenses for private K-12 school to the tune of $10,000 a year per beneficiary.
Fill Out Financial Aid Forms
Even if you have money squirreled away in a 529 plan, do not count out the possibility of financial aid. College savings plans, such as the 529 plan, that are held in the name of the adult (with the child named as the beneficiary) are assessed only up to 5.6% of the account value when determining need for financial aid. Up to $9,400 (opens in new tab) of the account value falls under the Asset Protection Allowance and does not count at all against financial aid. If a parent's 529 account exceeds the Asset Protection Allowance by $10,000, her child's financial aid award could be reduced by $564. Any loss of financial aid is disappointing; however, the loss is paltry compared to the remarkable tax-free investment gains you've earned in your 529 account.
One of the biggest mistakes a student can make is failing to fill out the Free Application for Federal Student Aid (FAFSA) form. Regardless of your family’s income level or net worth, it never hurts to apply. You might be surprised by what you receive, especially from a smaller private university. Over a third of high school graduates didn’t complete the form in 2018, personal finance website NerdWallet recently found, leaving behind roughly $2.6 billion in free college money as a result.
Only the custodial parent is required to file the FAFSA. Generally, the student will receive more financial aid if the custodial parent who is filling out the forms is also the parent with lower income and assets. There definitely are some planning opportunities here!
Watch Out for Bad Behavior on 529 Plans
The owner of a 529 college savings plan can choose to make distributions from the 529 plan whenever they please. Nothing prevents this parent from draining the 529 plan account and leaving kids to fend for themselves to pay for college.
If one parent does not trust the other parent, he or she could demand a transfer of the 529 funds into a new (or existing) 529 account in his or her own name and designate the child as the beneficiary. The divorce agreement should also place restrictions on how the funds can or cannot be used, and require that the parent who is not the account owner be provided with monthly “interested party” statements from the 529 plan account provider. Hershkovitz says, “Before signing any divorce agreement that provides for application of 529 funds to a child’s educational expenses, the parent who is not the account owner should confirm that the other parent did not withdraw 529 funds for non-educational purposes prior to execution of the agreement."
Developing a plan for paying for college as part of your divorce is imperative to ensuring that your children have the educational opportunities that they deserve. While there are many issues on your list to tackle during a divorce, college expenses and savings needs to be at the top.
Stacy is a nationally recognized financial expert and the President and CEO of Francis Financial Inc. (opens in new tab), which she founded 15 years ago. She is a Certified Financial Planner® (CFP®) and Certified Divorce Financial Analyst® (CDFA®) who provides advice to women going through transitions, such as divorce, widowhood and sudden wealth. She is also the founder of Savvy Ladies™, a nonprofit that has provided free personal finance education and resources to over 15,000 women.