You’ve seen the headlines. The cost of a college education is staggering and expected to continue to rise. Some of the latest numbers suggest that tuition, room, and board are estimated at around $13,500 per year for a public university, and averaging around $34,500 at private non-profit and for-profit institutions. While most parents are concerned about how to afford to pay for their children’s education, for divorcing parents, the issue is often not only how, but who will pay for college after divorce.
Paying for a child’s education is strictly voluntary for intact families. But it’s not necessarily so for divorced parents. Some states, including Utah, Washington, and New York, allow a judge to force non-custodial parents to chip in. In other states, including Alaska and New Hampshire, parents aren’t legally obligated to pay for a child’s college education and few judges will order a parent to for higher education expenses unless the parents had a previous agreement.
Still, most parents who are financially able to help their children go to college want to do so. For that reason, no matter how young your children are when you divorce, you should consider higher education expenses in the negotiations.
Written College Support Agreement
Your divorce settlement should include a written college support agreement that includes details such as what percent of higher education expenses each parent is responsible for and limits on payments. Since more than half of kids today take more than four years to finish an undergraduate degree, you may also consider setting a cap on the length of time you are on the hook.
With the rising cost of a college degree, it makes sense to set an appropriate cap for expenses.
For example, you could agree to pay 50% of all tuition, room, and board up to $15,000 per year.
You can also use your state university as a guide for establishing an upper limit for expenses, agreeing to pay 50% of the maximum amount charged by your state university, including room and board expenses. That way, even if your child chooses to go to a very expensive college, your maximum contribution is limited even if actual expenses are much higher.
Even with a written agreement in place, you may need to revisit the issue down the road as your kids get older, and your finances change, but having an agreement in place will, at least, establish a baseline going forward.
While you are working out the details of the agreement, it’s a good idea to also require life and disability insurance to cover college obligations. Any agreement about sharing costs is not worth the paper it’s written on if one parent can’t work or dies prematurely.
Saving for College
Whether you set aside a lump sum as a part of your divorce settlement or save incrementally in the years leading up to college, funds should be set aside in a trust account or a 529 Plan, a tax-free account for college-only expenses. Unfortunately, even with the best intentions, parents may be tempted to “borrow” from savings accounts that are too easily accessible. You don’t want to reach your child’s college days to find that the money you thought was set aside has been depleted paying for legal bills or living expenses.
Before anyone pays a dollar of tuition, you’ll want to complete a Free Application for Federal Student Aid to see how much, if any, need-based assistance your child is eligible for. To maximize your eligibility for student aid, the parent with the lower income should have primary custody (and the tax dependency exemption for the child) the year before applying to college.
Your divorce decree may allow one parent to claim the child as a dependent for tax purposes even though the child lives with the other parent 90% of the time, but for financial aid, who the child lives with matters. Federal and private financial aid formulas typically use the custodial parent’s income and assets to determine need.
Even if you think you make too much money to be considered for financial aid, you should complete the FAFSA. The FAFSA is the only way most colleges will consider your child for financial aid. Even students from families earning more than $200,000 per year may qualify for need-based aid from private universities or low-cost, forgivable federal student loans.
There are several tax benefits available to help offset the cost of higher education. While both parents may want to take advantage of these benefits, especially if they’re sharing the cost of their kid’s education, only one parent can take advantage of them.
If your child attends college and you pay the tuition, you may be eligible for the American Opportunity Credit or the Lifetime Learning Credit. The American Opportunity Credit is available for the first four years of an undergraduate degree and can take up to $2,500 off your tax bill. The Lifetime Learning Credit is equal to a percentage of the first $10,000 you spend on your child’s tuition and related qualified higher education expenses. Both credits are a dollar-for-dollar reduction in the tax you owe.
Unlike the tax credits, the Tuition and Fees Deduction is not a dollar-for- dollar reduction in the tax you owe, but it can reduce the amount of your income subject to tax by up to $4,000. This deduction may be beneficial if you don’t qualify for the American Opportunity or Lifetime Learning credits.
Whether you take advantage of one of the tax credits or the deduction, only the parent who claims the child as a dependent can take advantage of these tax incentives. To claim the child, she must live with you for more than half the year and not provide more than half her own support.
The IRS allows the parent who is eligible to claim the child as a dependent to waive his right to the exemption so the other parent can claim it. In order to do this, tax law requires that the child receive more than half of her financial support from at least one of the parents, that there be a divorce decree or legal separation agreement, and that the child be in custody of one or both of the parents for at least half the school year. If all conditions are satisfied, the parent who has the legal right to claim the exemption must sign Form 8832 and provide a copy to the other spouse.
All three tax incentives phased out if your Adjusted Gross Income is above certain thresholds.
- For the American Opportunity Credit, the upper limit for a Single or Head of Household filer is $90,000 for 2015.
- For the Lifetime Learning Credit, the AGI limit is $65,000.
- For the Tuition and Fees Deduction, the limit is $80,000.
If one parent’s Adjusted Gross Income is above these amounts, no tax incentives are available to that parent and it makes sense to allow the other parent to claim them.
Talking about finances is challenging at best for couples going through a divorce, but you need to talk about what makes the best financial sense for your family. Getting started early on planning – and saving – for your child’s education makes sense for all parents whether married, single, or divorced.
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