Crunching the Numbers on College Costs

Crunching the Numbers on College Costs

College can be expensive, but it doesn’t have to be. Planning ahead with your ex-spouse can help to ensure that your finances are in order when it comes time to send your child to college. If you divorce when your child is young, you may be wondering, where will my child go to college? Will my child choose a four-year institution? Will my child go to graduate school? Will my child receive a scholarship?

While you may not know the answers to these questions, it’s important to create a financial plan with your ex-spouse during your divorce. When your child provides answers to these questions, you can help make his or her transition from high school to college easier.

Talking with your child(ren) about your divorce can be challenging, but talking with them about college is exciting. However, it is important to understand how much you and your ex-spouse are obligated to pay.

Many parents want to help support their children through college. Thus, it’s important for parents to incorporate an agreement regarding college expenses to help their child with college funding into their Final Divorce Agreement.

The Court’s Considerations in New Jersey

In determining the cost of higher education, courts consider the following factors:

(1) Whether the parent, if still living with the child, would have contributed toward the costs of the requested higher education;

(2) The effect of the background, values and goals of the parent on the reasonableness of the expectation of the child for higher education;

(3) The amount of the contribution sought by the child for the cost of higher education;

(4) The ability of the parent to pay that cost;

(5) The relationship of the requested contribution to the kind of school or course of study sought by the child;

(6) The financial resources of both parents;

(7) The commitment to and aptitude of the child for the requested education;

(8) The financial resources of the child, including assets owned individually or held in custodianship or trust;

(9) The ability of the child to earn income during the school year or on vacation;

(10) The availability of financial aid in the form of college grants and loans;

(11) The child’s relationship to the paying parent, including mutual affection and shared goals as well as responsiveness to parental advice and guidance; and

(12) The relationship of the education requested to any prior training and to the overall long-range goals of the child.

Normally, the child’s assets and scholarships are first applied to college costs before either parent has an obligation to pay for the costs. In balancing these factors, courts help parties reach a fair and equitable contribution amount. Parents are also free to discuss and agree on what percentage each will pay and how loans are to be handled for college costs. Speaking with an attorney regarding college costs can help alleviate stress and make the process less intimidating.

College Expenses

Often the property settlement and support agreement signed at the time of divorce sets forth the terms of the parties’ agreement regarding college expenses. When entering into a final divorce agreement that includes provisions for college expenses, try to spell out exactly what each parent’s future financial obligations will be. Define where the money will come from and what it will cover. For instance, all predictable expenses should be listed, including tuition, room and board, meal plans, book costs, laptops, cell phones, and car costs, travel costs to and from the college, and other directly billed college expenses as well as college applications fees, SAT and SAT preparation courses.

Although it’s nearly impossible to determine where your child will go to college, especially if your child is young, many parents will look at the costs of local universities to determine approximately what future costs will be.

When considering college expenses, it’s almost important to think outside of the box. Will my child study abroad? Will my child play sports? What other opportunities will my child want to take advantage of?

Including details in your final property settlement and support agreement can help to give to you and your ex-spouse an idea of how much each of you will be paying in the future. Thus, both you and your ex-spouse can begin saving now for your child’s future.

When creating the agreement, you may want to add a provision that states that neither parent has a financial obligation until the child exhausts loans, scholarships and any college savings.

Courts consider various factors to ensure that one parent is not unfairly burdened. Courts consider how much each parent earns, the tuition expenses, and other child related costs. An attorney can help to determine how expenses should be allocated.

If possible, you and your ex-spouse should try to communicate and reach an agreement. There are a variety of ways to divide college costs and responsibilities and it’s important to create a plan in advance, especially if you divorce when the child is young. Waiting until the child gets accepted to college to reach an agreement may create more problems. Plan ahead so you and your ex-spouse can avoid future disputes.

In some cases, an ex-spouse might be unable to contribute to college costs. It’s better for the other parent to know in advance so that the paying parent can create a savings plan for their child(ren)’s future education.

Source: Bloomberg

Financial Aid Eligibility

Divorce impacts financial aid eligibility. If your child is in college, or within a few years of attending college, it’s important to examine how financial aid is determined.

In order to obtain financial aid, the Free Application for Federal Student Aid, or FAFSA, must be filed. Only one parent’s information is required. That parent is called the custodial parent, which may not be the parent who has legal custody.

Next, determine who owns any 529 college savings plans. If a plan is owned by anyone other than the custodial parent or the child, it is counted differently and can reduce financial aid eligibility.

If you remarry, your income may be counted against your new spouse’s children’s aid. A prenuptial agreement will not help determine financial aid because it will not be binding on the federal government.

Educational Tax Credits

College students graduate with an average of $30,000 in student loan debt. By planning ahead, you and your ex-spouse can help minimize this debt. Tax credits help to lower what you owe in taxes. As discussed below, determining whether you qualify for tax credits can help save you money in the long run.

First, you must determine how you want to claim your child on your taxes. One parent will receive tax credits for paying college tuition, but you must claim the student to receive the tax credits.

There are two types of education tax credits: the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC). According to the IRS, you must meet all three of the following criteria in order to be eligible for either of the two education tax credits:

1. You, your dependent, or a third party pays qualified education expenses for higher education, including tuition and fees required for enrollment or attendance.
2. The eligible student is enrolled at an eligible educational institution. To determine if your school is eligible, go to fafsa.gov and make sure it has a Federal School Code.
3. The eligible student is yourself, your spouse, or a dependent on your tax return.

The American Opportunity Tax Credit is up to $2,500 per year, per eligible student. You are eligible for the American Opportunity Tax Credit if your modified adjusted gross income is $80,000 or less. Moreover, your child must also meet the four main criteria applicable to tax credits (above), as well as the following:

• Has not completed four years of college credits.
• Is enrolled at least half-time during one academic period (e.g., semester) for the tax year.
• Is enrolled in a program in pursuit of a degree or certificate.
• The AOTC has not been claimed for more than four (4) years.

You are eligible to claim the Lifetime Learning Credit (LLC) if your modified adjusted gross income is $52,000 or less. Additionally, your child must also meet the three main criteria applicable to tax credits (above). Your child must also be enrolled in at least one course during the tax year.

This tax credit is must easier to qualify for, as the eligible student does not need to be pursuing any degree or certificate, can be an undergraduate or graduate, and can have completed more than four years of college credits.

You may only claim the Lifetime Learning Credit for one student per tax return. The Lifetime Learning Tax Credit awards up to $2,000 per return. This covers tuition and fees required for enrollment or attendance.

Even if you both qualify for tax credits, you can only claim one of them per student, per year. However, you can qualify for tax credits for multiple students, but you can only claim one per student. You may claim the American Opportunity Tax Credit for multiple students. However, you may only claim the Lifetime Learning Credit for one student (so a maximum of $2,000 per return).

A good resource for information on education credits is the IRS website.

The Road to College

Your child will likely feel anxious, excited, and nervous about attending college. Your child may want to move to a different state or stay at home. Regardless of your child’s vision, it’s important that you and your ex-spouse have a plan. On move in day, you want to put your child’s mind at ease as he or she begins a new and exciting chapter in his or her life. You don’t want to be arguing with your ex-spouse about splitting costs. Creating a detailed agreement can prevent this, and you can send your child off to college with ease.

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