Thursday, October 23, 2014

Financial Aid Considerations for Children of Divorced or Never-Married Parents


Whether a divorce was amicable, angry, or somewhere in between, divorced parents can face extra challenges when trying to help their college-bound children apply for financial aid. This article offers some suggestions for divorced and never-married parents to try to help reduce the anxiety and stress that can accompany what can be a complicated and confusing process.

This fall some 21 million students are expected to attend American colleges and universities. This is an increase of about 5.7 million since fall 2000. 1 For the 2012–13 academic year, the average annual price for undergraduate tuition, fees, room, and board was $15,022 at public institutions and $39,173 at private nonprofit institutions.2 These costs don’t include school supplies, clothing, transportation, food, equipment, etc.  The average 2013-2014 tuition increase was 3.8 percent at private colleges, and 2.9 percent at public universities.3     These figures are substantially higher than the general inflation rate and higher than the average increase in personal income.
 
Unfortunately, as college costs increase, aid available to students has failed to keep pace. 4      This makes it even more important to apply for federal aid early and correctly.  To be eligible for federal student aid, the student must, among other things, demonstrate “financial need.”  Financial need means the difference between the cost of attendance at a school and the Expected Family Contribution (EFC). 5    Aid is based on the concept that it is primarily the student’s and his or her family’s responsibility to pay for the education.  An independent student (over 24 years old; married; has dependents of their own; parents deceased; working towards masters or doctorate degree; emancipated; active duty or veteran of U.S. armed forces) will only need to report his or her own information. (If married, they will also need to report a spouse’s information).  A dependent student is assumed to have the financial support of parents and thus, that parents’ financial information is required. 6       A “parent” is defined as a biological or adoptive parent.  It doesn’t matter if the student doesn’t live with his or her parents, the student must still report information about them.  For dependent students’ with divorced or separated parents, it can be confusing to know which parent’s financial information to use.
 
Here is what you need to know if you are divorcing, divorced, separated or never married and have a child applying for federal aid   [Note: Consistent with the Supreme Court decision holding Section 3 of the Defense of Marriage Act (DOMA) unconstitutional, same-sex couples must report their marital status as married if they were legally married in a state or other jurisdiction, without regard to where they live or where the student will be going to school]:

•    If you were never married or are widowed, only your financial information is considered.

•    If you are divorced or separated and don’t live together, the financial information considered is from the parent with whom the child has lived more during the past 12 months.  If the child spends the same amount of time with each divorced or separated parent, the financial information of the parent who provided more financial support during the past 12 months (i.e. child support) is considered.

•    If you are a stepparent who is married to the legal parent whose financial information is considered, your financial information will also be considered. See Federal Student Aid, https://studentaid.ed.gov/fafsa/filling-out/parent-info

•    If you still live together, both parent’s financial information is considered.

Applying for federal aid can be complicated.  For more information visit https://studentaid.ed.gov/.  

In addition to helping your student apply for federal student aid, you can also contribute to your child’s college expenses through the following:

•    A Section 529 Plan is a special type of education savings account that offers certain tax benefits.  Funds within a 529 Plan account grow tax free, much like a 401(k) or IRA.  Withdrawals from the account may also be made on a tax-free basis, so long as the withdrawals are used for qualified educational expenses (tuition, fees, books, room and board, etc.).  Contributions to a 529 Plan are not deductible from federal income taxes, but many states (including Oregon) offer a state income tax deduction.

•    Contributions to 529 Plans constitute gifts under federal gift tax law.  If the contributions, together with all other gifts you have made to the child in that calendar year, total less than $14,000, the 529 contribution will qualify for the annual gift tax exclusion and does not need to be reported on a gift tax return.

•    One benefit unique to 529 Plans is that contributors may elect to use up to five years of annual gift tax exclusions for one contribution.  For example, you could contribute up to $70,000 to a 529 Plan today for your child without making any taxable gifts.  To make this election, the gift must be reported on a timely filed gift tax return (which is due April 15th in the calendar year after the gift is made). 

•    In addition to the tax benefits of 529 Plans, the Internal Revenue Code provides that amounts paid directly to an educational institution for tuition expenses escape gift tax completely.  That means that payment of your child’s tuition bill does not count toward the $14,000 annual limit.  There are two important rules to consider when making tuition payments. First, to qualify for the exclusion, the payment has to be made directly to the educational institution; you cannot give the money to your child.  Second, the exclusion only applies to amounts for tuition expenses, so to the extent that payments for books, room and board exceed $14,000 per child per year, they will constitute taxable gifts.

Written by Paige De Muniz, Shareholder (Family Law), and John Christianson, Of Counsel (Estate Planning)

1 U.S. Department of Education, National Center for Education Statistics, Common Core of Data (CCD), January, 2014.
2U.S. Department of Education, National Center for Education Statistics, Higher Education General Information Survey (HEGIS), March 2014.  
3The College Board, http://www.collegeboard.org
4The College Board, http://www.collegeboard.org.
5Federal Student Aid, https://studentaid.ed.gov/glossary#Financial_Need.
6Federal Student Aid, https://studentaid.ed.gov/glossary#Financial_Need.