Two Sides of the Coin is a series of articles written by Ian Steinberg, a matrimonial and family law attorney, in conjunction with an array of other professionals from different industries. The series provides insights into issues from the perspective of each party to a divorce. Each article provides readers with practice tips that are helpful when navigating through the divorce process.
College is expensive. The cost of providing your children with higher level education can be stressful for many families. Some of us feel like we have to compromise between paying for the best college for our child(ren) and securing our comfortable retirement. Even contributions from family members such as grandparents can come with emotional strings attached as well as tax complications. Utilizing the assistance of a financial planner can bring the temperature down by helping map out cash flows and deciding whether to apply for loans and scholarships. However, sometimes the “smart” financial decision gets overshadowed by tradition or societal pressures.
When parents of college-aged children are divorced or going through the divorce process, determining how to pay for college (both tuition and the related expenses) can become overwhelmingly complex and emotional. Because of this, a well negotiated and drafted separation agreement coupled with well-thought-out financial planning is essential.
Below are a few tips that can help parents reduce the stress associated with college and divorce.
Clearly Determine Tuition Obligation of Each Parent
The first step when planning for college upon a divorce is to determine the obligation of each parent. Upon a divorce, each parent is typically required to pay certain expenses for the children above and beyond child support. These are called “add-on” expenses, which include health insurance premiums, unreimbursed medical expenses, and childcare while a parent is working. Often there are other “add-on” expenses that are agreed upon by the parties, which include extracurricular activities, summer camp, and college.
These “add-on” expenses are typically paid by each parent in proportion to their income. For example, if parent one earns $300,000 and the parent two earns $100,000, then parent one would be responsible for 75% of the “add-on” expenses. The question becomes, does this apply to college as well, or will there be some other split for this particular expense? If you are the monied spouse, you may want to try and utilize marital assets (such as 529 accounts, which are discussed below) to pay for college, while the non-monied spouse would be best served by having his/her spouse pay for the lion’s share of the college expense.
There is another concept in New York called the “SUNY Cap.” This means that the combined contribution of the parents towards a child’s college expenses is capped at the cost of tuition at one of the State University of New York (SUNY) schools at the time the child is attending college. It is recommended, for the purposes of clarity, to include the exact SUNY school for which the obligation will be capped. If you are the non-monied spouse, you will want to choose the school with the highest tuition, which is typically SUNY Binghamton, whereas the monied spouse may want to choose a school with a lower tuition like SUNY Empire State College.
Utilize 529 Accounts and Other Educational-Related Accounts
College savings account are important tools that are often used by parents throughout the early life of their children. Many families utilize a college savings plan called the NY 529 College Savings Plan. This is a type of investment account that is often utilized for college savings because withdrawals on the earnings are tax-free (both federal and state) if they are used for educational purposes. You can also withdraw the money for other uses, but typically you will have to pay a 10% penalty tax on the earnings and federal/state income taxes. As a parent and the owner of the account, you are able to pick investments, assign a beneficiary of the account (i.e., your child) and you can determine how the money is used. This is where the assistance of a financial advisor, who is well trained in college planning, is incredibly valuable.
Typically, separation agreements upon a divorce will state that prior to either parent becoming responsible for college expenses, the existing 529 accounts will be utilized. This is where the age of the child(ren) is an important factor, as this will often determine how much has been saved already, and how much time there is remaining to save. If your child(ren)’s 529 account is funded with enough money to cover college (or at least up until the SUNY cap) there may be no further college contribution required.
If the child(ren) are still young upon a divorce, there becomes a question as to how the 529 accounts will be funded. Sometimes, parents agree that each will be required to pay a certain amount each year into the 529 accounts, based upon their pro rata share of income. It is recommended that, upon a divorce, each parent opens a separate 529 account for each child so that it is clear which are the marital accounts and which are the separate property (i.e., post-marital) accounts. Since there can only be one custodian of a 529 account, there has to be a bit of trust between the parties, and/or language in the agreement requiring statements to be provided and that the accounts not be used for anything besides education.
It is also important to determine how the 529 accounts will be used, assuming they are insufficient to cover the entirety of the tuition. Would the parents prefer to spend down the entire balance of the 529 accounts first or spread the payments over the four years of college. Each situation is different and regardless of what works best for you, it is always beneficial to have this clearly spelled out.
Utilizing Financial Aid
It is important to explore all options related to financial aid for college. This goes beyond athletic and/or academic scholarships, and includes filing the Free Application for Federal Student Aid (FAFSA) form that allows you to apply for federal financial aid. While many people think they may not qualify, there is federal aid available to families that are not necessarily low income. Filling out the FAFSA form is free and must be done before each academic year.
As the non-monied spouse, receiving financial aid for your child’s college tuition can relieve you from an otherwise burdensome obligation. Even as the monied spouse, there is no harm in paying less, if possible. Ideally, the parents will work together to ensure that the FAFSA form is filled out to maximize the chances of the child receiving aid, as this is mutually beneficial. This language can be included in your separation agreement. Further, this is another great opportunity to work with a financial professional who can walk you through this process.
Make Sure Ancillary Costs Are Considered
College expenses often include many other expenses besides just tuition room and board. Further, many of these expenses are incurred prior to your child stepping foot on campus. These include SAT prep courses, tutors, visits to college, books, computers, etc. Whether these expenses are paid from the 529 Accounts or directly out of pocket, it is important to work with your financial advisor to ensure that they are budgeted for. Further, it is important to ensure that the payment of these expenses is accounted for in your divorce agreement. Parents fighting over who will buy schoolbooks or a computer is not a great way for a child to start their college experience.
Consider the Complete Package
The payment of college expenses is just one piece of the puzzle when settling the financial aspect of a divorce proceeding. As such, it is important to consider the complete package. Oftentimes, divorce agreements provide for a “room and board” credit against a parent’s child support obligation when a child is in college. This takes into account the fact that the parent is paying for room and board while the child is in college, which should reduce the other parent’s food, clothing, and shelter expenses (i.e., the expenses that make up basic child support).
In New York, a parent’s child support obligation ends at 21. However, a child may turn 21 as early as their junior year of college. Oftentimes, this leads to parties agreeing that child support will continue until the earlier to occur of a child’s graduation from a 4-year college or attaining the age of 22. This makes it such that the child’s expenses are still covered until they graduate college, and allows for the child support recipient to still have a place for the child to return during school breaks and summers.
The payment of college expenses is stressful for any parents, let alone those going through a divorce. When going through the divorce process, it is important to work with both your financial advisor and your divorce attorney to ensure that you are making an agreement that is feasible and sets you up for success. Whether you are the monied or non-monied spouse, determining the best method for paying college expenses and considering what else you are able to “give” or “get” in your divorce agreement is of the utmost importance. This will ensure a bright future for you, and most importantly, for your children.
Ian Steinberg is a matrimonial and family law attorney with Berkman Bottger Newman & Schein. He can be reached by email at isteinberg@berkbot.com or by phone at (212) 867-9123.
Prem G. Hira is the Founder of Investry, LLC, a financial planning firm, where he holistically advises individuals and families on meeting their specific life goals. Prem can be reached by email at pgh@investry.com or by phone at (914) 721-6040.