With tuition expenses increasing every year, paying for college has become a serious issue for many Colorado parents. Many begin saving for college soon after a child is born. Some choose to open a 529 college savings plan, which has some tax advantages. But, when these parents divorce, careful planning is required for knowing what to do with the 529 plan and how to plan for the child's college costs.
One financial planner has identified three main college funding issues for divorcing parents to think about. The first is ownership of the 529 plan. In the asset division process, the plan can be awarded to one parent or split between both of them. The financial planner recommends that the non-custodial parent be given ownership of the plan, because the Free Application for Federal Student Aid, or FAFSA, does not require disclosure of assets owned by the non-custodial parent.
A second issue is which parent should claim the child as a dependent for tax purposes. This is important because the parent who claims the dependent exemption is eligible for IRS college credits. Parents should also keep in mind that if a parent has income above a certain level, that parent will not qualify for the credits.
Finally, which parent will have custody of the child can be critical to college funding. The FAFSA generally looks only at the finances of the custodial parent in determining financial aid eligibility, so if one parent earns significantly less than the other, awarding custody to that parent can be an advantage. However, about one-third of colleges request additional financial information, including information about the non-custodial parent.
Negotiating a divorce settlement requires consideration of a number of issues, including college funding. Understanding how divorce and tax laws affect financial aid eligibility is important for any divorcing parent.
Source: U.S. News & World Report, "3 Important College Funding Questions to Answer During a Divorce," Andrea Williams, Aug. 19, 2015