Learn the Rules and Plan Early
Finding a way to pay for your children's college education is a challenge for most families whether it’s a "traditional" two-parent household, a single parent household or a household with a blended family.
There are unique opportunities and challenges facing blended families, which we will go over in a minute. First, remember these three things that apply to all families:
1) College expense planning must always be considered in the context of overall family financial planning. College can be very expensive. Families have debts to pay, savings’ needs, and everyday expenses, and few have enough money to do everything all at the same time. Work the numbers and decide how much you can afford.
2) Parental needs should always trump college funding needs. There are many ways to pay for college but the only way most people can pay for retirement is to save, save, save.
3) Debt for college funding should be minimized if not eliminated all together.
2 Main Types of Financial Aid
There are two types of formal financial aid. There is Federal financial aid, which can come in the form of grants and subsidized loans. Other financial aid may be available through the college itself in the form of grants, loans, and scholarships, and is called "Institutional" financial aid.
Filling out the free application for Federal Student Aid or FAFSA form gets the financial aid process started. This form is available from the Department of Education and it must be filed annually with the school where the student intends to enroll. Each school and state has its own filing deadline so be sure to submit your form on time. It is always a good idea to submit it as soon as possible after January 1st of each year because many needs-based grants are offered on a first come, first served basis
Blended Family Considerations for Financial Aid
There are rules and formulas that apply to federal financial aid and this is where it gets interesting for blended families.
One of the elements that determine how much aid your student will get is the EFC (Expected Family Contribution). The EFC is calculated in accordance with the parents’ and student’s income and resources. Generally, students qualify for more aid as the EFC goes lower. The key to determining parental income and resources for children of divorced parents is with whom the child spent the most time during the previous twelve months. It does not matter who pays child support or who gets to take the child as a tax deduction. What matters is where the child lived. Let’s look at an example:
Mom and Dad divorce. They have one child who lives with Mom. Dad pays child support and has weekend custody. Whether by decree or agreement, Dad’s going to pay for college costs. Dad is a relatively low-earning teacher who remarries a divorced waitress with three children of her own who live with her. Her former husband is in prison. Mom remarries the CEO of a Fortune 500 company, a self-made multi-millionaire who has never been married and thinks children should pay their own way through school like he did. Dad applies for financial aid thinking this is going to be a slam dunk because let’s face it, he’s broke. Imagine his surprise when his child qualifies for no federal aid because the household in which the child lives is filthy rich!
In this example, Dad would be smart to have his child apply for “Institutional” aid through the college. On the surface, the child would not qualify, but most institutions have an appeal process where a respectful and well-worded letter may provide some relief.
How could this have been avoided? Actually, it would have been pretty easy. The child was already spending 104 days a year with Dad. Just 79 more and Dad’s household would be the household of record.
There are other blended family issues as well. For example, let’s assume that the child lives with Dad but Mom’s new husband wants to help pay for school. Will this cause the child to be turned down for aid? No, but stepdad’s money “gift” needs to be reported as the child’s asset, making the child richer and reducing the need for aid.
The point is, you need to know the rules and you need to make a plan long before it becomes a crisis. Most parents, divorced or not, want to do what’s best for their children and like all money issues, communication is the key.
Frank Boucher, CEBS, CFP® is the owner of Boucher Financial Planning Services in Reston, Virginia.