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What Happens to My Child’s College Savings After Divorce?

 Posted on August 28, 2015 in College Expenses

b2ap3_thumbnail_college-savings-divorce.jpgWith college tuition rates consistently rising in the United States, many parents are deciding to start saving for college earlier. Ideally, parents should begin saving as soon as the child is born. Even if the monthly contribution is small, starting early can give parents the extra boost they need to keep up with ever rising college costs. It is a smart move and your child will appreciate it down the road. In the case of a divorce, the college savings becomes uncertain. Co-saving, like co-parenting, is possible post divorce, but there are a few things you need to know to save successfully.

College Savings Accounts

When setting out to save for a child’s future college tuition, many families invest in some sort of 529 college savings plan. These are tax-advantaged investment accounts, and help many parents save more money faster. Often, parents open these accounts jointly. In the unfortunate case of a divorce, parents must explore their options for future account ownership. Typically, one parent will need to be designated as the sole owner of the account. There are however, other options, such as freezing the account, or splitting the savings into two accounts.

In most cases, it is recommended that the non-custodial parent be given ownership of the account. Typically mothers, who often retain custody of their children, have lower incomes, allowing them to qualify for further financial assistance for college costs if necessary. The non-custodial parent’s income and assets will not be included when completing the Free Application for Federal Student Aid, or FAFSA, which families must fill out to be considered for financial aid for college. This means the non-custodial parent's 529 account, which will be solely in their name, will not be included in the consideration for financial aid. The parent who does not own the account can still be listed as an authorized user. That way, they can see all account activity but are unable to access the funds.

Tax Considerations

Parents must also decide who will claim the child for tax purposes. Federal tax deductions are available to whichever parent claims the child as a dependent while the child is attending college. To be eligible for this dependent tax exemption, the child must be considered a full time student by his or her educational institution. Both parents should consider their income levels and the different benefits available before making tax decisions so that no benefits are lost.

Custody of the child can also play a role in college savings and access to financial aid. As stated above, it is only the custodial parent’s finances that are listed on the FAFSA. Deciding which parent will have custody can have major implications for the child’s access to financial aid, if needed.

If you are dealing with divorce, the assistance of a qualified Naperville divorce attorney can be necessary. Please contact the Pesce Law Group today at 630-352-2240 for more information.


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