A couple planning a divorce should form a voluntary college support agreement about how to finance their children’s college education. It is a good idea to form a plan before the divorce is final. This is hard when the children are young or there are special considerations present, such as a child wanting to attend an out-of-state school. Each spouse should consult their accountant before forming the agreement. The parents may also want to talk to a financial planner before forming the agreement.
Voluntary college support agreement
A voluntary college support agreement is a contract. Divorcing parents work out who will be responsible for the cost of college and how the money will be paid. Typically, parents commit to saving a certain amount per month or year for each child. Parents can also form an agreement about funding college to a certain rate, such as the projected cost of a four-year degree at an in-state public university.
A voluntary college support agreement is different from a divorce decree. A divorce decree is issued by the court. The decree contains the judge’s rulings, which bind both parties. A divorce decree usually includes custody information, details on property division, and the terms and schedule for spousal and child support payments. A divorce decree may not contain decisions about college tuition.
No requirement to pay past age 19
A parent is not obligated to pay for their child’s education after the child turns 19, according to Ex Parte Christopher, a 2013 Alabama Supreme Court ruling. Both parents should keep this in mind as they form the voluntary college support agreement. The ruling means the child over 19 may not be able to sue the non-paying parent for a failure to pay for the child’s college education. Yet a parent who abided by the voluntary college support agreement may have grounds to sue a non-abiding parent for breach of contract.
Custodial parent and FAFSA
When parents are divorced, the custodial parent fills out the Free Application for Federal Student Aid (FAFSA) form. The FAFSA defines the custodial parent as the parent the child lived with for most of the past 12 months. The person identified as the custodial parent on the divorce decree may not be the person that the FAFSA recognizes as the custodial parent.
If the custodial parent remarries, they must enter their new spouse’s information on the FAFSA too. This is true even if the new spouse has not legally adopted the child. Alabama recognizes common-law marriages, but only for marriages entered into before January 1, 2017.
When a child splits their time equally between two residences, the custodial parent will be the one who gave the child primary financial support. The non-custodial parent does not have to submit information for the FAFSA. Their income and assets will not count to calculate the expected family contribution. The exception to this rule is divorced or separated parents must both be on the FAFSA if they live together in the same home.
Scholarships and loans
If the wealthier parent happens to be the non-custodial parent, the household income may be low enough to allow the child to qualify for need-based scholarships. The weather parent can still help pay for the child’s college education. If a parent takes out a Direct PLUS loan, only that parent who borrowed the money has to repay it. Both the custodial and the non-custodial parent may borrow from the Direct PLUS loan program. Such a loan is also called a parent PLUS loan.
529 College Savings Account
A College Counts Alabama 529 Savings Plan is a qualified tuition program under Section 529 of the Internal Revenue Code. The state of Alabama allows parents and other individuals such as grandparents, relatives, and friends to contribute to a college savings account for a child. Withdrawals from a qualified 529 savings plan are exempt from Alabama income tax. Contributions to the fund are Alabama tax deductible up to $5,000 per Alabama taxpayer or $10,000 for married Alabama taxpayers filing a joint return.
Federal tax credit
The parent who claims the child as a dependent can claim the federal education tax credit known as the American Opportunity Tax Credit (AOTC). This tax credit was formerly known as the Hope Scholarship. Typically, only one parent may claim the child as a dependent.
The exception is when the two parents file a joint return. They can do this when they are planning to divorce but the divorce is not final yet. If both parents claim the child as a dependent, the IRS typically allows the parent who housed the child for most of the year to claim the AOTC.
When parents disagree
A couple should consider having a mediator at a discussion if they cannot get along. It may also be advantageous for each side to have their own Tuscaloosa divorce attorney (or a divorce lawyer where you live in Alabama) present and for the attorneys to negotiate the terms. If a former spouse is hiding financial information, the other parent should consider hiring a forensic accountant to determine whether the actions constitute fraud.
Attorney Steven A. Harris regularly blogs in the areas of family law, bankruptcy, probate, and real estate closings on this website. Mr. Harris tries to provide informative information to the public in easily digestible formats. Hopefully you enjoyed this article and feel free to supply feedback. We appreciate our readers & love to hear from you!