How a Texas Divorce may Affect Your Child's College Fund

Many divorced parents in Texas underestimate the potential impact a separation can have on their children’s college educations. It’s important to note that after a divorce, eligibility for financial aid can be affected by which parent owns the 529 plan account for their child.

When a divorce between two parents is finalized, the task of completing the Free Application for Federal Student Aid (FAFSA) falls on the custodial parent. There are two circumstances that define a custodial parent:

• First, it can be the parent with whom the dependent student has been living with the most over the last 12 months until the FAFSA filing date.
• Second, if the child has been spending an equal amount of time with both parents, which is common in recent divorces, the custodial parent is the parent who has been providing more support.

If the custodial parent owns a 529 plan account, this is registered as an asset on the FAFSA but with distributions being ignored. Furthermore, need-based financial assistance is reduced by a maximum of 5.64% of the asset’s value.

On the other hand, if the non-custodial parent owns the 529 plan account for their child, it is not reported as an asset on the FAFSA, but distributions are considered as untaxed income to the student. In exchange, however, eligibility for need-based assistance can be slashed by as much as half of the distribution amount.

Let’s assume that the student’s 529 account has a balance of $30,000 and all of it is depleted during his freshmen year.

• If that account is owned by the custodial parent, at worst, it reduces the student’s eligibility for financial aid by $1,692 (i.e. 5.64% of $30,000).
• On the other hand, if the 529 plan is owned by the non-custodial parent, the aid eligibility could be reduced by as much as $15,000 (i.e. half of $30,000).

While there are some workarounds to the issues associated with the non-custodial parent owning the 529 plan, it’s usually better for all parties if the custodial parent owns the plan.

Of course, you may have concerns about having one parent using a non-qualified distribution to pay for a new car, or something more realistic, such as paying for food and other living expenses. The best protection against this are court orders requiring the money to be spent only on the child’s college expenses.

Divorced parents agreeing to pay for half of their child’s college costs are also advised to specify whether their child will be going to an in-state public college or a private college. Furthermore, it should be clear whether the child’s college costs will be split before or after applying 529 funds and financial aid are applied.

At the Lyttle Law Firm, we believe in the importance of both parents being involved in their children’s college process. Get in touch with Austin family law attorney Daniella Lyttle to talk about protecting your child’s college education during and after a divorce. Call the Lyttle Law Firm at (512) 215-5225 or by using our contact form.