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How divorce can affect college aid for the children

As divorcing Illinois parents negotiate a settlement, they should consider how divorce might affect financial aid for their children. The rules regarding this vary, so parents might have to do some research before deciding how to handle any 529 college savings accounts they had previously opened.

College aid and the expected family contribution

When children apply to college, most will file a Free Application for Federal Student Aid, or FAFSA. Only the custodial parent needs to file the FAFSA. For the FAFSA, the custodial parent is the one the child lived with for the majority of the year, or, in cases of equal parenting time, the parent who provides the most financial support. When the custodial parent earns less, the child might qualify for more financial aid and the expected family contribution, or EFC, might be lower. But if the custodial parent has remarried, the new stepparent’s assets and income must also be included in the FAFSA, which might lead to an increase in the EFC.

How is a 529 account treated when it comes to paying for college after divorce?

After a couple ends their marriage and there is a division of assets, a 529 account might be treated differently, depending on who owns the account. These include:

  • The custodial parent owns the 529 account so the distributions, part of the parent’s assets, are not included in the calculations for EFC. Financial aid is affected by only 5.64%.
  • The non-custodial parent owns the 529 account so distributions from the account are included in calculations, raising the amount of EFC and decreasing the potential amount of financial aid by up to 50%.

As parents negotiate their divorce settlement, they should seek information about the 529 accounts and the repercussions of each choice available to them. They can include provisions in the settlement to protect their children’s interests regarding 529 accounts.

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