In our last post, we discussed a few aspects of estate planning that a couple with minor children and a relatively simple estate might want to address during divorce mediation. Today, we will continue looking at our example couple, Deena and Greg, as they consider educational planning for their two younger children, 14-year-old Brian and 12-year-old Lindsey.
As we previously discussed in College Planning and Mediation: Part I, there are circumstances under which divorced parents In New Jersey can be held responsible for funding post high school education for children. Educational expenses typically include tuition and fees, room and board, and books and supplies. Other associated costs include things like college prep exam fees and review courses, application fees, travel expenses for college visits and necessary and discretionary expenses during college (clothing, travel, entertainment, etc.). Absent an agreement between parents about how to cover costs, a court would apply the criteria set out in the 1982 case of Newburgh v. Arrigo.
If your children are young, it might seem like a better idea to wait and address this issue later. After all, many things can change over the years, and you already have plenty to worry about. Mediation, however, is an ideal forum for addressing parental contributions to children’s higher education expenses. Courts tend to uphold agreements between parents about contributions, as long as they are specific and clear. If college is still a few years away, you can write up an agreement that provides for an income-based cost sharing plan while leaving out specific dollar amounts. Putting your plan into your Marital Settlement Agreement (MSA) allows your attorneys to review it along with your other terms. You can also include a clause agreeing to return to mediation to refine the agreement later.
Educational Contributions and Parental Income
Deena and Greg currently have very similar incomes and plan to share parenting equally. They were happy therefore, to take child support off of their current list of concerns. Nevertheless, they should be prepared for the possibility that this might change. What if one of them gets a new job or starts a lucrative business during the next few years? At that point, the less financially well-off spouse might wish they had thought about college funding sooner. They might even want to change their mind about getting a child support agreement.
To get an idea of how New Jersey courts calculate child support for parents who share custody, Deena and Greg can look at the New Jersey Shared Parenting Worksheet. The first figure in the support calculation is “gross income.” This includes both earned and unearned income. Part C of the Family Case Information Statement (CIS) includes a more detailed breakdown of what income includes. As we have previously discussed, it is usually a good idea for couples in mediation to complete and exchange at least a rough draft of the CIS, even if, as in Greg and Deena’s case, their financial situation is pretty simple. Sometimes completing the CIS reveals things that no one previously considered. Other times it simply ensures that all income and assets are taken into account.
Although the New Jersey child support guidelines do not apply to children who are in college and not living at home, they can provide insight into how parents might set up an agreement for income-based college contributions. The next step will be to decide how to budget for the planned contributions. The parents can then incorporate the contribution agreement into their MSA.
Funding Higher Education for Children
Deena and Greg do not currently have any savings designated for their children’s education. They do, however, have good salaries and well-funded retirement accounts. Greg has a traditional IRA and Deena has a 401k. In some cases, it is possible to use retirement accounts for educational expenses. Withdrawals from both traditional and Roth IRAs before age 59 ½ that are used for qualified higher education expenses are not subject to the usual 10% early withdrawal penalties. They are, however, still subject to income taxes. Qualified expenses generally include tuition, fees, books, necessary supplies and equipment, and room and board for students enrolled at least half time in a degree program.
There are, of course, downsides to using retirement funds for education, the most obvious of which is that the funds would no longer be available for retirement. It is also only IRAs that can be used in this way. Deena’s 401k would not qualify. It might be possible for her to borrow from her vested balance in the 401k to pay for college expenses. Before considering this option though, she should discuss the financial impacts with a financial advisor. Pursuing other student loan options will usually be a better choice.
Another option that is usually better than dipping into retirement savings is opening 529 plans. Although it would have been ideal for them to begin earlier, Greg and Deena still have time to do this. Each parent could open an account for each child and fund the accounts on a regular basis going forward. Any loans or retirement withdrawals would then be only back-up options. If the parents can agree on how much each of them will contribute, they can coordinate setting up the plans with the rest of their asset distribution in divorce.
Including Children in College Planning Discussions
Deena and Greg should also decide how and when to include their children in college planning discussions. Brian will be old enough for that within a couple of years. Lindsey is still young, but because of her disability, her future education may require earlier and more extensive planning. Parents often want children to understand that there is a “cap” on how much they will be able to contribute. The earlier they make this clear, the less likely a child is to become excited about possibilities that do not make sense financially. If children may need to work part time or take out loans themselves, that is another important topic of discussion.
Deena and Greg decide to build future college planning meetings into their MSA. They set three dates, the first for a meeting between the two of them, and the second and third for meetings between both parents and each child. They also agree to add additional meetings with a mediator if necessary to resolve any disagreements. A tentative checklist of topics for the meetings includes the following:
- The Child’s Educational Goals
- All Estimated Costs of the Education
- Current Savings and Future Savings Plans
- The Child’s Expected Contribution.
- Each Parent’s Expected Contribution
- Mechanics of Payment
For more detailed information on college planning and mediation, including more on the list of topics to address, see: College Planning and Mediation: Part II.
If you and your spouse or former spouse would like to discuss educational planning for children and mediation with one of our experienced family mediators, take advantage of our initial consultation and contact us today.