I was asked the other day, “Is there really a student debt crisis, or is it a small number of recent grads complaining about their finances because they did not prepare well enough for their future?” At first, I was taken aback because I live in this world as a father of four young children and have seen the impact upon so many families. However, the person who asked was in their early 70s and had received their degree when higher education was affordable. Student loan debt totals approximately $1.6 trillion and affects more than 50 million people in the United States.
While most people focus on how they pay down the debt after graduation, more and more people are impacted by student loan debt as their children are in college or planning to go to school in the next several years. Divorce is complicated and extremely difficult, but when mixed with college planning and student loan debt, it can seem insurmountable.
Traditional thinking must be changed when discussing educational planning and the journey itself. Financial advisors need to be able to provide guidance as each situation is different and often complex. Clients need to be provided with answers to their situations and customization is important.
As much as advisors help their clients try to prepare for the cost of education, in most cases 529 plans fail to reach the goal of paying for the total cost of an education. The total cost of higher education is increasing at a faster pace than clients’ ability to save. To prove my point, I ran some numbers in a college cost calculator from one of the largest 529 providers.
In my scenario, for one child, you put $2,500 into a 529 plan when they were born and added $250 a month at a 7 percent total return. At age 18, you could have accumulated approximately $127,000 into a college fund. However, if I factor in costs for a public, in-state university and reduce the education inflation index in half to 4 percent, the cost would be around $177,000 for one child. That is still a $50,000 deficit for the child. Remember this is just for ONE child. The question is not if I am going to need financial assistance, but how much. Advisors need to know about the available options and what their clients need to do to get started.
As of October 1, parents have started filling out the Free Application for Federal Student Aid (FAFSA). Even though it has been shortened it is still time-consuming. Some people feel that since they will not qualify for aid, they should not bother taking the time to fill it out. This is a mistake. Colleges and universities have a process called enrollment management. There are many different calculations that go into the process, but one of those is financial. Colleges are looking for those that qualify both academically and fall within their average award parameters. A student could qualify academically but be a “reach “school financially or be on the border academically and need no aid at all. It is important to make sure all factors are considered.
Which parent fills out the FASFA in a divorce situation? The parent who takes care of the child most of the year should fill out the form. If the child lives with the dad for five months and the mom for seven months, the dad’s income could be irrelevant. If the custody arrangement is 50/50 and the child lives an equal amount of time with each parent, then the information for the parent where the child attend high school should be used. Important to note, do not look at the calendar year when determining the residency of the child. For financial aid purposes, you need to look at the twelve-month period that ends the day the FASFA is filed.
In addition, there are highly competitive schools in the United States that use the CSS PROFILE aid form. The PROFILE form treats divorce differently from the FASFA form as there is more financial information included. In most cases, these schools want information from both divorced parents, including the non-custodial parent. It will vary from school to school what they will do with this information. The value of the home would be an example of an asset that would need to be disclosed. In addition, a child’s eligibility for financial aid can be jeopardized if the custodial parent remarries. The new non-biological spouse’s income and assets must be reported.
If a client remarries and signs a prenuptial agreement with the new spouse, their assets can be included in the calculations. Many advisors are aware of the prenuptial agreements signed by their clients, but most do not realize they are ignored by the federal need analysis process. In the eyes of the government, the step-parent of the custodial parent is also responsible for supporting the child.
Remember, 529 plans are great investment tools, but advisors should plan on more than just one option. In talking with both parties of the divorce, be aware of who is the owner and the beneficiary. If a plan is owned by anyone other than the custodial parent or the child, it is counted differently and can change the financial aid eligibility. In addition, if one of the parent’s inquiries into the value of the 529 plan during a divorce proceeding, be extremely aware of who the owner and beneficiary are when providing account values.
Student loans are not just a challenge for a younger generation but for all of America.
The fastest growing age group with student loans are people above the age of 60. According to the Federal Reserve Bank of New York, this age group has over $85 billion in student loan debt as of the end of 2017.
With the rise in grey divorce, advisors are going to have to address this situation as they focus on retirement planning. To develop a plan for repayment, advisors can help them understand debt ownership, the impact on tax fillings, and loan forgiveness advantages. Advisors should help parents and grandparents get a better understanding of the advantages and disadvantages of Parent Plus loans as they are quickly becoming the funding vehicle of choice for many Americans.
Advisors need software tools and education to help their clients navigate both the borrowing and repaying decision in one place. PayForED is a software platform for advisors, employers and schools—the partner to help families save time and money. Our mission is to help solve the student debt crises, and we help by providing simplicity and transparency.
The student debt crisis will not go away anytime soon, and advisors should be prepared to help guide clients through the many complexities—especially when their circumstances are complicated even further because of divorce.