The NJ Divorce Solutions College Contribution Series – Part 2 of 3
The most challenging aspect of navigating your child’s college planning is understanding financial aid. Many settlement agreements provide that the parents’ college contributions apply to the portion remaining after the child’s financial aid eligibility, but what is financial aid? Our partner, Christina Previte, Esq., has had previous experience working as a financial aid advisor at a private college prior to practicing law which has been very useful in guiding clients through the college contribution quagmire. Here are a few tips in understanding what you should be looking for when discussing financial aid with your ex-spouse so you do not pay more than you should:
- Make sure your child submits a FAFSA, which applies for a variety of grants and loans. The FAFSA is the most important piece of the puzzle. Generally speaking, submitting a FAFSA applies for a variety of federal and state grants and loans. The FAFSA generally initiates the financial aid application process so it is important to submit a completed FAFSA as early as possible. Contrary to popular belief, you can still submit a FAFSA even if you have not filed your tax returns yet. If you have not already filed your tax return that year, you can provide estimated tax return information subject to further verification at a later date. It is better to provide estimated tax return information and submit the FAFSA on time than it is to postpone it while you wait to do your tax returns. The reason for that is because some types of financial aid are subject to a deadline upon which the FAFSA must be filed. You do not want to unwittingly foreclose your child’s eligibility for some types of financial aid simply by filing the FAFSA too late. If you have specific questions about these deadlines, or the specific grants and loans that are available, you should refer to the college’s financial aid office or the FAFSA instructional materials. There are also valuable materials available online through the U.S. Department of Education.
- Confirm with your child’s financial aid advisor which parent has to fill out the FAFSA. It is also a common misconception whose responsibility it is to provide their income information on the FAFSA. Sometimes it is the responsibility of the primary custodial parent. However, some schools require both parents to submit their income tax information. If you have doubts whether your ex-spouse is being truthful when he or she requests income information for the FAFSA, you should simply call the financial aid office of the school the child wishes to attend, or if the child’s school has not been determined yet, you can utilize the resources available online at the U.S. Department of Education for further instructions.
- The FAFSA will generate several financial aid responses. As indicated above, when your child submits a FAFSA, he or she is not just applying for one type of aid. As such, your child will receive several separate notices in the mail indicating whether he or she is receiving a grant or loan. Therefore, do not assume just because you received a denial letter regarding a Pell Grant, that the FAFSA did not produce any financial aid eligibility. The only way to know exactly what grants and loans the child will be eligible to receive is to consult with the school that is ultimately selected and wait for the financial aid office to prepare a financial aid award package detailing all of the grants and loans, and any scholarships that are applicable to your child, which can only be determined by the information supplied by the FAFSA and the child’s enrollment information.
- Virtually all students are eligible for student loans. The only students who are not eligible for guaranteed federal student loans are students who are in default on previous student loans. These are the same loans that your child applies for by submitting a FAFSA. These loans do not require a credit check and they do not require a cosigner. The amount of the student’s loan eligibility is generally contingent upon certain factors such as his or her grade level (that is the number of college credits he or she has accumulated), whether he or she will be attending school on a part-time or full-time basis, and the child’s school program or curriculum. Once your child has selected a school, an advisor at the financial aid office will review the materials transmitted by the FAFSA to create a financial award package detailing the amount of any and all grants and loans for which the child is eligible. By virtue of submitting a FAFSA, your child is applying for student loans. Therefore, if your ex-spouse indicates to you that your child was “not eligible” for student loans, you should inquire further with the college to clarify that further as all students are eligible for student loans unless they have defaulted on a prior loan or they have not satisfied some other enrollment requirement. Both parents are entitled to this information, including any documentation to verify it.
- Private student loans generally require a credit check and a cosigner. There are usually additional loans that are available above and beyond the guaranteed student loans your child applies for by virtue of submitting a FAFSA. However, these other loans are secured privately through a bank, rather than subsidized by the federal or state department of higher education, although they are often coordinated by the college. These loans should be utilized secondary to the loans available through the FAFSA since they usually have very high interest rates with less than favorable loan repayment terms. They also require a credit check and, since the average student entering college has little or no credit and a minimal work history, the banks almost always require a cosigner. If you agree to sign on as a cosigner for your child’s private loans, you must address this issue in the context of college contributions by you and your ex-spouse. For instance, who is going to cosign the loan? It is possible to secure two loans with separate cosigners. Also, who is going to be responsible for paying back the loan when it goes into repayment status? The person who is the primary borrower, or the cosigner if the borrower fails to pay, will be responsible for making the payments. Therefore, if your ex-spouse was supposed to contribute, you may be in a situation in which you have chase after the other parent for payment. These are often issues that have not been discussed at all until the child is about to graduate from college. It is of paramount importance that both parties and the child understand who is responsible for the repayment of the loan and specifically how repayment is going to be made in the future. The agreement should also be in writing so that it is fully understood by all parties involved and will be enforceable in the future if anyone reneges on the agreement.
- Parent PLUS loans are loans that are taken out in the parent’s name for the child’s college expenses. In addition to the guaranteed student loans that are taken out in the student’s name and any potential private loans discussed above, there is the option for one or both parents to apply for a federal PLUS loan. These are loans that are taken out in the parent’s name. Contrary to popular belief, both parents can simultaneously apply for a PLUS loan to help pay for college costs. It is not only available to the primary custodial parent or the parent who was required to provide income information for the FAFSA. Additionally, it is important to know that the parent who applies for the PLUS loan and takes out the loan is the borrower. Therefore, if there is any agreement in the context of your settlement as to the ultimate liability for these loans, it is important that it be expressed very clearly in writing. One final essential piece of information about PLUS loans is that if either parent applies for a PLUS loan and is denied credit, the student automatically becomes eligible for a higher amount on his or her guaranteed federal student loans through the FAFSA. Therefore, depending on the circumstances, applying for a PLUS loan when you have poor credit and believe you will be denied can actually be beneficial in some cases.
- The child may receive a refund check if the financial aid award was more than the college costs. After the college prepares a financial aid package for your child, the various financial aid awards, whether they are grants or loans, will begin to be paid to the school. As the school receives these payments, the school posts them to the child’s student account to properly credit the student for the payment. Often times, the disbursements to the account will exceed the actual costs that are posted to the account for tuition, mandatory fees, room and board plan, etc. This can also happen if a parent makes a payment towards the child’s expenses and then financial aid disbursements post to the account at a later date. If that happens, the child will get a “refund.” It is important for the parents to understand exactly what the costs are each semester and what disbursements are expected to post to the child’s account for this reason. If these various payments do create a refund, the parties must be aware of that since the child will likely be the one to be notified of the refund. Additionally, the parties will need to determine the source of the refund to determine who is entitled to those funds.
These are just a few of the intricacies of the college financial aid process. These are the most prominent pitfalls that we see in our practice in the context of allocating parents’ college contributions. As long as you and your attorney understand how the financial aid process works, you are in a much better position to ensure that your child has his or her college expenses covered and that you are not being taken advantage of by paying too much simply because you are not aware of the process and don’t know what to look for.
Should you have specific questions about your child’s financial aid issues or wish to learn more about this process, contact NJ Divorce Solutions fora confidential consultation.