When Mary Thate and her now ex-husband divorced, she had no idea where her children would go to college. As a couple, they had put aside money for their three children's college education. Early on in the divorce process, they decided to stay in touch and save individually for the collegiate needs of their children.
Saving for college after a divorce is a process of communication. However, the communication is easier if a framework is set up during the divorce settlement, says Mike Fitzgerald, chairman of the College Savings Plans Network.
The framework could include freezing the current 529 plan account (a tax-advantaged investment account used for higher education), splitting 529 plan accounts when needed and deciding what proportion each parent will pay toward their children's education.
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First, freezing a 529 plan account means no more deposits are made to the account. The money already in it can only be used toward education for the child designated, Fitzgerald says.
Under normal circumstances, an account owner could withdraw money at any time for any reason – a car, a vacation or another purpose – though they would have to pay a tax penalty for non-education spending. Freezing the account prevents former spouses from doing so during what is often a very tense process, he says. Freezing the account would also prevent a parent from using account funds to pay for the education of a child from a new marriage.
The other issue that should be discussed or decreed is what to do with money left over after the child completes his or her education, says Ernest Almonte, a certified public accountant. Possible options include one of the parents using funds to return to school or a sibling using leftover funds, he says.
Once the account is frozen, there are still investment decisions, Fitzgerald says, which are made by the account owner. The legal owner could decide to change the investment strategy to a riskier, more stock-based one or take a more conservative route with a greater percentage of short-term bonds and money market and savings accounts, he says.
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There is a solution to the problem of one parent having full investment control. "The judge can order splitting an existing 529 plan, and the state has to abide by it," Fitzgerald says.
That means each half of the plan would be set up as a new account and owned by one spouse, who would make investment decisions on his or her half of the account. If a 529 plan had $5,000 in assets, each spouse would be responsible for a new account containing $2,500.
"That money could eventually be used by each parent to help pay for his or her share of the college costs as outlined in the divorce settlement," Fitzgerald says. The court can mandate the percentage each parent will pay toward the child's education, he says. However, each parent will make their own decisions as far as how and where the savings is held or invested.
Thate set a goal of saving $4,000 a year, which she deposits into Idaho's Ideal College Savings Program 529 plan. Her new husband also deposits $4,000, for a total of $8,000. Her ex-husband makes his own decisions about how he will save.
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Each child's education had a different price tag, and that cost wasn't known until college neared. It varied per child based on scholarships awarded, the tuition at time of graduation and high school grades, Thate says. Their oldest won a scholarship and the former couple adjusted what each needed to contribute toward their daughter's education accordingly.