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College Expenses and the Stepparent Family

College Expenses and the Stepparent Family

College Expenses and the Stepparent Family

Adapted for Flying Solo by
Margorie Engel, 1994

I. Financial Aid Background
A. Principles of Financial Aid
B. Sources of Financial Aid
1. Federal
2. Colleges and Universities
3. State
4. Private
C Determination of Eligibility

II. Applicants for Financial Aid

III. Federal and State Financial Aid
A. Definition of "Family"
B. Recognition of Divorce and Premarital Agreements
C Definition of "Independent" Student

IV. College and University (Institutional) Funds
A. "Institutional Prerogative"
B. Definition of "Family"
C Extenuating Circumstances
D Documentation of Extenuating Circumstances

V. Tuition Terror and Timing
A. Is College the Right Choice at this Time?
B. Non-traditional Sequence of Events
C Traditional Sequence of Events

VI. Where the Money Will Probably Come From
A. Grants, Loans, and Scholarships
B. Home Equity
C Margin Loans
D Savings and Retirement Plans
E. Government-sponsored Loans
F. College and University Loans
G Life Insurance Cash Value

VII. Chance for Change?

VIII. Light at the End of the Tunnel


COLLEGE EXPENSES IN STEPPARENT SITUATIONS
Adapted for Flying Solo by Marjorie Engel

Real life is what happens while you're making other plans. I know because my husband and I have been part of a stepfamily for 7 years—he has 3 daughters, I have two daughters, with 3 weddings, 2 college degrees, and parents who have moved into retirement communities in that time span.

College expenses and inheritance. Predictable issues that arise without regard to the length of marriage, extent of finances, or stage in stepfamily development. Both issues are fraught with emotional overtones in addition to practical realities.

You won't be the first stepfamily to initially split along biological lines during the search for solutions to these financial strains. It may help to remember that you've already solved problems together and, while a thorny path, couples before you have survived a walk through the same rose garden.

Couples have dealt with grandparents or trust funds that covered most of the costs for one set of children in the family while the other set of children don't have the same financial reservoir. They've struggled to reach agreement about taking on debt for his and her child—one of whom pulls all-nighters in the library and the other in pubs. They've looked at the surface inequity of a child who was sent to an Ivy League school many years ago and what the same dollars will cover for today's college student. In round numbers, you can expect to pay $6-8,000 per year at a public university and more than $20,000 per year at many private schools.

Before struggling to reach a family agreement about what is "fair," take a look at how the real world views stepfamilies with regard to college expenses and inheritance.


FINANCIAL AID BACKGROUND


Principles of Financial Aid

• Family bears primary responsibility for paying college costs—financial aid is considered the "last dollar" into the mix of resources.

• Majority of financial aid is awarded on the basis of Need, not merit.

Sources of Aid

• Federal government—the largest provider of financial aid of all types. Primary federal programs include college work-study, Stafford Loans (formerly Guaranteed Student Loans), Perkins Loans, Pell Grants, and Supplemental Educational Opportunity Grants. Almost all federal programs are distributed solely on the basis of need. Take your expectations of financial aid way, way, way down.


• Colleges and universities—provide the next largest source of direct assistance through scholarships, loans at favorable interest rates and terms, and other inventive aid programs. Each institution establishes policies for awarding its own aid based upon need and merit.

• State—aid is awarded only to residents of the state. Residency requirements vary and most state grants are need-based, although an increasing number contain a merit component.

• Private—aid from foundations, scholarship organizations, unions, fraternal and civic non-profit groups, professional associations, religious organizations, and corporations. They also make their own rules for distribution of aid.

Determination of eligibility

• Need = Cost of Attendance (—) Family Contribution

• "Snapshot" of the family's financial picture at the time the application is filed.

APPLICANTS FOR FINANCIAL AID

The percentage of applicants for college financial aid (who are members of a complicated family) ranges from _ to according to financial aid officers from a variety of public and private schools. These applications take a disproportionate amount of time to process. As the staff at Harvard told me (where the bulk of financial aid is institutional money, not federal money), "About 1/4 of our financial aid applicants take up much more than 1/4 of our time." This school goes so far as to draw family trees to help them understand their complicated family applicants.

All schools use the "Free Application for Federal Student Aid" as their basic information.

Otherwise known as FAFSA or FAF, the quest for financial aid begins by filling out this multi-page, rigidly formulaic form. It must be used for distribution of federal aid and is used as a "starting point" for virtually all other kinds of financial aid.

FEDERAL AND STATE FINANCIAL AID

Federal programs consider the family to have the primary responsibility for higher education expenses—unable, not unwilling, is the operative word when considering eligibility for federal funds.

Funding for state schools comes almost entirely from federal funds—they have very few scholarships. This form will usually provide the only information state schools consider in making monetary awards.


Definition of Family — by federal and state programs

For purposes of determining eligibility for aid, federal and state programs define "family" as the student's custodial unit (parent with whom the child lived most for the past 12 months), including stepparents, and will require financial information from both the custodial and stepparent. Applicants may not exclude stepparent financial information, nor does the need analysis methodology segregate custodial and stepparent data in determining eligibility for aid. This holds true even if you keep your money separate and use the "Married, Filing Separately" form for tax returns.

The noncustodial parent's financial information is not included in the analysis, nor calculated as an expected contribution—except as child support is included in the custodial parent's income stream. For purposes of determining eligibility for federal financial aid, the government has no interest in the non-custodial biological parent!

Professor Sarah Ramsey, Associate Dean, Syracuse Law School (specializing in Stepparent Support of Stepchildren) says that according to common law, a stepparent's legal obligation to support a stepchild is limited.

In practice, our country is not clear about the relative weight of financial obligation between the non-custodial parent and the stepparent. Federal child support reforms have been directed at forcing biological parents to support their children. So far, legal reforms have not attempted to change a stepparent's voluntary contribution to a legally enforceable one—probably because it is recognized as a "can of worms."

(Since the Revolutionary War, we in the U.S. have assumed that with responsibilities and obligations come enforceable rights...) Congress doesn't abide by that admirable philosophy when it comes to the federal financial aid purse strings. Stepparents are highly visible—a "bird in the hand," so to speak. They don't have to be tracked down; no one has to be responsible for enforcing or amending child support court orders; and the debate about financial responsibility for children over the age of minority doesn't have to come up in a public forum.

To date, this financial liability exposure is not an equal opportunity for both stepfathers and stepmothers. The majority of divorced mothers have physical custody of their children. The majority of divorced mothers remarry. A stepfather is an available resource to keep children off the public dole—including federal financial aid for college. Without a stepparent's legal obligation, this is really an illusion of another financial resource and really makes needy stepchildren dependent upon the voluntary contributions of their stepparents. An enormous strain on relationships all around. Stepfathers, while your family is in financial turmoil, isn't it comforting to know that Uncle Sam loves you. You've been drafted!

Recognition of Divorce and Premarital Agreements in Assessing Eligibility for Aid—by federal/state programs

To put it quite bluntly, divorce and premarital agreements are ignored. They're ignored on the grounds that the financial aid program is not a party to the agreement and is therefore not bound by its terms.

Definition of an "Independent" Student—by federal/state programs

• Graduate student, or

• 24 years of age (all students under the age of 24 are considered "dependents" as of December 31, 1993), or

• Married, or

• Has dependent(s).

COLLEGE AND UNIVERSITY (INSTITUTIONAL) FUNDS

Colleges have the potential and the opportunity to alter the federal assessment of your family's ability to pay for college.

Institutional Prerogatives Within the Need Analysis System—the "Professional Judgement."

For schools with private scholarships, endowment funds, and other discretionary monies, the federal form will typically be supplemented by information about as many extenuating circumstances as they wish to consider. Schools with institutional money have leeway in assessing financial need.

Typically, the initial paperwork is processed by anyone in the financial aid office and they all start with the government FAFSA form and evaluation. After a student is admitted, assignment is made to a specific financial aid officer. At this point, the relationship becomes more personal.

Financial aid officers have told me, "Where we feel twice as bad is when the students say, 'I'm not going to be able to afford to do this, so I'm not going to try' and we never have the opportunity to work with them." The point is, they will work with you, so meet deadlines for admissions applications and financial aid requests. You have "response-ability." Get a calendar and write in the deadline dates. Encourage your child to fill out financial aid forms for each school to which he or she has applied for admission.

Institution Willingness to Redefine the "Family" is Driven by their School Budget

Schools might:

• Put the biological "family" back together and include the income and assets of the non-custodial parent.

• Schools cannot compel a non-custodial parent to contribute to college costs, but the student's eligibility for financial aid can be predicated on the assumption that non-custodial resources will be available. Schools do not enter into a collection game. If the non-custodial parent does not provide the assumed funds, the student must fill the "gap" through other means.

• Exclude the income and assets of the stepparent.

• Require financial disclosure—and a contribution for college costs—from four parents if both biological parents have remarried.

• "Mush" aunts, uncles, grandparents into "family" for a larger source of student funds.

EXTENUATING CIRCUMSTANCES

Some of these "meet needs" schools will ask for a letter outlining extenuating circumstances. Others have pre-printed forms. Some prefer to meet with parents and student on the phone or through an on-site visit.

Be prepared to briefly discuss:

• Who claims this child on their federal tax return?

• How long ago was the divorce/remarriage?

• They might change the definition of "family."

• What does the Divorce Agreement say about children and education expenses?

• Many times, a divorce agreement will state "each party must be responsible for providing the financial aid office of the college with the FAFSA form and any and all other documents which are required to process the child's application for financial aid." This clause is considered binding on future stepparents—even though they aren't a party to the agreement. Institutions will typically look only at the current family situation.

• If payment for college expenses is not spelled out AND honored, schools know that this will not be the logical source of funds. They recognize the high cost of returning to court because college expenses are one of the toughest support components.

• The needs of children change and courts can't generally modify a property division.

• College expenses are for the "future needs of children" and divorce financial settlements can only divide between husband and wife.

• Only 20 states consider support for children over the age of 18; college expenses are not unforeseen costs—if the couple does not address them in the divorce decree, these expenses are not generally seen by the courts as a "material change in circumstances."

• Courts have no power to compel parents in intact families to pay for college; this makes it difficult to legally justify different treatment for children of divorce. (Judges will encourage "set aside" funds, such as trusts, where it appears that the family can afford to create them.)

• What's the financial status of the non-custodial biological parent, including a new spouse?

• Institutions may require financial disclosure and contribution for college costs from all four parents if both natural parents have remarried.

• Does the non-custodial biological parent have a subsequent family to support?

• including stepchildren of the subsequent marriage

• Would circumstances such as abuse preclude involvement with both biological parents?

• Is there a Prenuptial Agreement?

• Remember—this agreement may be entirely ignored by schools on the grounds that the institution is not a party to the agreement and is not bound by its terms.

• Is the custodial stepparent supporting grandparents or children from a prior marriage?

• Have there been significant financial losses?

• corporate dissolutions, unemployment, extraordinary medical expenses, bankruptcy

• Can the student be considered "independent?"

• Institutions tend to be very conservative in recognizing undergraduate students as independent—especially if that recognition renders the student eligible for significant institutional aid funds. Financial aid officers must be able to defend their position of extreme circumstances (for example, irreparable estrangement due to abuse or supported by a third party or agency for reasons other than personal choice) documented by third party professionals such as therapists, guidance counselors, or clergy.

Documentation of Extenuating Circumstances

Complicated families are evaluated with a case-by-case documented professional judgement. Make photocopies of relevant sections of papers (IRS returns, divorce decree, prenuptial agreement, court restraining orders, proof of financial losses, etc.) so they will be readily available. If the student might be considered "independent," gather the necessary information required on the Dependency Override Request.

TUITION TERROR AND TIMING

"Start planning early. Real early."

"The longer you put off saving for college, the more it will cost you."

"Investigate the arsenal of investment and tax strategies: pre-paid tuition plans, series EE savings bonds, zero coupon instruments, mutual funds, whole life insurance, and custodial accounts under Uniform Gifts/Transfers to Minors Act or trusts."

Great advice to stepparents if the children are young. Even better advice to biological parents when the children were young or as part of the divorce settlement. Give that information to your divorcing friends.

You're a stepfamily. Chances are, college plans weren't funded. You've filled out the FAFSA form and have prepared a list of "sound bites" to answer questions about extenuating circumstances. You know that this work does not guarantee financial aid—or enough of it. The price tag on a college degree can be intimidating. Now what?

Is College the Right Choice at this Time?

Consider the reality that college is not for everyone. Only 20% of the U.S. population have college degrees. We all know the stories about kids who go through college, become business executives or bank VP's and ultimately chuck that lifestyle and do what they really wanted to do in the first place—become master carpenters or run a successful boat yard.

Nonetheless, statistics that support the economic justification for a college degree remain compelling.

• Lifetime earnings of college grads exceed non-grads by more than $600,000.

• Unemployment rate is less than half for those with a high school education.

• Basic skills in analysis, critical thinking, and effective oral and written expression enables college grads to cope rapidly with a changing world.

• Also an opportunity to meet that interesting person who may become your son/daughter-in-law.

"Non-traditional" Sequence of Events

Loosen up on the idea of following a traditional sequence for obtaining continuing education. Delaying freshman year may make both dollars and sense.

• After six months or a year of employment, many companies fund the cost of courses and degree programs—on both a part-time and full-time basis.


• As an "independent" student (after the age of 24), financial aid is no longer dependent upon an assessment of any parental contributions.

• Schools like to enroll "mature" students—who tend to have a greater appreciation for the educational process and its value. Because they like to have a diversified student body, a wider choice of schools may also be available for an older student.

"Traditional" Sequence of Events
CATCH 22
federal aid assumes funding from residential stepparent institutional aid assumes funding from non-custodial biological parent

If you're determined to use the "traditional" timing—from high school senior to college freshman—here are steps you can take:

• Try to get the non-custodial parent involved in the choice of college so that parent will have a vested interest in contributing to the cost.

• Recognize that this idea doesn't always work. Letters such as this one are heartbreaking:

Dear Mom,
I want to thank you for helping me through this rough period. I honestly don't know what I would do without you. It's funny how I keep thinking 'Maybe this time Dad will pull through"—guess not. It's very sad for me to think about Dad for very long—to accept the kind of father he has been and the kind of person he has become. How does he maintain any sort of self-respect? ... How do divorced fathers get away with this?"

• Consider making the student's "home" with the parent with the lower income in order to maximize the benefits from colleges which look only to the custodial family to assess need if your focus is on federal aid.

• Don't assume you can't afford a particular college (such as the Ivy League group). Speak with the college first. Remember "Professional Judgement."

• Apply to a "safety" school such as a state college or university (which uses the federal approach) in case financial aid packages at private institutions are insufficient.

• Consider the service academies: West Point, Naval Academy, Air Force, Merchant Marine, Coast Guard and ROTC scholarships.


• Look into schools with a Co-Op program. A four-year program typically takes five years to complete because classes are interspersed with paid employment. This employment is not linked to financial need—it's the "work-study" programs that are part of the federal financial aid. Students compete with others to be hired for these jobs in the community.

• Make arrangements for student to live at home and be a "commuter."

• Emphasize the responsibility to work in the summer and during the school year—but don't expect students to "work your way through school like I did." Students on work-study programs earn an average of $5 an hour. You just can't meet today's cost of education like that.

WHERE THE MONEY WILL PROBABLY COME FROM

Even families eligible for significant financial aid need to be prepared to bear a significant portion of the financial aid burden.

• Grants, Loans, and Scholarships

• Without much accumulated savings, you will have to rely on the many grants, loans, and scholarships available. Lower incomes qualify you for more generous grants and loans. However, with loans, you will be burdened by years of interest payments. Apply for as many grants as you can find because grant money need not be repaid. I understand that many scholarships go un-awarded because no one applies for them.

• Your Home—Equity

• Primary homes are not considered assets on the financial aid form. Retirement funds are not considered assets, either. So, for maximum federal aid, use whatever money you can afford to pay down your mortgage and to increase your retirement funds. You'll be appropriately cash poor for the federal aid form without jeopardizing your future financial security.

• For cash money to pay college bills, you can open a home-equity credit line with a bank, savings and loan, credit union or brokerage firm. Borrowing up to $100,000 is tax deductible. This does put your home is on the line—if you default, the lending institution may foreclose.

• Margin Loans

• If you have a sizeable investment portfolio, it is possible to arrange for a line of credit based upon the market value of the portfolio assets.



• Your Company Savings and/or Retirement Plan

• Most employers will let you borrow against savings plan money and have you repay the loan through payroll deduction. 401K and pension loans may be possible. Also, ask the employee benefits department whether your firm makes college loans to employees.

• Government-sponsored loans

• These loans are offered through commercial lenders:

• Parents—Parent Loans to Undergraduate Students (PLUS loans)

• Independent students—Supplemental Loans to Students (SLS)

• College and university loans

Schools have become quite creative in devising financing options:

• loans at below market rates

• installment payment plans

• guaranteed tuition plans

• Your life insurance—cash value

• You can usually borrow against the cash value in your life insurance policy at a favorable interest rate. Keep in mind that the loan will retard the growth of your cash value and lower your death benefit by the amount of the loan. If the student or parent spouse is also the policy beneficiary, it may be more helpful to provide the funds now rather than later.

A CHANCE FOR CHANGE?

I spoke with Cheryl Hickey and Joe Simpich at the National Association of Student Financial Aid Administrators (NASFAA) in Washington, (202) 785-0453, the only national association with a primary focus on student aid legislation. When I asked about the inconsistency in federal treatment of biological and stepparents when it comes to supporting children, she reminded me that financial aid disbursement is all POLITICS. The procedure is legislated by Congress and regulated by the U.S. Department of Education.

Here's how it seems to work: Congress gets a "wild hair" and makes some decisions. The Department of Education decides how long folks have to read these ongoing "Notices of Proposed Rule Making" (NPRM's) that appear in the Federal Register—US Department of Education Regulations (a period sometimes as brief a period as 30 days).

Even though the issue of financial aid cuts across class, race, and economic status, there are no grass-roots groups rising up to question rulings or to propose different ones. I can understand why. One of the largest and most effective lobbying groups is for senior citizens. We're senior citizens for a very long time. The college years are brief—change takes a long time. With only a few years involved, there's not much inducement for follow-through. It's a tough period for families, to be sure. When it's over, most of us would like to forget the aggravation and move on to other challenges.

LIGHT AT THE END OF THE TUNNEL

As a Karrass business advertisement states, "You don't get what you deserve, you get what you negotiate." No part of this process can be described as "fun," but completing the financial aid and scholarship forms may turn out to be the most profitable time you have ever spent. Keep a replica of the college mortarboard on the desk to keep you focused on the reason for all the work.

While portions of this process will need to be repeated for each year that your child applies for student aid, take heart. Once students have initially received financial aid and satisfactorily completed a year of school, very few are forced to leave because they desperately need money for room, board, and tuition.

EXTENUATING CIRCUMSTANCES

Some colleges and universities consider themselves "meet needs" schools and will ask for a letter outlining extenuating circumstances. Others have pre-printed forms. Some prefer to meet with parents and student on the phone or through an on-site visit.

Be prepared to briefly discuss:

• Who claims this child on their federal tax return?

• How long ago was the divorce and/or remarriage?

• What does the Divorce Agreement say about children and education expenses?

• Does the non-custodial biological parent have a subsequent family to support?

• Would circumstances such as abuse preclude involvement with both biological parents?

• Is there a Prenuptial Agreement?

• Is the custodial stepparent supporting grandparents or children from a prior marriage?

• Have there been significant financial losses?

• Can the student be considered "independent?"


NOTICE

This material was developed with experienced professionals to give you basic information which is not intended either as a substitute for advice from an attorney or as an attempt to answer all questions about situations you may encounter. Because all situations are different, because the law of each state varies, and because you may have questions that are not covered in this material, we urge you not to rely on this material as legal advice and not to make decisions without the advice of a family lawyer whom you should consult for appropriate advice about your specific legal problems. This material is sold as is, without warranty of any kind, either expressed or implied.

© 1997 Flying Solo™. All rights reserved. Legal Notices



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