In late April of this year the U.S. Department of Education announced that they will begin recognizing same-sex parent households in the Free Application for Federal Student Aid (FAFSA) application process. The application will still fail to include a same-sex or registered domestic partner marital status, but instead will use “unmarried parents living together.” The new forms will also use gender neutral language such as Parent 1 and Parent 2 instead of mother and father.
In some ways this feels like an accomplishment in recognition and equality, and it is; but, yet again, it is bitter-sweet. We can add this to the list of situations where DOMA’s existence requires an institution to create workarounds in order to function as intended. Just as the IRS has had to do with certain tax returns, the Department of Education has had to modify its processes in order to acknowledge same-sex couple households without actually being able to recognize same-sex relationships. Regardless, it is still progress towards equal rights, and, with those rights come responsibilities.
Beginning with the 2014-2015 FAFSA application cycle, income information from both parents will be collected. In the past, students who have same-sex parents have only reported the income of one parent. Now that the income of both parents will be included, many students will suddenly find themselves eligible for less aid, and in some cases altogether ineligible.
Luckily, if you anticipate your child to be eligible for less funding than you originally planned for, there are other tools available to help you. Some of the most commonly used are the various tax advantaged college savings plans. Generally, these plans allow for tax-free earnings on your contributions as well as tax-free withdrawals if funds are used for qualified education expenses.
There are two types of college savings plans; 529 Plans and Coverdell Education Savings Accounts.
529 plans are state sponsored plans. This means that the attributes of each 529 plan are unique; each state does it their own way.
Washington’s 529 plan, the Washington State Guaranteed Education Tuition (GET) Program is a pre-paid tuition plan. This plan allows contributors to pay for tomorrow’s tuition at today’s price. In a climate where college education costs are rising dramatically, this plan becomes quite attractive.
Contributions to WA’s GET program are in the form of “unit” purchases. One hundred units is equal to one year of resident undergraduate tuition at WA’s most expensive institutions, currently either UW or WSU. The value of your units will always be the current value, meaning, if you buy 100 units in one year, and five years later the cost of tuition has risen, your 100 units are still worth one year of tuition at current prices.
Coverdell Education Savings Accounts (Coverdell ESAs)
Coverdell ESAs are tax favored savings accounts. The contributions are not deductible; however, the earnings are tax-free. Unlike 529 plans, Coverdell’s have contribution limits, both in amounts that can be contributed and in eligibility to contribute at all. Contributions to Coverdell’s are limited to $2,000 per student per year.[i] One benefit the Coverdell offers that 529 plans do not is the ability to use the funds for K-12 education. The tax-free and penalty-free withdrawals are not limited to post-secondary education as they are with 529 plans.
In addition to college savings plans, the IRS offers various deductions and credits to taxpayers who are paying for higher education. It is possible to receive benefit from financial aid, college savings plans and deductions/credits in the same year, but they are not independent of one another. Coordinating your education benefits is a critical piece of college planning. For example, funds you have set aside in a savings plan may affect a student’s eligibility for aid. Or, a taxpayer may or may not be able to exclude scholarships from their income and claim an education credit in the same year. Education assistance benefits from an employer will also have an effect.
No matter what your personal situation is, and whether or not the Department of Education’s announcement affects you, maximizing your education benefits can make a significant difference in your ability to pay for college. Start planning now!
[i] This amount begins to phase out based on the contributor’s Modified Adjusted Gross Income.