By Melissa Myers and Michael J. Tucker, September 2015 Issue.
Melissa Myers: I may have inadvertently annoyed some clients recently when I questioned their decision to get married so soon.
Michael J. Tucker: Didn’t they look like “marriage material” to you?
Myers: Well, no, they were clearly in a committed long-term relationship. In fact, you might say they were settled into domestic tranquility.
Tucker: What was bothering you, then?
Myers: Turns out their child currently attends college. The student has qualified for a solid package of federal aid, as well as financial aid from the college itself, and she is rounding that out with student loans to help pay the costs of her education.
Tucker: Oh, I see. Are you concerned that these convenient financial arrangements could be negatively affected if the parents were to tie the knot?
Myers: Exactly. When the only parent of a financial-aid-eligible college student gets married, the income and assets of the stepparent will be included in her financial aid calculation from then on.
Tucker: So the federal government considers all of the married couple’s income when making its calculations?
Myers: Yes, and that’s true whether or not the stepparent plans on contributing anything toward the student’s education costs.
Tucker: As I understand it, federal needs-based student aid programs all rely on the Free Application for Federal Student Aid (FAFSA), a form that is required to compile information about the assets and income of both the student and the parents.
Myers: That’s right. In turn, that information is plugged into a formula that computes the student’s expected family contribution, or EFC. That’s the amount the family is expected to pay toward college.
Tucker: So the idea is that any excess college costs can be financed through a combination of federal Pell Grants, Stafford or Perkins loans, parent loans through the PLUS loan program, and federal work-study aid programs?
Myers: Correct. Also, many colleges administer their own scholarship and loan programs, in addition to what a student may qualify for through the federal student aid programs.
Tucker: As we might expect, the colleges will rely on the FAFSA form to determine eligibility for their aid packages, rather than coming up with their own particular forms.
Myers: In the case of my soon-to-be newlywed clients, their student has been eligible for both loans and scholarships from the college and federal aid.
Tucker: Depending on their combined income if they marry, your clients may be jeopardizing their child’s eligibility for these aid packages. They could lose some or all of the aid, as well as their ability to utilize needs-based loans to supplement the aid package.
Myers: One resource to determine the potential effect would be the college’s financial aid department. Their representatives can offer guidance in this area.
Tucker: If the indication is that the couple’s finances would be negatively impacted to a significant extent, a possible solution would be to delay their marriage until the student completes her final year of student aid applications.
Myers: Some education tax credits can also help.
Tucker: Indeed. For example, the American opportunity tax credit can be claimed through tax-year 2017 for expenses paid for tuition, certain fees and course materials for higher education.
Myers: Eligibility for this tax credit is based on income. If a single parent marries, both spouses’ incomes will be considered. Adding the second income may cause the couple to exceed joint income limits for eligibility.
Tucker: It is important that the couple discusses this with their tax professional and financial advisor, prior to marrying, to avoid unwanted consequences.
Editor's Note: This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Investors should consult a tax or legal professional regarding their individual situation. Neither Camelback nor Commonwealth offers tax or legal advice.