College financial advice for divorced families

 

Students of divorced parents have special considerations when applying for college financial aid. After all, they are likely part of two households, often two families if one or both parents remarries, and two financial circumstances. To find out the inside scoop on maximizing college financial aid for children of divorce, I turned to Mark Kantrowitz, senior vice president and publisher of Edvisors.com which helps students and their parents plan and pay for college.

When a student’s parents are divorced, which parent’s income should be listed on the Free Application for Federal Student Aid (FAFSA)?

When a student’s parents are divorced, only one parent is responsible for completing the FAFSA. This parent, called the custodial parent, is the parent with whom the student lived the most during the 12 months preceding the date the FAFSA is filed.

Generally, if the custodial parent is the parent with lower income, the student will qualify for more financial aid.

If custody is not legally distinguished, the custodial parent is based on whichever parent provided more financial support. So, to some extent the parents can control which parent completes the FAFSA. However, colleges can ask for a copy of the divorce decree and child custody agreement. So if the living arrangements don’t match both of these documents, it’s best if the parents get the court to modify the agreements.

What happens if the parents are separated but not legally divorced?

If the parents are divorced or separated but living together, they are treated as though they were married and the financial information of both parents is required on the FAFSA. This is a recent change effective starting in the 2014-2015 school year. However, if they are legally separated and living together, or informally separated and maintaining two separate residences, then only one parent must complete the FAFSA.

What happens when one or both parents remarry? How do the stepparents’ income affect financial aid?

If the custodial parent has remarried, the income and assets of the stepparent must be reported. When choosing the custodial parent, the parents should take the finances of the stepparents into account.

Note that if the stepparent provides more than half support to his or her other children, these children get counted in household size, even if they don’t live with the stepparent. In particular, if any of these children are in college, they get counted. Increasing the number in college can have a big impact on eligibility for need-based financial aid. So, while including the stepparent’s income and assets on the FAFSA may decrease eligibility for need-based aid, including the stepparent’s other children in the number in college figure may increase eligibility for need-based aid.

Does it matter which parent’s name is on the 529 plan?

If a 529 college savings plan is owned by the non-custodial parent, it is best to change the account owner to be the custodial parent. A 529 plan that is owned by the custodial parent is reported as a parent asset on the FAFSA (worst case impact, a reduction in aid equal to 5.64 percent of the account’s value) but distributions are ignored. If the 529 plan is owned by the non-custodial parent, it is ignored as an asset, but distributions count as untaxed income to the beneficiary on the FAFSA (reducing aid eligibility by as much as 50 percent of the distribution). Having a 529 plan owned by the custodial parent will reduce the impact on eligibility for need-based aid.

Should custody always be switched to the lower-earning parent?

It should be genuine. College financial aid administrators have more experience sniffing out fraud that parents do gaming the system. It’s best if the child’s high school is in the same district as the custodial parent’s home address in addition to having court documents supporting the change in custody. Otherwise, the college financial aid administrators will suspect that the change of custody is a sham.

Can’t parents just work it out between them in a friendly agreement so the lesser earning custodial parent gets their child support or alimony under the table, off the books?

Under the table is fraud. There may also be tax implications. It seems very rare that divorced parents have an amicable divorce and are willing to compromise for the benefit of the children. Children of divorced parents are much less likely to graduate, in part because they get caught in the middle.

What deadlines should divorced families adhere to?

Any custody changes must occur prior to the FAFSA being filed (between Jan. 1 and . Since custody changes can take several months for the courts to process, it is best to start a year in advance. Also, if any financial changes will yield capital gains, it is best for these changes to occur between January 1 and June 30 of the year of enrollment.

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