When parents are wrangling about alimony, asset distribution, and who gets the large collection of Tupperware, it’s fairly common to overlook what really matters. How do the kids feel? What does their future look like?
Divorce can have massive repercussions when it comes to paying for college. Not only is a little cooperation needed, but things become extremely confusing when trying to figure out how to maximize financial aid, how to submit the FAFSA and CSS Profile correctly, and how to save and pay for college with efficient money.
How do financial aid rules impact the kids of divorced parents?
File the FAFSA No Matter What!
It does not matter who you are or what your family situation is. You should always file the Free Application for Federal Student Aid (FAFSA).
We hear from parents all the time that they did not file the FAFSA because they make too much money. Colleges want to see your cards before they show you theirs. In other words, they want to see what you have before they decide to offer any financial aid to your child.
If you don’t submit the FAFSA, the federal government and many colleges take it for granted that you are going to pay for 100% of your college costs. What does this mean?
- This means your child will not receive access to low-interest federal loans. Student loans offer their own set of challenges, but it is always a good thing to have access to other financial tools, even if you don’t use them.
- This also means your child may lose out on other forms of aid: state, institutional, and even private. Many families don’t realize that the FAFSA, despite its name, does not only apply to federal aid: some schools and private organizations REQUIRE you to fill out the FAFSA to be eligible for merit aid!
- This means if your family faces any financial challenges or family changes it will be harder to access the aid that you need.
So, even if you think that you can pay for your child’s college, it’s a good idea to file the FAFSA.
Why It Is EXTRA Important to File the FAFSA as the Custodial Parent After a Divorce
The definition of the custodial parent on the FAFSA is not the same as the divorce decree!
The FAFSA is interesting in that it generally only asks for the custodial parent’s financial info. This can be hugely beneficial for children of divorced parents, but it is crucial to understand what exactly the FAFSA means by “custodial parent.”
For the purposes of FAFSA, the custodial parent is the one that the child lived with the most in the past twelve months.
It does not matter if you share joint custody, what matters is which parent the child lives with the majority of the time.
If the child lives with each parent for the same amount of time, then the custodial parent is whoever offered more financial support in the last twelve months.
A note on how the FAFSA sees divorce: if parents are legally divorced but still live together, BOTH parents have to include their information. If parents are legally married but do NOT live together, only the custodial parent (as the FAFSA defines it) has to fill in their information.
What if the custodial parent remarries?
If the custodial parent remarries, then the income and assets of the stepparent must also be reported on the FAFSA and the CSS profile. This could result in a significant reduction of financial aid.
However, if the stepparent has his or her own children from a previous marriage and are providing more than half of their support, then those children are also counted in the household size; this could result in reducing the Expected Family Contribution (EFC) and thus the potential for more financial aid.
If the said parent also has kids in college at the same time, then the EFC is further divided among multiple children and could result in higher financial aid eligibility.
Although rare, we have heard of parents waiting to remarry so that their children will not lose out on financial aid!
Why Is It So Important to Understand Financial Aid Rules for Divorced Parents?
Depending on how the family intends to pay for college, what the breakdown of contribution is between parents, and which schools the student applies to, there are many different strategies you can employ.
For example, some interesting planning opportunities arise when there is a significant difference in income between the two parents.
Remember, for the purposes of the FAFSA, the income and assets of the non-custodial parent are not counted. If the custodial parent makes a low to moderate income and the noncustodial parent makes a very large amount of money, then it may make sense for you to encourage your student to apply to schools that only take the FAFSA.
Keep in mind that the custodial parent must list alimony and child support as untaxed income on the FAFSA. This will lessen eligibility for aid.
The CSS Profile for Divorced Parents
Like the FAFSA, the CSS Profile is used to determine your family’s ability to pay for college and how much aid you are eligible for. This form is used in addition to the FAFSA by many private schools and some elite public schools.
Unlike the FAFSA which focuses mostly on income, the CSS Profile takes a more holistic approach to your family’s financial situation. It is incredibly detailed and all-encompassing because these schools have money to give and they want to make sure they are giving the right amount to the right people.
How Should Divorced Parents Fill Out the CSS Profile?
For divorced families, most schools that require the CSS Profile also require that the noncustodial parent fill out their financial information.
The only exception is if one parent has abandoned the child and cannot be located. In that case, the colleges have a CSS Profile Waiver Request for Non-Custodial Parent that needs to be submitted and each school treats this differently.
If the noncustodial parent makes a lot of money, this may jeopardize the child’s chances to receive need-based financial aid. Obviously, this becomes a major problem if the noncustodial parent does not want to help pay for the child’s college or is not holding up their end of the bargain.
Should You Still Consider CSS Profile Schools?
The answer to this really depends on each family; it may hurt your chances of getting aid, but it may also help you.
If the custodial parent does not make a lot of money and the noncustodial parent does make a lot of money, it may be a good idea to focus on schools that do not require the noncustodial parent’s info. Here’s a post that explains this in more detail.
Of course, the answer is not as simple as this. Since the CSS Profile focuses on more than just income and looks at things that the FAFSA does not look at (medical expenses, mortgage payments, etc.), you may get a more desired aid package through a CSS Profile school. This is why it’s crucial to calculate your EFC and determine if you are going to qualify for need-based aid in the first place.
The next best thing for you to do is talk to a financial planner who understands the rules of financial aid and can help you devise strategies beyond financial aid. If you’re not sure who to talk to, we offer a free consultation with one of our college funding coaches!
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Bear in mind that the CSS Profile is not free. It costs $25 to submit to the first school and $16 for each school after that. You can waive the fee, but only if the student is eligible for an SAT waiver, parental income is less than $45,000, or the student is an orphan/ward of the court and under 24 years old.
There are about 75 colleges that require the CSS profile but don’t require info from the non-custodial parent. If you are the custodial parent, and you don’t make a lot of money, then this is key information. Encourage your student to apply to some of these “FAFSA-only” colleges and CSS Profile schools that don’t require non-custodial parent financial information.
The Puzzle of 529 College Plans Amidst Divorce – Who Should Own Them?
Ownership of 529 Plans is another crucial part when saving and paying for college.
If the 529 plan is owned by the custodial parent or the dependent student, then it is included as a parental asset on the FAFSA; parental assets are counted up to 5.64%. The distributions from it to pay for college are ignored.
However, if the 529 plan is owned by the non-custodial parent, then its treatment is the same as that of grandparents owning the 529 plans. The asset is not counted, but distributions are counted as untaxed income of the student in the following year.
Student untaxed income is counted on the FAFSA at a rate of 50%! Compare this to parental assets, which are counted at a maximum of 5.64%. It’s very clear: make sure that any 529 plans are transferred to the custodial parent to be eligible for more aid.
In case you are not convinced, let’s look at hard numbers.
If the custodial parent has $20,000 in a 529 plan as a parental asset, it can impact financial aid by up to $1128. If the noncustodial parent has $20,000 in a parent-owned 529, this has the potential to reduce aid by as much as $10,000.
Besides transferring the 529 plan to the custodial parent, there are other planning strategies that can be used to overcome this problem. One of these is not taking a distribution from the 529 plan until the spring of the child’s second year in college (assuming they will graduate in four years). Since the FAFSA looks at prior-prior year finances, these distributions will not be counted against you for the purposes of financial aid.
Lost a 529 Plan in the Divorce Chaos?
Occasionally, in the divorce battle of who owns what and how it’s divided, a 529 plan can get missed.
If you are the custodial parent and are not sure what happened to the 529 plan, it’s best to call your state’s 529 plan provider. In most cases, they are able to help locate the plan with the beneficiary’s social security number. Sometimes they may need to speak to the beneficiary for verification purposes.
As always, we are here to help:
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