The Impact of Divorce on Financial Aid

The break-up of a marriage can have long-lasting financial effects on both parties, many of which you can anticipate. However, in addition to who will own joint assets and pay off existing debts, is the oft-forgotten impact of financial aid for current or future college students.

Here are important considerations in the divorce settlement, which can affect the financial assistance college-bound children will receive.

Child Support

Even though child support is not taxable income, you must report it on the FASFA (Free Application for Federal Student Aid). The FASFA establishes the maximum amount of need-based assistance the student can receive each year.

In most states, custodial support ends on the child’s 18 birthday or when they graduate from high school. To receive help from an ex-spouse during their college years, you must either establish extended child support at the time of the divorce or modify the current support order.

The parenting plan established during divorce proceedings can arrange for the non-custodial parent to pay for college if they have the financial resources. Another common solution is for parents to divide the cost of attending school based on a percentage of the cost. In these cases, you can add the contributions of the non-custodial parent to the child support received. When the non-custodial parent gives funds directly to the student, it becomes assets of the student, which is a disadvantage because of the formula used.

You must also include alimony payments as a form of income.

Custody Arrangements

Federal financial assistance does not rely on the dependency status on a tax return to determine which parent files the FASFA. The custodial parent or one who provides the most financial support is the one to file.

The parent filing the FAFSA must include household income and assets. For instance, if the child lives with their mother for eight months and their father for four months, the mother would file the FAFSA and use her household income and assets to determine financial aid eligibility.

From a financial perspective, it is more beneficial for the child to live with the parent earning the least because the form does not require the income of both parents. When parents share time and resources to raise the children equally, the FASFA uses the information from the parent who pays the most for the child’s care.

How a Remarriage Impacts Financial Aid

The remarriage of the custodial parent will factor into financial aid because the FASFA requires the disclosure of household income, not just the custodial parent’s income and assets. The government determines the marital status based on the date of the marriage compared to the FASFA filing date, not based on tax return data, which uses your status as of December 31. For example, if you file the FASFA on February 1, and get married on March 1st, you would file single for that year.

When the biological parents of a child never marry, the FASFA treats a household the same as divorced parents. The FASFA does not consider prenuptial agreements with regard to receiving federal financial assistance ad disclosing assets.

Treatment of Income and Assets

The divorce agreement should clarify the expectations of each parent and include the following:

  • Who will pay for college?
  • How much will the responsible party pay toward college expenses?
  • Which schools qualify? For example, in-state versus out of state, private versus public, and university versus vocational.

Clarifying expectations, even for younger children can prevent future arguments and allow the responsible parent to plan for the child’s educational future.

Funds saved in the child’s name count towards the child’s assets. The FASFA formula calculates the money saved in the parent’s name at a lower rate than funds held in the child’s name. Non-custodial parent savings do not count towards the FASFA calculations. Although money given to the child can count as a gift, included as an asset to the student.

When you have multiple children, it is advantageous to separate assets used to pay for the child’s college expenses into separate custodial accounts. Assets held in the name of siblings will not be a part of the financial aid calculation for the student.

Without a written agreement, there is no obligation for the non-custodial parent to assist with the cost of a college education.

When considering assets, the FASFA typically does not count equity in the home or retirement accounts, but does consider savings and general investments.

In some cases, a school may include the equity in a home after an exclusion amount or require the financial data for the non-custodial parent before offering a financial aid package.

Filing Date

When completing the FASFA, you answer the questions based on the date you file, which can be different than what you claim on your tax return, which includes asset account balances, marital status, and child custody. When establishing who the child lived with most and which parent provided the most support, you use the FASFA filing date, which may not be the fiscal calendar year or based on the tax return. The end of the year is the day you sign the FAFSA.

Assets Held in the Parent or Child’s Name

Before filing, review asset balances for the custodial parent and the student along with the method of any payments for out of pocket costs. For example, if a grandparent gives the child money for college from a 529, The FASFA considers the monetary assets of the child. If that same amount came from a 529 in the parent’s name, with the child as the beneficiary, the FASFA considers it the parent’s assets, which calculates assets at a lower percentage.

Clarifying Future Obligations Through the Divorce Agreement

Divorce agreements should include the amount of support required for a specific number of semesters, yearly payments, age limits, along with any restrictions. Agreements should also constitute what college expenses entail. For instance, does that include only tuition and room and board or more indirect expenses such as books, fees, living expenses, health insurance, and travel to and from campus?

How Much Aid Can Your Child Receive

Federal aid tabulates the total cost of attendance (COA), which includes both direct and indirect costs of attending college. From the COA, the FASFA subtracts expected family contribution (EFC). That total becomes the maximum financial aid a student can receive, which can include both free and borrowed forms of assistance.

At the age of 24, a student automatically becomes independent, which no longer requires the consideration of a parent’s income or assets for financial aid.