College Financial Aid, the FAFSA and Divorce

By Diane C Pappas, CDFA™
Solutions For Divorce LLC
www.untyingthefinancialknot.com

It’s the new year…time to fill out the FAFSA or Free Application for Federal Student Aid. If your child will be attending college between July 1, 2017 and June 30, 2018, the 2017-2018 FAFSA is now available on line. Follow this link to the new application: https://fafsa.ed.gov/index.htm.

Although the deadlines for submitting the FAFSA are still a ways off (Federal is 6/30/18, Massachusetts is 6/1/17, your school may have it’s own), it is best to fill out the FAFSA as soon as possible. No matter what type of aid you are looking for, a FAFSA needs to be completed for each student. A school will not consider awarding aid until they have the completed FAFSA on file. Since some aid is first come, first serve, it makes sense to submit the FAFSA as soon it becomes available, which is January 1st.

If you are currently going through a divorce and have a high school senior, filling out the FAFSA is probably the last thing on your mind. But depending on your current financial situation, the estimated date of divorce and what your divorce agreement says or will say, about college tuition, it will have an impact on who fills out the FAFSA.

If your divorce is final prior to submitting the FAFSA, you will file as ‘Divorced’. This can have a huge impact on qualifying for financial aid, because the FAFSA only asks for the custodial parent’s income and not the other parent’s income. If you are the custodial parent and your income is significantly lower than your ex’s, you may qualify for more aid, regardless of what your ex makes. However, alimony and child support are considered a source of income on the FAFSA, but your home’s equity and retirement funds are not considered for qualifying purposes. In some cases, it may make sense to structure your settlement in the divorce agreement in order to maximize the possible receipt of financial aid. You must consult with a financial expert to explore these options, so both you and your spouse understand the future impact of any proposed settlement.

Are you the custodial parent? Hopefully, this was addressed in your divorce agreement, because having the status as the custodial parent has many tax advantages, especially if college tuition is in your family’s future. (Please note – ‘custody’ in this case does not refer to the term ‘legal’ custody, it refers more specifically to parenting time.)

The definition of ‘custodial parent’ for tax and financial aid purposes, is the parent with whom the child lived for the greater number of nights during the year. The other parent is the noncustodial parent. A problem exists when parents have ‘shared’ physical custody, commonly referred to as equal parenting time or 50/50 parenting time, meaning the child lives with each parent for an equal number of nights during the year. This current trend of 50/50 parenting, can create a big problem when it comes to filling out the FAFSA. Who is the custodial parent in this case?

Both the IRS and the FAFSA use a tiebreaker rule that states the parent with the higher AGI (adjusted gross income) is the custodial parent. Which is not what you want when financial aid is a possibility.

The workaround in this situation is to make sure your divorce agreement states that the parent with the lower income figure will have the child at least 51% of the time, instead of an equal number of nights. Most couples can usually agree to this language in the agreement, as it is may be in the best interest of the family and finances.

The IRS goes into great detail in Publication 501 on custody and divorce, so it’s important to review this publication with your attorney or CDFA™ (Certified Divorce Financial Analyst) to make sure you have properly addressed your situation in the most tax efficient way.

Follow this link to the IRS Publication 501: https://www.irs.gov/publications/p501/ar02.html#en_US_2014_publink1000220904

Filling out the FAFSA can be a straightforward and easy process. You should never pay anyone to help you, as the website, www.fafsa.ed.gov, is very easy to navigate and guides you through the application. Filing the application is FREE. Another informative website to visit is www.studentaid.ed.gov.

Tax Returns

You will need to submit your tax returns with the FAFSA, so it is a good idea to have them done prior to submitting the application, but I know that most people, especially in a divorce, do not have their tax returns ready. If you are filling out the 2017–18 FAFSA, you will need your 2016 tax information.

Don’t worry though, if you don’t have your tax returns ready, because, after you file your taxes, you can log back in to the FAFSA and correct any estimated information that was wrong.

One last piece of advice – don’t assume your attorney or mediator will address the tax issues in your divorce. Working with a CDFA™ is the best way to ensure that all your specific tax and financial issues will be addressed and not overlooked. Not addressing certain things in your divorce agreement could lead to thousands of ‘dollars’ being lost.

Be informed, be empowered, take control of your financial future.

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