By Diane C Pappas, CDFA
It’s that time again, when households across the United States are anticipating the arrival of college acceptance letters and more importantly the arrival of the coveted financial aid award letter.
If you are recently divorced, hopefully the consideration of which parent should fill out the FAFSA (Federal Application for Free Student Aid) was taken into account. If you know for a fact that your child will not be eligible for financial aid based on your income and assets, then it does not really matter who fills out the form, but if there is a slight chance that your child may be eligible for financial aid above and beyond the Stafford Loan, then it is worth addressing the issue of which parent should fill out the FAFSA, prior to signing the divorce agreement.
Typically, the custodial parent is responsible for filling out the FAFSA. It’s important to understand that the term ‘custodial’ is not synonymous with legal custody. The custodial parent is the parent with whom the child lived with most during the last 12 months. Even if it is one day more than the other parent, that parent is still considered the custodial parent for the purposes of financial aid. Most parents have shared legal custody and that is okay. What’s important is which parent the child lived with the most.
Why is this important? Because the Federal government does not consider the income and assets of the non-custodial parent in determining a student’s financial need. It does however consider child support received by the custodial parent and while the form doesn’t specifically ask if there is alimony, it would be included in the total income figure (because alimony is taxable income), which you are required to provide.
As is often the case, the non-custodial parent is the higher wage earner. The higher the income, the lower the financial aid. Of course there are other considerations as well, but in general, it is always best for the custodial parent – the lower wage earner – to fill out the FAFSA.
Sometimes it is not definitive as to which parent is the custodial parent. In some cases, a tiebreaker is needed. This can happen when the divorce was very recent or when there was an even number of days in the year. In such circumstances it is based on whichever parent provided more support. This is where you need to be very careful, because the financial aid administrator of the college may make a decision you will not like, by saying the custodial parent is the one with the greater income, presumably the one who provided more support.
Another thing to consider during the divorce process is which parent will claim the child as a dependent on their tax returns. Sometimes the dependency exemption is awarded to the non-custodial parent (which is a whole other issue for another blog). If the financial aid administrator should happen to request a copy of the custodial parent’s tax return or your FAFSA application is selected for verification, and sees that the parent filling out the FAFSA doesn’t claim the child, it could raise a red flag with the administrator. It’s okay to alternate the dependency exemption, as long as the custodial parent is still the parent with whom the child lived with the most. The separation agreement should specifically address which parent this is. The dependency exemption in of it self, does not determine who is the custodial parent.
The easiest way to avoid possible scrutiny from the school’s financial aid administrator is to be very clear at the time of divorce which parent will fill out the financial aid forms based on the reasons discussed above. If there is a real need for financial aid, addressing it in the separation agreement is imperative, because some colleges may request a copy of the divorce/separation agreement to help with a determination.
This ‘strategy’ only works for state schools and other private schools that use the FAFSA as the only form for determining financial need. There is another form called the CSS Profile, which unfortunately, does not ignore the non-custodial parent’s financial responsibility to pay for college. This form requires the financial information of both parents and a copy of the separation agreement to be submitted as part of the complete package. They will even go so far as to consider the income of a stepparent as a source of income of support, and, they will not accept a prenup that absolves that stepparent of any financial obligation for payment of college. If marriage is in the near future for either spouse, it should be a consideration.
Since I currently have a child in college who receives the Stafford Loan, I realized I hadn’t yet renewed my FAFSA application. I did it today as I wrote this article. It took me 21 minutes. I noted that it asked me for my marital status. When I answered ‘divorced/separated’, it then asked which parent’s information would be provided. It also asked for my tax filing status – ‘head of household’ – and how many dependents I claimed on Line 6d – ‘2’. It even allowed me to directly link to the IRS to download my tax information. It didn’t work because I just recently filed within the last three weeks and wasn’t yet in the system.
My child will only receive the unsubsidized Stafford Loan, but I know of a high school senior who just this week found out she had received an incredible financial aid package from her first choice school. Her parents are divorced, and because her mother (the custodial parent) filled out the FAFSA, this student received the best possible package.
Since there was a real need for aid in this case, the student received a combination of Federal and school awarded aid, including the Pell grant and SEOG (Supplemental Educational Opportunity Grant), a housing grant, merit scholarship and need grant from the school, the subsidized and unsubsidized Stafford Loan and Federal work study (FCWS). The award represented 64% of the total cost of tuition, fees, room and board. This aspiring artist has now been afforded the opportunity of attending the school of her choice, without putting herself or her parents into too much debt. Congratulations to her!
Sometimes, the system really does work for those that need it.