How a Parents' Divorce Affects a Student's Financial Aid

Steps to Take When Filing the FAFSA

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A parents’ divorce has many intangible and tangible impacts on the family, especially those that can drag on for several years. There are questions of custody, living arrangements, child support and alimony, along with in-depth discussions about an equitable separation of property and assets. The uncertainty can put everyone into an emotional tizzy as children’s loyalties are torn between their two parents.

If one of the children is also applying to college, some even more perplexing questions can come into play. Here are some of the ways a parents’ divorce can affect the student’s college financial aid application process:

  • Which parent completes the FAFSA? This is often one of the biggest questions in the case of a divorce, although the rules are actually quite clear. The legal requirement is that the custodial parent is the one who completes the FAFSA. That is usually the parent who the child lived with the most during the twelve months previous to filing the FAFSA. The custodial parent must report any child support or alimony payments received as income. If the time was equal, it is the parent who provided the most financial support. Some families will try to “game” the system by claiming that the student lives with the lower-income parent, or by making alimony and child support payments “under the table” so they don’t show up on tax returns. This can be a dangerous game to play. Some colleges may ask for verification or court documentation to support income and custodial claims, which could lead to a reduction in financial aid for the student.
  • What if the parents still live together? Sometimes divorced or separated parents choose to live together for financial or other reasons. In this case, both parents’ income will be reported on the FAFSA. However, if they are only legally separated but not yet divorced, and living together, only one parent completes the FAFSA.
  • Do we have to report a stepparent’s income? If the stepparent is married to and living with the custodial parent, that financial information must also be reported on the FAFSA. The stepparent may be able to count other children as part of the household if he or she is also providing more than half of their financial support.
  • Living with a stepparent after the biological parent died: If your biological parent died, but you are still living with that parent’s partner as your stepparent, you will not use their financial information unless that person has legally adopted you. Use the financial information for your remaining biological parent.
  • Living with other relatives: Some divorces are so bitter that it is better for the children to temporarily live with other relatives; however, this does not change the requirement to use the parents’ financial information unless the relatives have legally adopted the child.
  • What about our 529 plan? It is advisable to have the custodial parent listed as the owner of any 529 college savings plan. Although it will still be listed as an asset, the distributions will not be included in income. If the non-custodial parent maintains ownership, it is not listed as an asset, but distributions count on the FAFSA as untaxed income to the beneficiary, the student, which could negatively impact the amount of financial aid that is granted.

    If it does make sense financially to change the custody arrangement, and both parents and the child are comfortable with the new agreement, do it legally and properly through the court system so you will have verifiable documentation to show, if needed. Make sure you leave yourself plenty of time to process the paperwork as the agreement must be in place before the FAFSA period begins. Beginning in 2016 the FAFSA period will now start on October 1. Beware of any financial transactions that may yield a capital gain, however, as that may also reduce the financial aid. Divorce can be a difficult time, so make decisions based on the best interests of your children and try to think strategically when it comes to completing the FAFSA so your child’s college education opportunity is not negatively impacted.