When advising divorced or separated parents on the college financial aid process, a number of questions come up that have answers that aren’t intuitive. In this post I will cover the most frequent situations I encounter. I will also include tips to help you use the rules to your benefit and save money on the cost of college.
The two most important questions you need to answer are “Who is the custodial parent for financial aid purposes?” and “Whose income/assets need to be reported?”.
Believe it or not, these are not straightforward questions. The answers are important because they serve as the basis for who is required to share their financial data on college financial aid forms. The FAFSA (Free Application for Federal Student Aid) is required by all schools to access federal financial aid (and most school financial aid). The additional CSS Profile may be required by some schools, and still others have their own supplemental financial aid forms. It’s always best to ask the school what forms they require.
For the FAFSA, the most common scenarios I see are:
- Biological parents are divorced or separated and still live together – both parents’ information needs to be reported
- Divorced or separated parents don’t live
together – report the information for the parent the student lived with the
most (if equal, report information for the parent who provided more support)
- If the parent the student lived with more is remarried – that person’s information must also be reported (this shocks many parents and their new spouses!)
- The FAFSA does not require information from the non-custodial parent (or their new spouse)
This graphic will help you figure it out: infographic link
For the CSS Profile, the information for the non-custodial parent (and their new spouse) may be required. This shocks many non-custodial parents and their new spouses! Schools want to find all the people out there who may have resources to pay for college.
Many parents are surprised because it doesn’t follow the rules of who has “custody”. It’s not the same as the “custodial parent” who takes the income tax exemption. It also doesn’t necessarily match with any agreements made in a divorce agreement as to who is responsible to pay for college. Got a prenup? Doesn’t matter, the federal government doesn’t care when it comes to paying for college.
Given these rules, there are some planning scenarios that can be advantageous.
- There could be a financial advantage to the
child living with the parent with the “lower income”.
- Again, this seems straightforward, but it isn’t. Child support is counted as untaxed income, so you need to add that into your consideration. Under the new tax rules, alimony received can be taxable income to the parent receiving it, or untaxed income, depending on when the divorce was finalized. Be careful you aren’t reporting it twice if you have to report information for both parents.
- The benefit of living with the lower income parent could be negated if the school uses the CSS Profile and requires financial information from the non-custodial parent (and their spouse, if they have one).
- There can be a benefit for the custodial
parent to wait to get remarried.
- The significant other’s information is not required if they are just living together.
- There can be a benefit to getting
- Although information on income is from the prior-prior year (i.e. 2018 for the 2020-2021 school year), if you get divorced or separated before filling out the financial aid forms, just split out your information from the non-custodial parent and report that.
- Be aware that financial aid offices at schools may request documentation of separate households if the tax returns were filed jointly.
Can I just not provide the information?
Parents ask all the time if they have to provide information for their new spouse, or if their ex has to provide information. If the forms require it, then yes. If you or your ex don’t provide it, your student is at a disadvantage in the financial aid process because the school may decide they aren’t eligible for any financial aid at all because of incomplete data.
In some special circumstances, CSS Profile schools may waive the requirement for the non-custodial parent information, but this is for instances like incarceration, abuse, etc, and requires documentation. If you have a contentious relationship with your ex, the school will contact them on your student’s behalf and ask for the information.
Can I Take Advantage of Tax Benefits?
To get some education tax benefits, you must be the parent taking the exemption on your return for the student (regardless of who is paying the college expenses). The three main tax strategies are detailed below:
American Opportunity Credit
- up to $2,500 tax credit per student, for tuition, fees, and course materials
- 2019 Income (MAGI) Phaseouts are $80-90k Single and $160-180k Joint.
Lifetime Learning Credit
- up to $2,000 tax credit per student, tuition and fees only
- 2019 Income (MAGI) Phaseouts are $58-68k Single and $116-136k Joint
Student Loan Interest Deduction
- up to $2,500 deduction from income for interest paid on eligible student loans
- 2019 Income (MAGI) Phaseouts are $70-85k Single and $140-170k Joint
The tricky thing about tax strategies is coordinating the expenses paid. You can’t count the same expenses more than once for both the tax credits and qualified withdrawals from education savings accounts (Coverdell ESAs or 529 plans). For more information check out the IRS Publication.
Please schedule a meeting if you need help with your specific situation.