How students with divorced parents can maximize college financial aid

Amy Fontinelle

By Amy Fontinelle
Amy Fontinelle is a personal finance writer focusing on budgeting, credit cards, mortgages, real estate, investing, and other topics.
Posted on Aug 13, 2020

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Describe how the FAFSA evaluates divorce in calculating aid for the 2023-24 and 2024-25 school years.

Explain how the FAFSA and CSS Profile differ when it comes to divorce.

Show why it’s important to understand how colleges expect a student’s biological parents to contribute.
 
     

Applying for college financial aid is complicated no matter what your situation, but for children of divorced parents, it’s even more so. The amount of federal and state financial aid a student is eligible for can change significantly depending on which parent the aid formulas consider to be the primary provider.

In families where only one parent takes care of the child, it’s easy to know who to list. But for families with joint custody arrangements, decisions about which parent the child lives with the majority of time or which parent provides more financial support can have major implications for college financial aid. (Related: College savings calculator)

What’s more, many private schools calculate a student’s financial aid differently than educational institutions that rely solely on the Free Application for Federal Student Aid (FAFSA). Parents might need to consider different financial aid planning strategies depending on their child’s college preferences.

Further complicating things are differences in how federal and state aid will be calculated for the 2023-24 and 2024-25 academic years because of the FAFSA Simplification Act. (Related: Big changes for the FAFSA)

How FAFSA looks at divorce

The FAFSA is what the federal government and most colleges and universities rely on to formulate students’ financial aid packages. The FAFSA asks about the parents’ marital status, but FAFSA’s definitions aren’t the same as the legal definitions of marriage and divorce or separation.

“The FAFSA depends more on the parents’ relationship with the student than the parents’ relationship with each other,” writes college expert Mark Kantrowitz at Saving for College. What FAFSA cares about is whether a student’s legal parents (biological or adoptive) live together in the same household.

If the parents live together — regardless of whether they are unmarried, separated, or divorced — FAFSA requires information about both parents. Parents who are legally married, but lead separate lives and live in separate households, are not considered married for FAFSA purposes. In this case, and in the case of divorced parents who live separately, the student only needs to provide information about the parent he or she lived with the most in the past 12 months when completing the FAFSA for the 2023-24 academic year. FAFSA calls this parent the “custodial parent,” regardless of who has legal custody. However, for the 2024-25 academic year, the student will instead need to provide information about the parent who provided the most financial support.

Custodial arrangements, child support, and alimony

Arranging custody so that a student lived at least one more day of the year with the parent with the lower income used to be a strategy to try to increase financial aid. That’s no longer the case.

It’s too late to make such arrangements for the coming academic year. The 2023-24 academic year FAFSA will use 2021 tax return information. Plus, having the student live with the less well-off parent wouldn’t necessarily increase financial aid if that parent received considerable financial support from the better-off parent. The FAFSA accounts for child support and alimony.

The 2024-25 FAFSA will use 2022 tax returns, so it’s essentially too late to strategize for either of the next two academic years. However, it’s still helpful to know what aid might be coming and how things are changing.

“There are no current changes on the ‘23-’24 award year FAFSA that address divorced or remarried parents of dependent students,” said Scott Bennett, associate vice president of student services at Lee College.

The 2023-24 FAFSA considers child support the custodial parent receives to be untaxed income to the student. And it subtracts child support the custodial parent pays from student income.

“A significant change for all students is to the income protection allowance for students and parents, which is a calculation that shields a percentage of students’ and/or parents’ income from being counted towards paying for college,” Bennett said. “This change allows for greater amounts of aid for students and families.”

For 2023-24, the FAFSA allows a dependent student to have $7,600 in income before any of it has to go toward college costs. Beyond that, the student is expected to put half of their income toward college. For 2024-25, the student income protection allowance will increase from $7,600 to $9,410. The parent income protection allowance for both academic years depends on family size and will be adjusted for inflation.

The 2024-25 FAFSA will not count child support received as income. Instead, it will count as a custodial parental asset, and 12 percent of parental assets will go toward college costs, an increase from 5.64 percent in 2023-24. However, many households with an AGI of $50,000 or less in 2021 and $60,000 or less in 2022 won’t have to report parental assets on the FAFSA.

For households that do have to report assets, the parental asset protection allowance for students living with one biological parent will increase. For example, instead of being nothing for a 45-year-old divorced parent, it will increase to $2,400. The amount is based on the parent’s age, with older parents getting a higher allowance.

“Students of divorced parents will most likely have a more nuanced and complex experience navigating FAFSA, and it will take longer,” said Joshua Lachs, CEO of Moneythink, a national nonprofit focused on increasing college graduation rates and reducing student loan debt. “It’s important to get a head start since we encourage students to submit their FAFSA as soon as possible in the fall.”

Look at the beginning submission date, not the final deadline, to determine your timeline. The first day to submit is Oct. 1, 2022 for the 2023–24 academic year. The U.S. Department of Education discourages waiting until the June 30, 2024 federal deadline, because some aid is distributed on a first-come, first-served basis. Plus, states and schools often have their own deadlines that are earlier than the federal deadline.

School policies may differ from federal policies

Many colleges and universities use formulas different from FAFSA’s to award their own financial aid. Students applying to these institutions will need to complete both the FAFSA and the school’s own financial aid application, which in many cases will be the CSS Profile.

Some of these schools and programs, unlike FAFSA, do require information on the noncustodial parent’s finances.

Harvard’s financial aid policy, for example, states, “We feel strongly that both parents have an obligation to support you, and a divorce or separation does not change that obligation. We look at each case individually, and we make every effort to be sensitive to particular family circumstances when deciding how much to ask from each parent.” Harvard arrives at an overall parent contribution figure that the parents and students are responsible for dividing up.

For schools like these, each parent must separately file their own CSS Profile (which allows them to maintain financial privacy). Only the custodial parent needs to provide the student’s financial information, but each parent will provide enough identifying information about their child for the system to put the family’s information together.

Harvard and other schools that use the CSS Profile will also request information about the new spouse and dependents if either parent is remarried. In fact, the CSS Profile asks for information on all of the student’s parents, whether living, deceased, stepparent, or legal guardian. It even asks about a legal guardian’s spouse and a parent’s unmarried partner. (Related: Getting remarried and your child’s financial aid)

The CSS Profile does provide an opportunity for each parent filing the form to state how much money they plan to provide for their child’s education for the coming academic year. A parent who can’t or won’t provide support can enter zero here, though doing so will not necessarily change the aid calculation without special circumstances.

The form’s special circumstances section gives each parent the opportunity to note any financial considerations, with dollar amounts, that schools should consider: financial support of other family members, eldercare expenses, or a change in employment, for example. Parents should plan to provide supporting documents the school can use to verify this and all information they provide.

In cases where a student wants to apply to a school that requires the noncustodial parent’s information but that parent won’t contribute, it may be necessary to complete the CSS Profile Waiver Request for the Noncustodial Parent or a school-specific form for reporting special circumstances. A school may waive its requirements for the noncustodial parent’s information if the student can demonstrate that the noncustodial parent has a history of abuse, has been legally been limited from contacting the child, or has a history of not supporting the child financially.

Advantage FAFSA?

Families who feel disadvantaged by the limited information FAFSA requests might receive more aid by applying to schools that use CSS Profile. After all, it is a much more extensive form and asks about special considerations such as high medical bills or loss of income. That said, financial aid administrators at FAFSA schools can also use their professional judgment to adjust aid awards based on those factors — if you ask, and the sooner, the better.

Unlike the FAFSA, the CSS Profile allows schools to customize which questions they ask. It’s possible that a school using the CSS Profile would not require information from the noncustodial parent. Some families might have an advantage with such a school, while others might be at a disadvantage.

In a situation where the custodial parent remains single, the noncustodial parent has remarried, and both biological parents will help pay for the student’s education, it might seem that FAFSA-only schools give an advantage to students with divorced parents. However, for the 2023-24 academic year, the FAFSA will still ask about any other sources of financial support the child receives. As mentioned earlier, this support counts as student income, which factors heavily in aid awards. The 2024-25 FAFSA, however, will eliminate this question—and still won’t ask for the noncustodial parent’s financial information.

Parents should call financial aid offices to ask about their specific parental disclosure policies, because information online is sometimes outdated and financial aid deadlines are tight. Further, until the 2024-25 FAFSA is actually released in October 2023, nothing is set in stone.

“We encourage students and their families to stay on top of this information and track any relevant changes,” Lachs said.

College aid considerations for divorcing parents

For parents who aren’t divorced yet but are strongly considering a split, it may be worth hiring an attorney who can structure the divorce settlement in a way that might ease the burden of paying for college.

Specifically, the settlement could stipulate how much each parent will contribute to the child’s 529 college savings plan (formally called a qualified tuition program) as well as who will own the account. (Learn more: Getting the most out of your 529 plan)

It matters which parent owns the plan for financial aid purposes. For the 2023-24 academic year, if the custodial parent owns the 529, then it’s counted as a parental asset, and distributions aren’t treated as income. If a dependent student owns the 529 plan, it’s also treated as a parental asset for the 2023-24 academic year. Financial aid will be reduced by 5.64 percent of the account’s value (and remember, there’s no parental asset protection allowance for 2023-24).

If the noncustodial parent owns the 529, the distributions will count as untaxed income to the student, not as a parental asset, for the 2023-24 academic year. That means 50 percent of 529 distributions will be part of a student’s expected contribution to college costs, after subtracting the student’s income protection allowance.

For the 2024-25 academic year, 529 plans will not be counted as a parent or student asset, nor will distributions count as income to the student.

The FAFSA asks for asset values as of the day you submit the form, which means there’s more time to strategize with assets than with tax-return information. If you already have a 529 plan in place and it’s owned by the “wrong” parent, it’s best to speak with a financial professional before doing anything. Moving assets around for financial aid purposes can have unintended and expensive consequences.

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Need advice? Contact us

This article was originally published in August 2016. It has been updated.

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The information provided is not written or intended as specific tax or legal advice. MassMutual, its employees and representatives are not authorized to give tax or legal advice. You are encouraged to seek advice from your own tax or legal counsel. Opinions expressed by those interviewed are their own, and do not necessarily represent the views of Massachusetts Mutual Life Insurance Company