March 1, 2015
If you are assisting a client who has young or teenage children, you have probably had a conversation about paying for college. Typically this is not a big part of the divorce negotiation. Any savings earmarked for college is usually kept intact and set aside from the property to be divided. A discussion around who will pay for college is warranted and perhaps the couple comes to a rough agreement of who will take on that responsibility. More often than not the higher-earning spouse takes on much of the burden.
Since college has become so expensive, more and more parents are turning to financial aid to help cover the bill. Because of this, maximizing the amount of federal financial aid that can be accessed is important. Qualifying for federal financial aid is dependent on both the parents’ and the student’s income and assets. There are strategies that divorcing parents can use to help ensure the student is awarded as much financial aid as possible.
The Free Application for Federal Student Aid (FAFSA) is used by most colleges and universities to determine eligibility for need-based aid. The application includes information about the student’s income and assets as well as the parents’ income and assets. The first question that typically arises is, if divorced, which parent should complete the application?
Only the ‘custodial’ parent need complete the application. The definition of ‘custodial parent’ is best described as where does the child sleep? FAFSA doesn’t care who has “legal custody”. The custodial parent is the one whose house the student sleeps at more than 50% of the year. Therefore to maximize financial aid the lower-earning spouse should be the custodial parent. (Note: some schools use the CSS profile which asks for both parents’ income.)
FAFSA uses a percentage of the custodial parent’s income to calculate financial aid. The percentage is 22-47% of Adjusted Gross Income (AGI), and includes alimony. Child support payments are added to AGI since they don’t show up on the federal income tax return (where AGI is calculated.) One tip to maximize financial aid is to avoid alimony or child support during the child’s high school junior year so that these figures will not have to be included in income. Keeping income low is the goal here. In fact if a parent’s taxable income is less than $24,000 and they are eligible to file a 1040A or 1040EZ then they will not be expected to contribute at all for college. You can help in this regard by giving assets or a lump-sum payment instead of alimony to custodial parent.
FAFSA also uses a small percentage, 3% - 6%, of the parent’s assets in their aid formula. Retirement accounts are not counted. But 529 College Savings Plans in a parent’s name are included. Have the non-custodial parent be the 529 account custodian to keep this money out of the equation. (Note: some of the income withdrawals will then be considered the student’s income for FAFSA.)
Some of the parent’s assets are exempt from the FAFSA formula altogether. There is an “Asset Protection Allowance” which is based on the age of the parent. An older parent receives a higher allowance.
No assets are included in the aid formula at all if AGI is less than $50,000 and the parent is eligible to file a 1040A or 1040EZ. Remember that retirement assets don’t count.
Remarriage is an important consideration. FAFSA will include a step-parent’s information.
So to summarize all of the above, some strategies that divorced parents can use to maximize federal financial aid include:
Of course not all strategies will apply or be practical for all situations, but there may be one or two that you can incorporate into the divorce settlement to help maximize federal financial aid.
