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Guidelines for a Divorced Parent in Getting Financial Aid [Part 1]

This is part one in a two part series on helping divorced parents understand the Financial Aid Process.

Thank you so much for asking me to answer your readers questions about college financial aid and how it is affected by divorce.  I’m Lisa C. Decker, a Certified Divorce Financial Analyst and I have a Teleseminar Series called Divorce Speak.  During one of my calls I had the pleasure of interviewing Kevin Worthley, a CFP and fellow CDFA from Rhode Island, who has a lot of specialized knowledge on this matter.  Here is a condensed snippet from my interview with Kevin that I hope sheds some light on this very complex matter.

Getting financial aid for your child’s college education requires that you get a basic understanding of how college financial aid is calculated.

However, there are a few things that you need to know first before anything else. You have to be aware that the full cost of college is very high but the actual price that parents and students pay can be a lot lower depending on the amount of the financial aid that the family might receive.

You also have to be aware that financial aid formulas differ between public and private schools. However both determine the “Estimated Family Contribution” or the EFC which is specific for each family and is determined by looking at the family’s income and assets, notably the parents’ income and assets for the most part. Parental Income is going to be the big determinant on what the family might get for financial aid. Student Income and Student Assets are the other two factors of the EFC that will be looked into as well.

Diving into the process, when you apply for a College Financial Aid for your child, you will be asked to fill out a lot of forms. The first one is the all-encompassing application for Federal financial aid better known as the FAFSA which stands for Free Application for Federal Student Aid.

The FAFSA is used mostly for public schools and some private schools and is broken down into 4 areas: (1) Parent Income, (2) Parent Assets, (3) Student Income, and (4) Student Assets. The FAFSA and the other form, called the CCS Profile (an additional form for those enrolling in private schools), both heavily look at Parental Income which is going to be the big determinant on what the family might get for financial aid.

The Parental Income is the Adjusted Gross Income of the combined parents or single parent for the previous year. The number of adjustments is made to come up with the parent income component of the EFC. So, what the parent does is fill the financial aid form and the form will lift what their income was for the previous year. That will then determine what their financial aid will be for the coming year.

Parent Assets in the Federal Formula for the public schools include things like checking account, savings account, non-retirement investment account, and equity in vacation homes. To a certain extent, they also include savings account such as the 529 College Saving Account. What they don’t include on the public school FAFSA form are the home equity and retirement account (i.e. 401Ks and IRAs). All else is included in Parent Assets, but again home equity isn’t included.

When talking about Parent Income and Parent Assets in the context of a divorce situation, only the income and assets of the custodial parent living in the household is equated.

Lisa C. Decker – Miss Money Matters – is the founder of Divorce Money Matters, a CDFA and a “Save Your Money, Save Your Sanity” Divorce Guide. Lisa has been interviewed by CNN, Good Morning America, NY Times, Business Week, Marie Claire, and Oprah magazines, Lisa is an expert in divorce financial matters, and a discreet problem-solver who guides her clients to “Divorce Your Spouse, Not Your Money.” Lisa is also a Breast Cancer Survivor, a mother to three daughters and an active volunteer in her community. For more of her work and other collaborators on general parenting and children and divorce, visit Parent eSource.

How Divorce Affects the Financial Aid Process

How to complete the FAFSA for a child of divorced parents

Unfortunate but true! When a marriage ends, children are affected the most. One of the issues concerning children of divorced parents is the payment of education costs, and financial aid. A court of law may award custody to one parent, which seems to imply responsibility for education expenses and the completion of the FAFSA (Free Application for Federal Student Aid). However, this implication causes confusion as the US Higher Education Act interprets the term custodial parent in a different manner.

Who shall fill the forms for FAFSA?

As implied above, the parent with the custody of child should complete the FAFSA. However, custody in this case does not mean legal custody awarded by the court; rather, the custodial parent is the one with whom the child lived for a longer time period in the previous 12 months.

Let’s take an example of Child C whose parents A and B have been divorced. In the case where C spends 180 days with parent A and the remaining 185 days with parent B in the previous year, FAFSA shall be filled out by parent B even if Child C’s legal custody was awarded to parent A by a court of law.

In a case where the child does not live with either of the parents but A fulfills most of C’s financial need, parent A should complete the FAFSA. This fact of provision of financial assistance should be represented on the concerned parent’s Income Tax Return as well.

If there is a tie between both of the criteria discussed above, then the College financial aid administrator shall determine who shall fill out the form based on the income of both the parents. Normally, the parent with the higher income is responsible for completion of the form.

How to calculate the time period of the last 12 months:

The period of the last 12 months does not imply last calendar year. Instead, it is the twelve months immediately preceding the date of application for financial aid. Elaborating on the above example of Child C, if the application is made on 12th January, 2010 then the period of 12 months shall start on 11th January 2009 to 12th January, 2010.

Criterion for Private College Financial Aid

The income and assets of the non-custodial parent is not taken into consideration for the FAFSA. Certain private colleges, however, do take into account the particulars of the non-custodial parent as well and require an additional form to be completed.

Specific Agreements

To avoid any confusion and disputes, it is always better to inform the college authorities about the possibility of divorce. In fact, an agreement should be made with the college clearly specifying which parent is liable for college fees and costs. This may provide some peace of mind to the child and the college as well.

Benefits

Though there is the possibility of confusion as to who will bear the education expenses, children of divorced parents are at an advantage as well. Even though the income of only one parent is required to be oncluded on the FAFSA, the child may provide the particulars of the parent with the lower income also. This figure is used to calculate the EFC (Expected Family Contribution). The lower the EFC, the higher the amount of financial aid granted. However, it’s not prudent to mention the particulars of a parent with whom the child has little or no contact since form will need to be signed by the parent.

References:

1. http://www.finaid.org/questions/divorce.phtml

2. http://www.fafsa.ed.gov/help/ffdef07.htm

http://www.brighthub.com/education/college/articles/83567.aspx