FAFSA
Every year the U.S. Department of Education awards about
$150 billion to help students pay for college. This federal student aid is
awarded in the form of grants, work-study funds, and low interest loans. There
is also aid from state government, scholarships, tax credits, and aid for the
military.
For purposes of FAFSA, custody is established according to
which parent the student lived with the most through the year. If the child
when home lives mostly with his mom, then his mom’s financial information is
all that FAFSA considers. Although the dad’s income might be high enough to
preclude federal student aid, if the dad is not the custodial parent for
purposes of FAFSA then his income is irrelevant and frankly not considered. If
the couple were still married and/or still cohabitating, then his income would
be factored into the equation.
Let’s say the mom is a social worker who earns $50,000/year
while the dad is a surgeon who earns $350,000/year. Had the couple remained
together, they would not have qualified for any federal student aid. However,
upon divorcing, the mom as the custodial parent may qualify for such aid. Her
assets and income, including any alimony would have to be revealed and factored
in to determine the extent of eligibility, but the dad’s income would be
ignored. I am involved with a case that meets this fact pattern. Mom will
become the custodial parent. Her income is a small fraction of her husband’s.
And, although she is likely to receive alimony, it might behoove the couple to
engage collaboratively in divorce financial planning to transfer more of the
husband’s retirement plan savings to the wife in exchange for less alimony as a
way to support the educational financial planning opportunities. The reason for this is because assets in a
qualified retirement plan or IRA are excluded from FAFSA calculations. Therefore,
if the wife can support herself on her salary and/or with additional but modest
alimony, and if through the divorce agreement and transfer of enough assets
from the husband’s retirement plan both she and the husband can live
comfortably in retirement, then this might be a way of qualifying for federal
student aid that would not otherwise have been available.
Remarriage and FAFSA
Although the dad’s income might be excluded from FAFSA
calculations, if the wife remarries, her second husband’s income will be
considered in arriving at any FAFSA eligibility. FAFSA looks at household
income. Even though the step-dad might not share a biological bond with the
student, his contributions to household income are relevant. Notwithstanding a
prenuptial agreement to the contrary, the federal government still considers
the step-parent as a source of support. This could possibly present a financial
justification to delay a remarriage until after the child graduates from
college.
Private versus Public Colleges
Most state universities use FAFSA to determine aid
eligibility. However, many private colleges and universities use their own
formulas to determine how much of their own available aid to award beyond what
might be accessible through FAFSA. It is very common for private institutions
to consider the income capacities of the custodial as well as the non-custodial
parent as well as the earnings of step-parents. Not only are private tuitions
significantly higher than those of public institutions, but additionally, they
do not provide the same opportunities with respect to divorce and tuition
planning.
Divorce financial planning is a fee-only process that does
not involve investment advice or securities transactions. All information
provided herein is financial and educational in nature and should not be relied
upon as legal or tax advice. You should
consult with your tax advisor or attorney regarding specific tax issues.
