Monday, August 8, 2016

College Financial Assistance and Divorce

Many divorces occur concurrently with the last child leaving home for college. The questions to ask is how this will affect The Free Application for Federal Student Aid (FAFSA), and what are the respective financial planning opportunities.


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.