There are ten things you need to know about divorce and financial aid and these ten things could help you to significantly reduce the cost of your child’s college education.
Yet, based on my experience, many couples don’t discuss their child’s college education as part of the divorce negotiations and those that do, focus on who’ll pay for what but overlook financial aid. That’s a mistake.
In my latest Conversation About Divorce, I’m chatting with Paula Bishop who is an expert in financial aid and often talks about Paying For College Without Going Broke. Listen in to our Conversation below or keep reading for a synopsis.
Talk About Paying For Your Child’s College Education
One reason many couples do not talk about paying for their child’s college education is that the court’s don’t require it. There is no law that requires parents to pay for post-secondary school education – that’s a good thing from my perspective, but it means rather than creating a side agreement that is separate from the divorce agreement, people just don’t have the discussion.
Another reason is that when the kids are young, trying to thrash out an agreement about who’s going to pay for what college related expenses seems impossible. Parents have no idea if their child will even go to college or what going to college is going to entail in ten or 15 years’ time. Nor do they have any idea where their own finances will be then.
The reality is also, when a couple is fighting over a lamp, adding in discussions about paying for college is likely to drag out the negotiations or even stall the whole process which isn’t going to benefit anyone.
Bishop says this is a mistake.
“When I finally meet with one of the parents they are beside themselves not knowing how it’s going to work ,” said Bishop. “They assume they’re going to get stuck paying the bill because there’s nothing in the divorce decree that says the other side is going to help.”
Bishops believes that if you want your kids to go to college, then at the very least include a statement in your divorce agreement that you’ll go to mediation to discuss the college finances a year before your child goes to college.
You Have To Fill Out FAFSA
Financial aid begins with the Free Application for Federal Student Aid or FAFSA. Based on this information, a college will calculate how much they think a family can afford for college for one student for one year. It is also through this application that colleges give away government money like Pell grants, subsidized student loans and work study.
“All colleges like to give away somebody else’s money first before their own,” said Bishop.
If you don’t fill out FAFSA, you are automatically excluding your child from these funding opportunities.
The other application that colleges, usually the private ones, use is referred to as the CSS Profile which is more complex. You’ll find a listing of the colleges that use the CSS Profile at Bishop’s website.
Determine The Custodial Parent
In a family of divorce, FAFSA only needs to be completed by the custodial parent and this is where it gets interesting.
The custodial parent for FAFSA purposes has nothing to do with who claims the kids on the tax return or what the parenting agreement says. It’s the parent with whom the child lived for more than half the year.
“That’s maybe why God put 365 days in a year so it’s got to be one parent or the other,” said Bishop.
Even if the difference is only one day, that’s all that counts but it doesn’t mean you have to have kept an actual record.
“FAFSA doesn’t have a little cart to follow you around the year before college to find out where the kid slept,” said Bishop.
“If the income between the two parents is very different, I would try to aim for having the lower income family be the custodial parent,” said Bishop.
This doesn’t mean that the lower income parent is going to be the one who pays for college. It just means for FAFSA, the financial aid is going to be based on the finances of the lower-income parent and that often means more aid which lowers the out-of-pocket expense for the family.
This is one situation where insisting that 50/50 parenting means exactly equal – 182.5 days per year doesn’t make sense and it’s important to set aside any emotional or psychological concerns to focus on the big picture.
That being said, who the custodial parent is has to make sense. If one parent lives in Arizona and one in Colorado and the child is in Arizona for vacations and summers, claiming that the Arizona parent is the custodial parent doesn’t add up.
For kids who are already in college when their parents divorce, if the child is not living at home while attending college, custodial parent means where the child goes home on vacation.
“I’ve never seen them in 20 years really question custodial parent too much and they allow changes,” said Bishop. “One parent can be the custodial parent one year and the next year, they’re not. That could happen.”
What Counts As Income?
Your income for FAFSA is not just what you receive from an employer. Both spousal support and child support are also included. Child support is included as untaxed income to the parent receiving it and is not deductible to the parent paying it.
For spousal support, if it’s tax deductible (typically for agreements that were ordered prior to December 31, 2018), then the support is deductible to the payor and included in come for the recipient. With the recent tax law changes, alimony agreements made after December 31, 2018 will no longer be tax deductible and Bishop believes that these payments will be handled similar to how child support is currently handled.
Most colleges that use the CSS Profile form require income information from the non-custodial parent.
Which Tax Returns?
If you were filling out FAFSA now for the 2018-2019 academic year, you would be using the 2016 tax returns. There is an option when you are filling out the FAFSA to connect to the IRS and upload your tax data from there. If however, that tax return status was as married, that’s not the data you need because it will include both your income and your now former spouse’s income.
What Bishop recommends is requesting a “tax transcript” from the IRS which usually takes a week. The transcript shows you all the individual data lines for your return and from this you can compute what your adjusted gross income was apart from that of your former spouse. You can then input these numbers to FAFSA and submit the transcript to the college if requested.
Don’t Get Remarried!
If you are the custodial parent, when you get remarried, your spouse’s income now has to be disclosed on FAFSA. As Bishop explains it, if you’re applying for the 2018-2019 academic year and are now remarried, FAFSA is going to want your 2016 tax returns and you are required to included your new spouse’s income for that year even though you filed as single in 2016 and weren’t married. This applies regardless of any pre-nuptial agreement you have.
Since we know that more income means less aid, Bishop recommends not getting remarried until your child graduates college.
Who Completes FAFSA?
The FAFSA may be worded directed at the student rather than the parent, but expecting your child to complete it is unrealistic.
“I don’t want a kid anywhere near it,” said Bishop. “How many kids know what adjusted gross income means or what a parent’s income is or untaxed income or contributions to a retirement plan? They don’t know any of that stuff. Kids only mess it up.”
I’ll confess. I have two kids. They’re both college graduates now and neither of them ever completed the FAFSA. I did it. Eight times and it is not straight forward so I’m with Bishop.
According to Bishop, FAFSA is redesigning the application so there is a section for the child and section for the parents. In the meantime, one parent and probably the FAFSA custodial parent needs to drive the process.
“I review hundreds of thousands of profiles,” said Bishop. “I make the parents fill it out. They know what it involves but I review their taxes and profiles before they submit them and in 20 years I’ve had one FAFSA that was right and no profiles over the years.”
What If A Parent Won’t Complete Financial Aid?
Bishop says in about one in ten cases, she has a parent who will not cooperate in applying for financial aid and it’s often a way for them to retaliate for the divorce.
In this situation, Bishop recommends applying to colleges that will only require the FAFSA form and not the colleges that use the CSS Profile form or look for colleges that don’t require the information from both parents. If the uncooperative parent is the lower income earner then it’s unfortunate because you could be forgoing helpful financial aid.
A word of caution. FAFSA does have exemptions and accommodations for situations where there are restraining orders when one party doesn’t want their address shared with the other party. If this applies to you, contact FAFSA before submitting the application to know how to protect yourself.
What About 529 Plans?
529 Plans are a vehicle for saving for college and while one child has to be designated as the beneficiary, there’s a custodial owner such as a parent or grandparent.
If you are the custodial parent and you’re completing FAFSA, then the 529 Plans on which you are the custodial owner have to be included in your investments.
If your former spouse has a 529 Plan and is making withdrawals to support your child’s college expenses, those withdrawals would be considered as untaxed income for your child and need to be disclosed.
Bishop says to avoid this it’s better for the non-custodial parent to shift portions of the 529 Plan year by year to the custodial parent and for the custodial parent to make the tuition payments to the school so that when completing FAFSA the value of the non-custodial account is zero and doesn’t impact the assets for the next year’s financial aid. The timing is a little tricky but it can be done without any negative impact on the child.
Don’t Wait To Get Divorced
People often wait till their child or children have graduated high school before getting divorced. From a pure financial standpoint, Bishop says this is not the best strategy, especially if you’re waiting for your youngest child because your FAFSA will be based on your combined incomes.
Getting divorced prior to your child going to college means their financial aid will be based on the income of only one parent. If your incomes are very different, then you can make the lower-income parent be the FAFSA custodial parent and by now, you know that means more aid.
My guest for this Conversation was Paula Bishop, CPA and financial aid expert. Check out Paula’s website for key reference materials for how to pay for college without going broke.