Divorce is one of the biggest question areas with the FAFSA. This may be because the FAFSA presents it so simply: it just asks the parents’ marital status; if “Divorced or separated” is chosen, it asks which parent’s information is going to be used. You have to read the fine print to figure out whose info the Department of Education thinks should be reported. Because of the different rules, divorced parents who are still at least cordial with one another can develop a more effective FAFSA strategy once they understand how the FAFSA works.
First off, unlike the CSS PROFILE, the FAFSA only requires one parent– the custodial parent– to file. The FAFSA’s definition of custodial parent is a separate issue from what your divorce decree says and from who gets to claim the student as a dependent on their tax return. For purposes of the FAFSA, the custodial parent is the parent with whom the student spent more time in the previous 12 months. If the amount of time is equal, then the FAFSA says the parent providing more financial support should file. Obviously that is likely to be the parent with the higher income. If you share custody fairly equally and intend to have the lower-earning parent file, it’s critical that you be able to demonstrate that the filing parent was actually the custodial parent.
Before juggling custody arrangements, though, pay attention to how the FAFSA treats payments between ex-spouses related to their divorce.
- The parent paying child support reports that amount under Additional Financial Information; this is subtracted from their income
- The parent receiving child support reports that amount under Untaxed Income; this is added to their income
- Alimony is already reported for tax purposes so it will be reflected in your AGI
Often times, these amounts will balance one another out.
In addition, if the non-filing parent is paying for the student’s education, the student reports any such money paid on their behalf in their own Untaxed Income section under “Money received or paid on your behalf.” Since that will reduce aid, the student might do better to take out loans for the first years of college and use that parent’s money to pay off the loans and/or pay for the final year(s) of college.
A couple of important notes:
- Your marital status is as of the filing date. If you are in the process of divorcing and it would be advantageous to file as divorced/separated, one parent must move out before filing.
- Regardless of what your prenup says, if you have remarried, your new spouse’s income counts in the FAFSA formula. Don’t penalize your child by marrying a high-earner who does not intend to help pay for college. If they’re really Mr or Ms Right, they’ll wait a few years.
- You cannot have one parent file the FAFSA for some schools and the other for other schools.
- No matter who files the FAFSA, only the parent claiming the student as a dependent on their tax return can take the education tax credit.