This is a big topic so for today I’m going to focus on general rules. Keep in mind the FAFSA rules are different from the CSS Profile rules; below is FAFSA only.
The custodial parent for the FAFSA can be different than the custodial parent in the divorce decree and/or different from who claims the student as a dependent on their tax return. The FAFSA defines the custodial parent as “The parent that you lived with most during the last 12 months. If you did not live with one parent more than the other, provide information about the parent who provided more financial support during the last 12 months, or during the most recent year that you actually received support from a parent.”
Many divorced parents share custody of their children. If that’s the case, then you’ll want to figure out who is the better parent to fill out the FAFSA. Typically that’s the one with lower income, but you do need to total all the income to be sure. For example, child support paid is subtracted from the paying ex-spouse’s income and added to the receiving spouse’s income. Alimony that’s taxed to the receiving spouse is likewise subtracted from the paying spouse’s income on their tax return.
Recent divorces can complicate things: While the FAFSA is based on the parents’ 2017 tax return, their marital status as of the filing date is the FAFSA’s interest. So parents who divorced this year will need to work directly with the FAFSA help line to ensure that their information is captured correctly.
Remarriages also throw a wrench into things: Whatever your prenup says, if you are the custodial parent and you’ve remarried, you must report your new spouse’s income and assets on the FAFSA, too.
The FAFSA also has a pretty strict definition of divorce: the parents must live separately in order to file as divorced.
What about assets? Again, only the custodial parent’s assets are reported and again, if they’ve remarried the new spouse’s assets count too. However, money flowing from the noncustodial parent to the student is reported as student income. That means it’s most helpful for the custodial parent to have sufficient income and assets to cover expenses through Dec. 31 of sophomore year to maximize aid eligibility.
What about loans? Even if both parents intend to borrow from federal programs to pay for college, you still only fill out one FAFSA, for the custodial parent. If the noncustodial parent will be taking out PLUS loans to pay for college, they will work through the school’s financial aid office to take out those loans based on the custodial parent’s FAFSA. The noncustodial parent will still be the named borrower and there are no credit ramifications for the custodial parent; however, the custodial parent still needs to fill out the FAFSA. (If the only purpose of the FAFSA is loans and only the parent who would otherwise be non-custodial is planning to borrow, then you might choose to have that parent be the one who fills out the FAFSA.)
For students where it’s especially beneficial to have one parent be the custodial parent, it’s important that there be some reasonable basis for claiming this. If the parent lives out of state, it’s unlikely to pass the smell test, for example.
What about the Profile? Generally it asks for both parents’ information, although schools may or may not use both parents’ info. Because the CSS Profile is far less transparent than the FAFSA, and because schools can use the data it collects differently or add their own questions, it’s hard to make generalizations beyond that.