Divorce, Separation and Financial Aid

In this video, I interviewed Paula Bishop, a CPA in Bellevue, WA and national financial aid expert, about how divorce and separation impact financial aid.

Once you’ve seen the video, click the link below to see how the rules regarding divorce and financial aid played out for a California family that did not approach the college search strategically. And then read the rest of this lesson to learn what you need to know about financial aid for divorced and separated couples.

A Case Study: Financial Aid and Divorce

If you are divorced or separated, the financial aid formulas may treat your child differently. Your child might even enjoy a financial advantage that other students don’t have.

How divorce and separation will impact your chances for financial aid will depend on which aid applications you must complete – the FAFSA and the CSS/Financial Aid PROFILE.

How the FAFSA Treats Divorce or Separation

In cases of divorce or separation, chances are you’ll only need to complete the FAFSA because most colleges and universities just require this federal form. This could be a plus for your child.

Here’s why:  The FAFSA only asks for the financial information of the custodial parent.

Unusual Definition of a Custodial Parent

If you know you are not the custodial parent, don’t be so sure.

You might be the custodial parent even if you don’t claim your child on a tax return or pay child support. Here’s why: The higher-ed world relies on an unusual definition of custodial.

For financial-aid purposes, the custodial parent is the one with whom the child lived the majority of the 12-month period dating from the day the FAFSA is filed.

Let’s say the FAFSA’s submission date was Oct. 1, 2017. The parent who completed the FAFSA would have been the one who took care of the child for more than six months going back to Feb. 1, 2016.

FAFSA Example

Let’s use an example to see how this custodial rule can play out:

The mom is a financial advisor who makes a hefty salary and the ex-husband is a high school teacher.

If the family wants to reduce their college costs, it would make sense for the teen to live with the lower wage earner long enough for the parent to be considered the custodial parent. That would mean at least six months and a day.

If the dad was the custodial parent in this case, the mother’s income and assets would not be divulged. With only the lower-income parent filing the FAFSA, the student would be more likely to qualify for more financial aid.

Colleges can’t track where a child lives so parents are on the honor system.

Separation and Divorce

Separated parents don’t have to be legally separated to be treated the same as divorce couples, but they can’t be living in the same residence.

FAFSA and Remarriages

So what happens if the custodial parent remarries?

The custodial parent would have to include the income from the new spouse on the FAFSA. And it won’t matter if the married couple signed a pre-nuptial agreement stipulating that the new spouse would have no financial obligation to help pay for college.

If a new spouse is supporting his/her own children or was only recently married, the family could try appealing to a school.

FAFSA Take Away:

  1. The FAFSA divorce and separation rules can be a huge plus for families when one parent earns significantly less than the other.
  1. The rules can also benefit families because the income and assets from one ex-spouse will never be counted.

How the CSS/Financial Aid PROFILE Treats Divorce

If your child applies to schools that also require filing the PROFILE, the rules will vary by school. Institutions using this extra aid application are mostly expensive private schools.

Here is the list of all participating PROFILE schools.

PROFILE schools that want the non-custodial parents to share financial information will require them to complete what’s called the Noncustodial PROFILE.

When considering PROFILE schools, you should check out which schools do and don’t require the Noncustodial PROFILE. In this screen shot, the red arrow is pointing to the Noncustodial PROFILE column.

Many PROFILE schools will only consider the income and assets of the two biological parents. Some, however, may consider the financial wherewithal of new spouses too. In other cases, a school may ignore the noncustodial parents information.

In the video above, Paula Bishop mentioned a wealthy parent who completed the Noncustodial PROFILE, but that parent’s income was not considered by the school. That’s yet another scenario.

How a PROFILE school handles the divorce issue can depend upon how much a school likes an applicant.

Mixed Financial Aid Results

When a school requires the FAFSA and the PROFILE, it is possible that you could qualify for financial aid from the federal and state governments but be denied institutional need-based aid from the school.

Here’s why:

PROFILE schools will use the FAFSA to determine your child’s eligibility for federal and state financial aid. The institutions, however, will rely on the PROFILE to determine if your child will qualify for their own in-house aid. In contrast, most colleges and universities rely on the FAFSA to determine which students are eligible for their in-house aid.

Bottom Line:

1. The only way that you will know how a school handles divorce is to call and ask the financial aid office.

2. Some students will qualify for more financial aid if they apply to schools where the noncustodial parent does not have to submit financial information.

3. Schools that rely exclusively on the FAFSA may have their own in-house form for a divorced parent. Ask a school what form, if any, that it uses in cases of divorce and separation.

3. At FAFSA schools, students can potentially be eligible for more financial aid when parents are divorced or separated.

Let's Connect

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  1. Hi Lynn,

    I have a bit of a strange question. I have a student (HS Senior) who just learned that neither parent claimed her on tax returns every other year. The student lives with her mom the majority of the time and the mom barely has any income. The dad and new step-mom assumed that mom claimed her on taxes every year, when in fact the mom only did every other year. Dad and new stepmom have a fairly high annual income.

    She filed FAFSA /CSS Profile under mom’s name. She is wondering if things would get messed up now if her dad and stepmom (the wealthier ones) claimed her on taxes this year (for 2015 base year)? I am assuming that would completely change the financial aid dynamic and leave her with less aid. But on the flip side, because there are multiple years of the girl not being claimed by anyone, she may be able to get some money back which she hopes to use for college.

    She is a senior right now and is actually going through the financial aid process with many of her colleges as this came up. As you can tell, it is not a pretty divorce and there is not a lot of communication between mom and dad, hence this pretty big misunderstanding.

    Thank you for any advice you can provide.

    1. Hi Heather,

      The fact that the student wasn’t claimed by a parent on the tax return during some years is irrelevant for financial aid purposes. The mom, however, might want to explore redoing her taxes to capture this nice tax deduction – she might get some refunds.

      All that matters, in terms of who is the custodial parent for financial aid purposes, is where the child lived the majority of the 12-month period ending on the day the FAFSA and PROFILE is filed. Since she lived with her mom the majority of the time, her mom would be the custodial parent.

      I hope that explains it!

      Lynn O’Shaughnessy

    1. What happens if the student is considering only PROFILE schools and the non-custodial parent refuses to fill out the non-custodial Profile? Note that the non-custodial parent is not now and may never be in a position to make any financial contribution to college costs.

      I would urge the custodial parent to tell the holdout parent that filling out the form will not in anyway commit him or her to pay for college. Also, the custodial parent will not see the financial information that the holdout parent shares. He or she would submit the noncustodial form directly to the PROFILE.

      If the parent remains irrational, the other parent could plead with the school to disregard this form, but that would probably be a very hard sell although schools have the power to do this. The chances would be better if the holdout parent has not involved in the applicant’s life.

      Lynn O’Shaughnessy

  2. What if the parents are divorced but still own assets together? For instance, parents are divorced but the house is still in the names of both parents and the mortgage is sill in the name of both parents. Or if the parents still have a mutual fund in both names? How should we answer the question about assets or home equity on both the FAFSA and the CSS?

    1. Hi PF,

      Owning a primary house with the FAFSA is a non issue because the FAFSA doesn’t ask if people own a residence.

      Beyond the FAFSA house issue, things can get really messy for divorced parents who did not separate their property. Depending upon what each school requires, you may have to file more than one PROFILE.

      I asked my friend Paula Bishop, a CPA in Bellevue, WA, about this unusual circumstance and here is what she said:

      You could split the assets 50/50, as these assets might have been community property assets when they got divorced. This would probably have the least impact on financial aid, as ½ of the equity in a house should be a much lower number, but of course as you know it depends on the college, and how they assess home equity.

      If they still own ½ of the house and are already divorced and one rents, I would write an explanation to the Profile form to explain that the parent is paying rent and also ½ of the mortgage. (I try to fill in the forms that has the lowest negative impact on Financial Aid). If only one parent pays the entire mortgage and there is little equity, and the other parent pays rent (though still owns ½), I might allocate it all to the parent paying the mortgage. Not sure who claims the interest deduction and property taxes on the tax return? Do they split it? No cut/dry answer, as I’m trying to maximize financial aid eligibility.

      Supposedly, ‘disputed assets’ while in the process of a divorce don’t need to be reported, as it’s not certain of who owns what. If they’ve been divorced for a while,, it’s time to cut the cord and split the assets.

      I hope this helps PF. You may also want to contact each school using the PROFILE and ask them how to proceed.

      Lynn O.