The New Rules of Financial Aid for Divorced Families

by | May 23, 2023 | Collaborative Law, Divorce and Finances, Mediation, Money Management

The process of getting into and paying for college has become ridiculously,  overly complicated and stressful in the past 30 years, but for separated/divorced families, it’s even worse. 

It can feel like a full time job to figure out which financial aid applications are required, who should complete them (both parents in a divorce or just the Custodial Parent?), and when they are due.  Not to mention the SUBSTANCE of what information you should put on the 300+ questions asked by the FAFSA (the main financial aid application) and the CSS Profile (an additional financial aid application required by approximately 400 colleges).

I will attempt to make sense of it all in this article.

In December 2020, Congress passed the FAFSA Simplification Act, in an attempt to improve the process of applying for financial aid, including for divorced or separated families (they are treated the same under this act).  The changes will take effect for students who will be in college in Fall 2024 and beyond.

This article will give a simplified overview of the pertinent changes – and landmines lurking – for divorced or divorcing families, and their attorneys, financial advisors and all other professionals who advise them.

 

Which Parent Should File for Financial Aid?

Under the old rules, the parent with whom the college-bound student resided  50% or more of the time during the past 12 months was deemed to be the Custodial Parent for the financial aid rules.  This rule is changing for the 2024-25 season.

For Class of 2024 high school graduates and younger, the parent who claims the child as a dependent on his or her  tax return during the operative tax year is the Custodial Parent.

This is known as the Base Year, which is defined as being two years before the college academic year for which you’re seeking aid.

Example:  For the class of 2024 high school graduates  – and anyone else who will be in college during 2024-2025 – the Base Year is two years prior:  2022.   The Custodial Parent  must provide information from his or her 2022 tax returns.

 

I expect this rule change to wreak havoc for many families who did not negotiate their respective divorce/separation agreements with this information.   Which is 99% of families in all likelihood.

The old rules made it easier for the parent with lower income to apply for aid, which obviously  was beneficial because they would qualify for more aid.

Under the new rules, it’s much more likely that the higher income parent will be deemed the Custodial Parent, so the family will be eligible for less aid.  These families, and their attorneys and advisors, lacked the knowledge of this hidden, arcane rule change.  Since there is likely a tax benefit to be had by the higher income Custodial Parent, that parent is not likely to retroactively change these terms of their agreement.

Before finalizing a settlement agreement, I recommend that you consider the financial aid ramifications associated with the decision as to which parent declares the child as dependent.  Relevant factors include:

  • Income of each parent
  • Assets of each parent
  • Academic profile of children
  • Colleges or types of colleges under consideration
TIP:  In a divorce negotiation, weigh the economic benefits of which parent gets to declare a child as dependent on a tax return in the context of the ability to qualify for need-based financial aid.

 

Issue: Timing of Divorce

To qualify for grants, scholarships or loans, you must file a FAFSA.   It is free to do, and it is based on the Custodial Parent’s finances.  If you’re separated or divorced and you are the Custodial Parent, only your information goes on that FAFSA.  Your ex is “invisible” (for financial aid purposes!).  But what if you were not yet divorced during the period in question?

Example: Your Class of 2024 student is applying for college, who will be attending college in 2024-2025.  You use the information on the 2022 tax return.  It’s your Base Year.

But If you were not yet separated or divorced during your Base Year, and filed a joint return in 2022, you must complete the FAFSA with only the Custodial Parent’s financial information, stripping out the Noncustodial Parent’s income and asset information.

The catch? There is no way to do this on the FAFSA automatically.  Ordinarily, FAFSA directions suggest that you use the IRS Data Retrieval Tool when completing the FAFSA to link your tax data automatically.

However, when your CURRENT  tax marital status is different from the Base Year’s marital status, the IRS DRT won’t help.  In that scenario, you simply carve  out your (the Custodial Parent’s) information from the tax return and enter it into the FAFSA manually.

Your colleges will likely need more information, and  may require you to order an IRS Tax Return Transcript to substantiate your portion of your finances. You can obtain the tax return transcript at www.IRS.gov.

 

TIP:  If your divorce or separation occurred after the Base Year (two years before the college academic year for which you want financial aid), do NOT use the IRS Data Retrieval Tool, because it will contain inaccurate information.  Enter your information manually.
FAFSA graduation hat coins and money

 

The CSS Profile

There are approximately 4,000 colleges in the United States.  They all require the FAFSA if you wish to be considered for federal or institutional financial aid, or obtain student or parent loans.

Approximately  400 of those 4,000 colleges require an additional financial aid form, the CSS Profile.  The CSS Profile determines your eligibility for institutional aid – funds from their endowments, as opposed to federal funds. For a school that requires both the FAFSA and the CSS Profile, the Custodial Parent on the FAFSA will also be the Custodial Parent for the CSS Profile.

The CSS Profile asks a few questions about the Noncustodial Parent, specifically:

  • Name
  • Email address
  • Mailing address/contact information
  • Employer, and
  • Year of separation or divorce.

The CSS Profile also asks whether there is an agreement specifying a contribution for college by the non-Custodial Parent.  Note:  The FAFSA does not ask about any such agreement.

Another note:  You may not want to get into the details of your separation agreement or your divorce agreement with the schools.  So don’t. Financial aid officers are not concerned with what you agreed to.

They are much more concerned by what they perceive as available resources to pay for college, not what’s been agreed upon by the divorcing parties.  Even if this seems unfair.

A substantial subset of the CSS Profile requiring schools will also require the Noncustodial Parent’s income and asset information by way of an entirely separate, full-blown CSS Profile (approximately 200-300 questions).

 

Which Financial Aid Applications Should You File

How do you know which forms your colleges  require?  You need to go to each college’s  website to see which forms are required, and for the year you are applying for.

Colleges’ financial aid requirements can change year to year.   One year they may require only  the FAFSA, and then the next year they could require both the FAFSA and the CSS Profile.

One year, maybe they’ll require both the FAFSA and the CSS Profile, and then the next year they could require the CSS Profile and all the Noncustodial Parent’s information on that CSS Profile.

If you are looking at schools that require the FAFSA only, you need not worry about the Noncustodial Parent’s financial information.  The FAFSA requires only the Custodial Parent’s information.

TIP:  BEFORE you finalize your child’s college list, determine which financial aid applications each college requires and what information the Custodial and Noncustodial Parents must provide.  Then research strategies to improve eligibility for financial aid.

 

“Deadbeat Dad”

Often, divorced/separated families raise the issue of the noncustodial, “deadbeat” parent (usually, but not always, the father in my experience).  Meaning, the parent who doesn’t live up to his financial obligations to his ex-spouse under the settlement agreement.

In the financial aid process, it’s common for the Deadbeat to  refuse to divulge any information.   What if you’re applying to a CSS Profile college that requires information from this parent?

You cannot get blood from a stone. Most colleges will permit you to file the equivalent of an affidavit that indicates that the Deadbeat is out of the picture and/or behind on his obligations.

If this describes your situation, don’t worry.  You have plenty of company and financial aid officers will likely understand. It’s all too common to be estranged from the Noncustodial Parent, with very little to no cooperation regarding the children, and/or for him to be in arrears in child support, forcing your returning to court to collect it. Or, dealing unpaid medical or other bills, or an existing  court order that’s not being followed.

In those and similar  circumstances, you would try to get a Noncustodial Parent waiver approved by the school that is seeking that information.

TIP:  If the ex-spouse refuses to pay or participate in the process of applying for financial aid, most colleges will allow you to attest to this by completing a short form, or waiver.  Contact the financial aid office directly to explain your situation.

 

I agree pen and paper

Separation Agreements and Financial Aid Eligibility

I mentioned this in passing, above but it’s important to understand.  What is the effect of divorce/separation agreement on the financial aid award?   None. 

The AGREEMENT is irrelevant.  Financial aid is about the family’s RESOURCES, not what was negotiated.

 An ex-spouse could have a multi-million dollar net worth, but have agreed to pay for 75% of tuition at an in-state university.    Every financial aid office in the country will disregard this arrangement and look at the ex-spouse’s assets and income to determine what he is CAPABLE of paying.

 

Remarriage

What happens when a divorced/separated Custodial Parent gets remarried?  For example, mom is the Custodial Parent. She remarries and now has a spouse who earns an income, and has his own kids. They have blended their families. When mom fills out her financial aid forms, does she include only her financial information? 

No.  Once a Custodial Parent remarries, her and her new spouse’s combined financial information, income and assets, comes into play for financial aid purposes.  Ditto for moving in together, sharing a home, even without marrying. 

That means all of the financial information of that new spouse or partner, even if that parent has his or her own children and his or her own child support obligations.  The theory behind this is that the mom and the new spouse/partner are sharing expenses pooling resources.

True, the  new spouse/partner has no legal obligation to support the mom’s child.   You can attempt to explain that to a financial aid officer after you receive your award, upon appeal, especially if the new spouse has his own set of expenses that would not otherwise be disclosed on the financial aid applications.

TIP:  Hold your horses.  Don’t be so quick to remarry or move in with your partner if you need financial aid for college.  Your new spouse’s/parent’s  income and assets will count against you on the financial aid applications, which are concerned with HOUSEHOLD income.

Next Steps

There is a lot more to cover about the basics of financial aid, not to mention what it takes to get into a decent college today, but these topics are outside the scope of this report.  I hope this article provided some clarity on how best to proceed in the financial aid process when divorced/separated families are involved. However, by necessity it is only a SUMMARY of the new rules, as we understand them as of the date of this writing (Spring 2023).

For more information about our financial aid consulting or other college advisory services, email me directly at vip@lockwoodcollegeprep.com or call my office, 516.882.5464.  

The New Rules of Financial Aid for Divorced Families

About the Author

Pearl Lockwood is the co-founder of Lockwood College Prep., a college advisory firm that specializes in financial aid and scholarships consulting, college advising, SAT/ ACT tutoring, majors and careers planning and more.  See  www.LockwoodCollegePrep.com for more information.

The New Rules of Financial Aid for Divorced Families

About the Author

Pearl Lockwood is the co-founder of Lockwood College Prep., a college advisory firm that specializes in financial aid and scholarships consulting, college advising, SAT/ ACT tutoring, majors and careers planning and more.  See  www.LockwoodCollegePrep.com for more information.

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DISCLAIMER: The commentary, advice, and opinions from Gabrielle Hartley are for informational purposes only and not for the purpose of providing legal advice or mental health services. You should contact an attorney and/or mental health professional in your state to obtain advice with respect to any particular issue or problem.

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