How to Improve College Financial Aid Opportunities When Divorcing

As a Certified Divorce Financial Analyst (CDFA), I often work with couples to maximize their estate by minimizing the tax impact of their financial decisions. However, with rising higher education costs, the conversation around divorce and college financial aid has become more prevalent. More couples are focusing on maximizing their financial aid opportunities when making financial agreements during their divorce. How assets will be divided, spousal support and other financial decisions can all impact financial aid eligibility.

One of the best things about choosing to go through mediation or other alternatives to dispute resolution is maintaining the power throughout your divorce process. When I sit down with a couple, before we even begin to discuss money, I talk to them about what's most important to them - what they are hoping to achieve for themselves and for their family. Parents with high schoolers often express concerns about how they'll pay for college. So, what do you need to know about divorce and college financial aid?

Financial Decisions will Impact Your EFC

You will make lots of big financial decisions during the course of your divorce. Many of these decisions will impact what information will end up on the FAFSA. The FAFSA (Free Application for Student Aid) is used to apply for federal financial aid. The information provided on the FAFSA is used to calculate the Expected Family Contribution (EFC). For example, one component on the FAFSA that goes into calculating the EFC is income.

Here are three things to consider about the income that's entered on the FAFSA and considered for the EFC:

1. If divorced or separated and living apart, the custodial parent will be listed. If there is shared custody, the custodial parent when talking about financial aid, is the parent who the child resides with the majority of the time (even if just 51% vs. 49%).
2. If divorced or separated and living together, both parents' financial information will be listed on the FAFSA.
3. If the custodial parent is remarried, both the custodial parent and the stepparent will be listed on the FAFSA.

Who has the lowest income?

Keep in mind that the lower the income listed on the FAFSA, the bigger the opportunity to receive financial aid. When considering spousal support, remember that spousal support reduces the income of the payor and increases the income of the recipient. If you have children in or nearly in college and are trying to maximize financial aid opportunities, it's worthwhile to run the calculations to determine how spousal support will impact your eligibility for financial aid. In some cases, I've seen parents agree to lower spousal support. The person paying the support then agrees to be responsible for a higher percentage of the college expenses. There has to be a very high level of trust to make an agreement like that but it works for some families.

For some institutions, the CSS Profile (College Scholarship Service Profile), a form used to determine nonfederal financial aid (not required by all institutions), does consider the income of each parent regardless of the time spent with that parent. A list of institutions that use the CSS Profile and whether or not information for the noncustodial parent is required can be found on the College Board website.

What about asset treatment?

What other factors should you consider as it relates to divorce and college financial aid?

1. Retirement assets are not considered available to pay for college education and thus, are not considered when calculating the EFC. This may affect how you decide to divide assets in your divorce.
2. Home equity is not considered on the FAFSA. It is included on the CSS Profile, though. Different schools that use the CSS Profile consider home equity differently. If you are trying to maximize your financial aid through your divorce agreements, consider what schools your child plans to apply to.
3. The cash value of life insurance policies is not reported on the FAFSA.
4. The value of nonqualified annuities is considered by some schools on the CSS Profile.

If you're able to work together, there are opportunities for your divorce settlement to positively impact your EFC. However, it's important to acknowledge that every family's situation is unique. Often divorce happens well before kids are even looking at colleges let alone selecting the one they'll attend. Different colleges and universities also have their own rules. It's best to work with an advisor who is well-versed in college financial aid opportunities as well as divorce financial planning to determine the best course of action for your specific circumstances.