facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast blog external search

What Divorced Parents Need to Know About Financial Aid

When advising divorced parents on the college financial aid process, a number of questions come up that have answers that aren't intuitive. In this post I will cover the most frequent situations I encounter. I will also include tips to help you use the rules to your benefit and save money on the cost of college. 

Who's my parent?

Believe it or not, this is not a straightforward question. Use the handy-dandy infographic here to figure it out based on whether or not the biological parents are married, whether or not they live together, who the student lived with more, who provided more financial support during the last 12 months, and whether or not that parent is remarried. 

The answer to this question is important because it serves as the basis for who has to share their financial data on financial aid forms. Many parents are surprised because it doesn't follow the rules of:

  • who has "custody" - not the same as the "custodial parent"
  • who takes the income tax exemption
  • any agreements made in a divorce agreement as to who is responsible to pay for college 

Whose Income Should Be Included?

The benefit of these rules is that there could be a benefit to the child living with the parent with the lower income. Again, this seems straightforward, but it isn't. 

  • Child support is counted as untaxed income, so you need to add that in to your consideration. Alimony received is taxable income to the parent receiving it.
  • If the parent is remarried, the stepparent's income is required to be included on the FAFSA. Got a prenup? Doesn't matter, the federal government doesn't care when it comes to paying for college.
  • If the school is one of several hundred that require the CSS profile, the benefit of living with the lower income parent could be negated if the school requires financial information from the non-custodial parent (and their spouse, if they have one).

Can I Take Advantage of Tax Benefits?

To get some education tax benefits, you must be the parent taking the exemption for the student (regardless of who is paying the college expenses). The four main tax strategies are detailed below:

  • American Opportunity Credit - up to $2,500 tax credit per student, for Tuition, fees, and course materials, 2017 Income Phaseouts are $80-90k Single and $160-180k Joint. 
  • Lifetime Learning Credit  - up to $2,000 tax credit per student, tuition and fees only, 2017 Income Phaseouts are $55-65k Single and $111-131k Joint. 
  • Tuition and Fees Deduction - up to $4,000 deduction from income ($2,000 in phaseout bands), tuition and fees, 2017 Income Phaseouts are $65-80k Single and $130-160k Joint. 
  • Student Loan Interest Deduction - up to $2,500 deduction from income for interest paid on eligible student loans, 2017 Income Phaseouts are $65-80k Single and $130-160k Joint. 

The tricky thing about tax strategies is coordinating the expenses paid because you can't use the same expenses more than once for any of the tax credits/deductions and qualified withdrawals from education savings accounts (Coverdell ESAs or 529 plans). For more information check out the IRS Publication.

If you need help with your specific situation, feel free to reach out and schedule a free introductory consultation!