It is the time of year when students receive their letters of admission to college, but the process for paying for college – particularly for children with divorced parents – should begin much earlier, because the process can be complicated.
College aid comes in two different varieties – merit-based and need-based. For merit-based scholarships, students lower their overall cost of college based on how well they have done academically. Students with high GPA and standardized test scores can earn significant reductions in the retail-price of college, particularly at state universities. Need-based aid depends solely on a lack of sufficient income or assets to pay for college.
Federal need-based aid falls into two categories – grants and loans. With grants, based on income, students can receive a stipend to pay part of tuition. Unfortunately, these grants only cover a fraction of the total amount of tuition. Often, states and the schools themselves offer additional stipends, and parents should research these options carefully. After all the “discounts” have been applied, the balance that remains must be financed by a student loan.
Student loans have several advantages over conventional loans. First, they tend to carry very low interest rates. Second, they do not become due until six months after the student is no longer a student in school at any level (undergraduate or graduate). Third, they frequently come with ways to “forgive” part of the balance through various public service options in terms of employment after school ends.
With these basics out of the way, we can address how divorce impacts the financial aid process.
When parents are married, the entire family income must be reported on the Free Application for Federal Student Aid (FAFSA). For families with two significant wage earners, this can make qualifying for aid more difficult as they will be more likely to hit the ceiling for aid.
After divorce, however, a student needs only one parent to complete the financial information on the FAFSA. In this case, the student should be very strategic if possible – ask the parent with the least income to complete the FAFSA to maximize the amount of aid.
But there is a catch – the person who completes the form must be the parent who has the most custody. Depending upon the custody arrangement, this may already work out well for the student. But if the parents have joint physical custody and the parent earning more money claims the child as a dependent, the parents need to consider changing the custody option – or thinking about this at the time of divorce. Simply changing a few days so that the lesser earning parent has 50.05% of the custody time will be enough to make the difference.
While losing the child deduction will have an impact on the parent with a higher income, it will also benefit the lower earning parent too, so the parents can reach an agreement on how to share that savings. But more importantly, the loss in tax relief will pale in comparison to the aid the student can receive, both in federal grants and student loan relief.
It is possible changing the designation could impact child support; again, parents will want to evaluate the options here and discuss what a potential savings could yield for college versus any support for the child going to college.
The financial aid process takes time. As such, parents should begin completing the FAFSA at the earliest time, preferably during the summer between junior and senior year.
If you have questions about divorce and financial aid for college, contact us – we can help.