Impact of FAFSA Changes for Divorced and Separated Parents

Indeed, the legislation held so much important and timely information to process that one of its components, the FAFSA Simplification Act, at first received little notice, even though it introduces some major updates to the way the FAFSA – that is, the Free Application for Federal Student Aid form – determines financial need for students pursuing higher education and their households at various income levels. If you have a child beginning college or approaching college age, understanding these changes and how they affect your family, especially if you are divorced or separated, will be important for any education planning on your horizon.

For example, keep in mind that these changes were initially set to go into effect July 1, 2023, for the 2023-2024 school year, but some of them have since been delayed and now aren’t expected to apply until the 2024-2025 school year. And while the FAFSA Simplification Act streamlines the FAFSA form by taking it down from 108 questions to under 40, perhaps more important are the significant adjustments it makes to the federal need analysis formula by doing away with the often-confusing Expected Family Contribution (EFC) and replacing it with the Student Aid Index (SAI). The SAI is used to calculate need for need-based programs. Another change involves the direct transfer of income information from the IRS. The intent is to better align the FAFSA with tax return data.

What are the effects of the FAFSA changes?

You are likely thinking that simple is better, right? What’s the problem? Unfortunately, some of the revisions to the FAFSA process could have special implications for divorced and separated parents. Today, only the custodial parent is required to fill out the FAFSA form with their financial information. The custodial parent is defined as the parent who has the majority of the physical custody of the child, or whoever the child spends the majority of their time with.

The major change in this arena, and the one to be most aware of, is that the definition of the custodial parent will differ when it comes to filling out the new FAFSA form. Rather than the parent that the student lived with most often during the year, the custodial parent will be the one who provided the most financial support to the student during that time. Why could this be problematic? In some situations, these might not be the same parent, particularly if there is a large discrepancy in income. It could also pose some difficulty in situations where families have already made agreements regarding who and how college will be paid for, and who may have been counting on certain financial aid or assistance. While this change may seem somewhat arbitrary, it makes more sense if you consider that it was introduced with the desire to better align the FAFSA with IRS records and your tax return.

The second issue that’s important to note is the changes in how family size is calculated. Going forward, the FAFSA will determine family size based on the number of dependents listed on the parent’s tax return. But in some cases, divorced parents will negotiate who will claim the tax deduction for children. Some parents agree to split who will claim which child, or may even switch year to year who will claim children on their tax return. As a result, this change to the FAFSA might not always take into consideration the true family or household size.

Take, for instance, a couple with two children that divorces and agrees that each parent will claim one child as a dependent. For FAFSA purposes, the family size formula would show only one dependent child when in fact the parent is supporting the financial needs of two kids. Furthermore, one of the parents could choose to get remarried, which may add multiple step-children to the equation. Bottom line: Kids in the household might not always equal kids listed as dependents on the tax return.

Together, these changes have the potential to decrease the amount of college financial aid for which children of divorced or separated parents are eligible. Less availability of aid could increase the cost for children to attend college, making certain schools unaffordable or out of reach. Each family, its financial situation, and its education goals and aspirations are unique, so it is difficult to address the FAFSA changes with a one-size-fits-all solution. But there are two things parents can start thinking about.

First, understand the level of aid for which you may be eligible given your current finances. There are calculators available online to give you an idea of what this might be (the Federal Student Aid website and savingforcollege.com are two great resources). Second, familiarize yourself with the forthcoming changes. Get an idea of how they may impact your family in the future. If you are in the process of going through a divorce, does this affect how you would negotiate custody, support or dependents for tax purposes? If you are still in the early stages of divorce, you have more of an opportunity to plan for future education expenses. For those who have already finalized their divorce, is there anything about the structure of your family and your divorce agreement that may complicate filling out the FAFSA in the future? Look for adjustments you can make today to better position yourself financially to apply for aid and to absorb college costs.

There are still several years until these changes go into effect, and that means plenty of time to plan ahead for the significant investment you will make in your child’s education.

The opinions expressed by featured authors are their own and may not accurately reflect those of Buckingham Strategic Wealth®. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice. Individuals should speak with qualified professionals based upon their individual circumstances. The analysis contained in this article may be based upon third-party information and may become outdated or otherwise superseded without notice. Third-party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. IRN-21-2498

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This commentary originally appeared August 23, 2021 on thestreet.com