Household Information is Reported as of the Date of Signing the FAFSA
“Household Information,” just as asset assessment, is reported on the financial aid application at the date the financial aid application form is signed. It does not matter what the household status was previously or will be in the future.
If the parents are both living and married to each other, income and asset information must be listed for both of them on the financial aid application. If the student’s parents are living together and have not been formally married but meet the criteria in their state for a common-law marriage, they should report their status as married on the application and report the income and assets of both common-law parents. If the state of residence does not consider the relationship to be a common-law marriage, then the parents should file as if they are separated. Check with the appropriate state agency concerning the definition of a common-law marriage.
Adoptive parents are treated in the same manner as biological parents. Their income and assets must be reported on the financial aid application forms.
Foster parents are not treated as a student’s parents. Their income and assets do not have to be reported on the financial aid application forms.
If the student has a legal guardian, the guardian’s income and asset information is not included on the financial aid application. If the student is living with grandparents, the same principle applies. The income and assets of the grandparents should not be reported on the application form unless the grandparents have adopted the student or are the student’s court-appointed legal guardians and are required by the court to use their resources to support the student.
Example 1: Joe Smith is a 19-year old undergraduate student whose parents are deceased. A court appointed his aunt and uncle as his legal guardians and they were ordered to use their financial resources to support him. Joe is not a veteran, is not married, and has no dependents. Because both parents are deceased, Joe must file as an independent student because he is an orphan.
Example 2: Debra Johnson is a 19-year old undergraduate student whose parents are living; however, when Debra was 10, a court appointed her grandmother as her legal guardian. The court order stated that her grandmother would need to use her own financial resources to support Debra. Debra is not a veteran, is not married, and has no dependents. Debra is considered a dependent student. Debra’s parents should supply their financial information and sign the FAFSA. However, with appropriate documentation, a financial aid officer would use professional judgment either to make Debra independent or to substitute the grandmother’s financial information for Debra’s parents’ information.
Note: In a situation where the student lives with foster parents, legal guardians, or grandparents, the student is considered an independent student.
Widowed or Single Parents
If the parent is widowed or single, only that parent’s income and asset information is listed on the financial aid application. If a parent dies before the application is signed, only the surviving parent’s income and assets are listed on the application. When a joint tax return has been filed, the surviving parent’s income and corresponding tax liability is separated out and only these amounts are listed on the application. The surviving parent must list only his/her income and assets at the time of signing the application. Should both the student’s parents be deceased at the time the student signs the application, the student is considered an “independent student.”
If the student has a stepparent, the stepparent’s income and asset information must be included on the financial aid application, if the stepparent was married to the natural parent prior to signing the application. Prenuptial agreements do not affect this rule. If the biological parent has died and the stepparent survives, then the student is considered an “independent student” (assuming the student is not dependent on the surviving biological parent), unless the stepparent legally adopted or is the legal guardian of the student.
Note: If the last surviving parent dies after the financial aid application has been filed, the student must use the Student Aid Report to update the dependency status and all other information as is required.
Observation: Even though prenuptial agreements are not recognized in the financial aid regulations, some families have successfully appealed the financial aid award because the FAO was convinced that the stepparent, because of the prenuptial agreement, would not contribute to the stepchild’s college costs.
Divorced or Separated Parents
If the parents are divorced or separated, the income and asset information of the parent with whom the student lived the most in the last twelve months must be listed. The separation need not be a legal separation, the student’s parents may consider themselves separated when one of the parents has left the household for an indefinite period of time and no longer makes a substantial contribution to the finances of the household. If the student did not live with one parent more than with the other (as in the cases of joint custody or a married couple who divorced or separated immediately before the financial aid application was signed), the income and asset information of the parent who provided the majority of financial support during the last twelve months, or during the most recent calendar year that the student was actually supported by a parent, is listed. This may not be the parent who claimed the student on a tax return or the one who was awarded custody by a court order. Support includes money, gifts, loans, housing, food, clothes, car, medical and dental care, payment of college costs, etc.
Example: On January 15, 2017, a married couple got divorced. On January 30, 2017 their child signed and filed a financial aid application. Since the household status is determined as of the date the financial aid application is signed, only the custodial parent’s income and assets had to be included on the application form. Since it was determined that the mother was the custodial parent in this case, only her income and assets had to be reported on the financial aid application form. Based on their accountant’s advice, the couple had filed a joint tax return for 2016. Since only the mother’s income had to be reported on the financial aid application, she has to separate her income and corresponding income tax liability from the joint income and report it on the financial aid application.
Example: A couple is in the process of structuring a divorce. The wife is expected to have $40,000 in income and the husband is expected to have $110,000 in income after the divorce. To make up for the disparity in income, the wife is to receive a greater share the couple’s assets. Because of the structuring of income and assets in this manner, they decided to have the children live with the wife. This will increase their children’s eligibility for financial aid. The wife’s income will make her eligible for the education tax credits (provided she met the other criteria for claiming these credits).
Caution: An “education clause” is often included in a divorce settlement. These clauses require the non-custodial parent to contribute a certain amount of money to the children’s cost of college. Some colleges will treat this contribution as a “resource” of the student. Thus, the contribution reduces the child’s financial aid eligibility on a dollar-for-dollar basis.
Caution: Many divorce settlements include a provision to create and fund a trust for the benefit of the children. Since assets are being shifted from the parents and their assessment rate of 5.6% to the children and their assessment rate of 20%, this may cause a future loss in financial eligibility.
Number in the Household
Where the financial aid application asks for “the number in the student’s household,” the number of people in a dependent student’s household includes:
- the student (even if the student will be enrolled less than half time or does not live with the parents)
- the student’s parent(s), excluding a parent not living in the household as result of death, separation, or divorce
- the student’s siblings, if they received or will receive more than half of their support from the student’s parent(s) between July 1st and June 30th of the upcoming college year or if they would be required to report parental information on the financial aid application
- the student’s children, if they received or will receive more than half of their support from the student’s parent(s) between July 1st and June 30th of the upcoming college year (even if the children do not live with the student’s parent(s), they must be counted if they meet this criteria)
- the student’s parents’ unborn child and/or the student’s unborn child, if that child will be born before or during the upcoming college year and the student’s parents will provide more than half of the child’s support from the projected date of birth until the end of the college year (if there is a medical determination of a multiple birth, then all expected children can be included); and,
- other persons, if they live with and receive more than half of their support from the student’s parent(s) at the time of signing the application and will continue to receive that support for the entire upcoming college year.
The following persons may be included in the household size of an “independent student:”
- the student
- the student’s spouse, excluding a spouse not living in the household as a result of death, separation, or divorce
- the student’s dependent children, if they received or will receive more than half of their support from the student’s household during the upcoming college year
- the student’s unborn child, if that child will be born before or during the upcoming college year and the student’s household will provide more than half of the child’s support from the projected date of birth to the end of the award year (if there is a medical determination of a multiple birth, then all expected children can be included)
- other persons, if they live with the student and receive more than half of their support from the student’s household at the time of signing the financial aid application and will continue to receive that support for the entire upcoming college year.
Note 1: For the purpose of including children in the household size, the “support” test is used (rather than a residency requirement) because there may be situations in which a parent supports a child who does not live with the parent, especially in cases where the parent is divorced or separated. In such cases, the parent who provides more than half of the child’s support may claim the child in the household size. If the parent receives benefits (such as Social Security or AFDC payments) in the child’s name, these benefits must be counted as parental support to the child.
Example: Jack was married to Jill in 2010 and that same year they had a son, James. In 2011, Jack and Jill divorced and Jill received custody of James and he lives in her household. However, Jack provides over half of the support for James. Jack remarried in 2012 and moved in with his new spouse and her daughter, Jane. In 2018, Jane was planning to attend college in the fall. When she completed her financial aid application, she correctly reported her half-brother, James, as a member of her parents’ household. Since Jane’s parents provided over half of James’ support, even though he did not live with them, Jane could list James as a member of the parents’ household. Since James was also attending college, Jane could list him as a member of her household who was attending college. Because of the fact that there were two members of the household enrolling in college, Jane’s financial aid eligibility is greatly increased.
Note 2: If a family has a graduate student in the household, in addition to an undergraduate student in the household, the graduate student is considered a member of the household enrolled in college, and the total number enrolled in college is two. Some FAOs might not think this is right and they may use their “professional judgment” to disallow the graduate student as a member of the household in college. If that is the case, the client should appeal the decision.
Note 3: The number of people in the household may or may not equal the number of tax exemptions claimed by the parents on their tax return.
Example: An older sibling, who is living in his own household but receives over half of his support from the student’s parent(s), may not qualify as a tax exemption for the parents, but can be counted as a member of the household since over half of the support is provided by the student’s parent(s).
Criteria for Household Members Attending College
Where the financial aid form asks for the number in the household that will attend college, the number of people (excluding the student’s parents) in the student’s household who will be college students between July 1st and June 30th of the upcoming college year must be listed. Members of the household may be counted as college students only if they are planning to enroll, or are accepted for enrollment, for at least six credit hours in at least one term, or at least twelve-clock hours per week, even if they do not complete a term. In some cases, colleges may accept correspondence courses or College-Level Examination Program (CLEP) tests as qualifying college credits for the above six credit requirements. A high school student taking college courses cannot be considered as enrolled in college. The student must be a high school graduate to be counted as a member in the household attending college.
To be counted as a college student, one must be working towards a degree or certificate leading to a recognized education credential at a college or trade school that is eligible to participate in any of the Federal student aid programs. (This does not include the U.S. Service Academies, such as West Point.)
The student should always be included, even if enrolled less than half time. If there are additional household members in college the family EFC can be greatly reduced. This is due to the parents’ contribution being divided by the number attending college and adding it to the student’s contribution to calculate the student’s EFC.
Additional Household Members in College
Effect on the EFC
Number in College One in College Two in College
College cost per student $35,000 $35,000
Expected Family Contribution $18,000 $9,000
Financial need per student $17,000 $26,000
*Assumes student contribution to the EFC is zero.
Note: Parents or other household members in college qualify for either the American Opportunity Credit or the Lifetime Learning Credit.
Independent Student Status
In the case where a student’s parents are married and have high incomes and assets, the student will not qualify for need-based financial aid. However, if at a later point in time the student becomes an “independent student, the student may then qualify for need-based financial aid. An independent student does not have to report the parents’ income and assets on the financial aid application forms and therefore may stand a better chance to receive need-based financial aid from a college. To determine if the student qualifies as an independent student, the financial aid rules regarding independent students must be reviewed.
Criteria for Independent Student Status
An independent student is one who meets one of the following criteria:
- is at least 24 years of age by December 31st of the school year.
- is a veteran of the US Armed Forces or one of the service academies. The student must have been released under a condition other than dishonorable. The student must have been in active duty, not the National Guard or a Reserve enlistee.
- is a graduate or professional student. A professional student is a student pursuing a course of study beyond a bachelor’s degree.
- is a married student.
- is a ward of the court, lives with a legal guardian or foster parents, or is an emancipate minor as determined under state law.
- has parents who are both deceased.
- has a legal dependent other than a spouse. A legal dependent is any person who lives with the student and receives more than half of his or her support from the student and will continue to receive more than half of the support from the student during the college year. Any child (may include an unborn child) of the student who receives more than half of the support from that student is considered a legal dependent, even though the child does not have to live with the student. The child can be a natural or adopted child, or a child for whom the student is legal guardian.
Example 1: A girl, who is a senior in high school, is pregnant at the time she signs her financial aid application. If she expects to provide more than half the support of her unborn child during the entire upcoming college year, she may be considered an independent student.
Example 2: A boy, who is a senior in high school, has a girlfriend who is pregnant at the time he signs his financial aid application form. Even though the unborn child is not expected to live with him during the upcoming college year, he may be considered an independent student if the student is expected to provide more than half of the child’s support.
Note: A non-custodial parent who pays over half of the support of a child is considered an independent student. In addition, child support payments are a deduction from the financial aid income.
There are some cases when a student’s dependency status can change from independent to dependent. This can occur in Professional Judgment cases, such as when a student was declared independent due to special circumstances and those circumstances change, or when a student transfers to a different college and the FAO at the new college chooses not to grant a dependency override to the student.
Divorce Planning to Cut the Cost of College
Proper college and tax planning in a divorce can preserve more of the income and assets for both the parents and the children. The preserved income and assets can be used to fund future college costs of the children.
Property settlements should be developed to ensure they are equitable. Even though the fair market value of the properties to be distributed may appear to be equal, the financial risks and tax consequences related to the properties may be unequal. For example, a limited partnership interest could soon lose much of its value, while a money market fund would retain its worth. The spouse who would be responsible for future college costs would probably not want to receive an asset whose value could drastically decrease, especially if the asset was going to be used to fund college costs. In addition, there are some assets that create a large tax liability if liquidated for college costs. It may be wise for the spouse who is responsible for future college costs to receive assets that have no potential gain or loss, such as CDs. The spouse does not need a large tax liability at the same time as large college costs arise.
Since alimony is deductible from the gross income of the spouse making the payment and included in the income of the spouse receiving the payment, the deduction for alimony creates an opportunity to shift income from a higher to a lower tax bracket spouse. The tax benefit created by the lower overall income tax liability can be used to fund college costs. Other payments made to a former spouse that can be considered alimony are medical insurance, mortgage payments, real estate taxes, insurance, utilities, life insurance premiums, and college costs.
A divorced client may consider saving for a child’s college education by investing in Roth IRAs. If the client had no earned income, no contribution to a Roth IRA could be made. However, since alimony is considered earned income, the alimony would qualify the divorced client for a Roth IRA. During college years the original contributions could be withdrawn income tax and penalty free to pay for college expenses.
Qualified Domestic Relations Order
Future assets, such as pensions and retirement benefits, are often not considered in constructing a divorce settlement. A “Qualified Domestic Relations Order” (QDRO) is required for an ex-spouse to receive an interest in a former spouse’s retirement benefits. A QDRO is a judgment, decree, or court order that provides an ex-spouse with the right to receive benefits from a qualified retirement plan.
A QDRO specifies the amount of retirement benefits to be paid or rolled over to the retirement account owner, the former spouse, and the children. The retirement account benefits are taxed to the former spouse when they are paid.
Therefore, in order to maximize the tax benefits of transferring pension and retirement plans to the ex-spouse and children, the advisor should be aware of the tax consequences and structure the agreement to maximize the income shifting tax benefits. If this is properly done, it will in effect make the distribution to the spouse equivalent to alimony (i.e., the spouse, not the retirement account owner, will be taxed on the distributions).
The 10% early withdrawal penalty on withdrawals before age 59½ does not apply to payments made to an ex-spouse under a QDRO. In addition to the income tax savings, the distributions to the ex-spouse escape gift and estate tax. The tax savings and retirement fund withdrawals can be used as a source of college funds.
A QDRO distribution can be made to the retirement account owner before the time the participant is eligible to receive a distribution. Distributions may be made even if the participant has not reached age 50. This could be a source of funds for college funding.
In the case where support payments decrease when the children reach a certain age, leave home, or marry, the payments will be considered child support. A QDRO could be structured to have the distributions made to the children for college expenses until they reach a certain age. The receiving ex-spouse would be taxed on the plan distributions. The original retirement account owner could not claim an income tax deduction for the payment, but would not have to report the distribution as income. Thus, the net effect of this transaction would be shifting of income to the ex-spouse.
Example: The parents are getting divorced. The divorce agreement requires the father to make payments to the mother until their child finishes college. Because the mother is concerned about the father’s willingness to meet this financial obligation, she obtains a QDRO against the father’s 401(k) plan to secure the college expense obligation. If the father defaults on the college expense obligation, the mother can recover the funds from the father’s 401(k) plan.
If a client intends to remarry after a divorce or death of a spouse, the use of a prenuptial agreement should be considered. Such an agreement can be used to preserve funds for future college costs for children from a prior marriage. Absent a prenuptial agreement, the ownership and disposition of property in the divorce proceedings will be determined by state courts. The court decision may be contrary to the original intention of using the assets to fund the future college costs of the children or stepchildren.