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DIVORCED OR SEPARATED PARENTS. - Parental income and assets for a student whose parents are divorced or separated is determined under the following procedures: (A) Include only the income and assets of the parent with whom the student resided for the greater portion of the 12-month period preceding the date of the application. (B) If the preceding criterion does not apply, include only the income and assets of the parent who provided the greater portion of the student's support for the 12-month period preceding the date of application. (C) If neither of the preceding criteria apply, include only the income and assets of the parent who provided the greater support during the most recent calendar year for which parental support was provided.Similarly, the following is an excerpt from subregulatory guidance that appears on page AVG-29 of the 2011-12 Application and Verification Guide. It directly addresses the tax return exemption issue raised by your stepdaughter's mother.
Divorce of the student's parents If the student's parents are divorced, he should report the information of the parent with whom he lived longer during the twelve months prior to the date he completes the application, regardless of which parent claimed him as an exemption for tax purposes. If the student lived equally with each parent or didn't live with either one, then he should provide the information for the parent from whom he received more financial support or the one from whom he received more support the last calendar year for which it was given. Note that it is not typical that a student will live with or receive support from both parents exactly equally. Usually you can determine that the student lived with one of the parents more than half the year or that he received more than half support from one of the parents.College financial aid administrators sometimes believe that the authority to use professional judgment allows them to disregard section 475(f) of the Higher Education Act of 1965. It does not. Section 479A of the Higher Education Act of 1965 gives colleges the authority to adjust the data elements on the FAFSA on a case-by-case basis when there are special circumstances. But the statute also says that "this authority shall not be construed to permit aid administrators to deviate from the contributions expected in the absence of special circumstances." A divorce case normally does not represent a special circumstance, given that Congress explicitly considered how to handle such a circumstance when enacting the legislation. It is possible, however, that the college financial aid administrator believes that you are manipulating the truth in order to qualify your stepdaughter for more financial aid. After all, she initially completed the FAFSA with her father's information and then switched to her mother's information after she got denied a Pell Grant. Try explaining that the original application was in error due to the biological mother insisting incorrectly that whomever claims the student on their federal income tax has to complete the FAFSA. It may be helpful to provide the college with a copy of the divorce decree demonstrating that it requires your stepdaughter live more with her mother than her father. If the custody is shared equally, provide an itemized list of which days she lived with each parent. It can also help to show other evidence that your stepdaughter lives with her mother more. For example, if her mother lives in a different state, provide documentation that she attended high school in that state, since the school district is based on the student's residence. Your question highlights an interesting quirk in the definition of household size. Even though your stepdaughter should be counted in her mother's household on her FAFSA, you may be able to count her in your household size on your FAFSA. The rules are not symmetric. The support test is primary when determining whether a child may be counted in the parent's household on the parent's FAFSA. You can count your stepdaughter in the household size on your FAFSA if you and your husband provide more than half of her support. Note that if you count your stepdaughter in household size on your FAFSA, then you cannot report the child support paid on her behalf on your FAFSA. If you and your husband provide less than half her support, you cannot count her in the household size on your FAFSA, but then you can report the child support paid on your FAFSA. You can't both report the child support paid and count her in your household size. You can do one or the other, but not both. The main impact of counting her in your household size, besides a higher income protection allowance, is the ability to count her in the number in college figure. That can have a big impact on your eligibility for need-based financial aid. On the other hand, the child support paid is subtracted from total income on your FAFSA. But usually increasing the household size and number in college has a greater impact on aid eligibility than getting to count the child support paid. Thus it is not a contradiction for your stepdaughter to be in her mother's household for her FAFSA and in your household for your FAFSA.