Is the Non-Custodial Parent a Parent for Federal Student Aid Purposes?
By The Fastweb Team
August 22, 2017
I am divorced and the custodial parent of two children who live with me. Both kids have Coverdell Education Savings Accounts. My soon-to-be college student daughter’s Coverdell lists her father (my ex-husband) as the account owner. My son’s Coverdell lists me as the account owner. How do I report my daughter’s Coverdell on the FAFSA? The fund will not give me the account value because my name is not on the account. Do I list my 15 year-old son’s Coverdell on my daughter’s FAFSA? — Julianne C.
The College Cost Reduction and Access Act of 2007 (P.L. 110-84) amended the treatment of qualified education benefits in section 480(f)(3) and (j)(2) of the Higher Education Act of 1965 effective with the 2009-10 award year. Qualified education benefits are treated as an asset of “the student if the student is an independent student” and as an asset of “the parent if the student is a dependent student, regardless of whether the owner of the account is the student or the parent.” Qualified education benefits include 529 college savings plans, prepaid tuition plans and Coverdell education savings accounts.
Your ex-husband is not considered a parent for federal student aid purposes. Only you (and your current spouse, if you have remarried) are considered a parent on the FAFSA. As such, any qualified education benefits owned by your ex-husband are not reported on your daughter’s FAFSA. It is important to distinguish between custodial accounts, where your daughter is both the beneficiary and the account owner (even if your ex-husband is the custodian), and regular non-custodial accounts, where your daughter is the beneficiary and your ex-husband is the account owner. The former get reported as an asset on the FAFSA while the latter do not. So your daughter’s Coverdell account does not get reported on her FAFSA because it is owned by your ex-husband.
Your son’s Coverdell account, on the other hand, does get reported as a parent asset on your daughter’s FAFSA (and eventually on his FAFSA) because it is owned by you.
Distributions from a qualified education benefit that are not includable in gross income are not counted as estimated financial assistance. They are also not normally counted as untaxed income. However, guidance published by the US Department of Education in the 2009-10 Application and Verification Guide indicates that “when the owner is some other person (including a non-custodial parent), distributions from these plans to the student count as untaxed income, as money received.” Thus distributions from your daughter’s Coverdell will be reported as untaxed income to her on the next year’s FAFSA, while distributions from your son’s Coverdell will not be reported on his FAFSA.
The potential treatment of distributions as untaxed income generally has a greater impact on aid eligibility than the potential treatment of the account as a parent asset. (Although the qualified education benefits might be treated as parent assets on every child’s FAFSA, one would need to have more than about eight children for the combined impact of the assets on aid eligibility to exceed the impact of the distributions on aid eligibility.)
Accordingly, it is usually best if divorce decrees and separation agreements change the owner of a qualified education benefit to the parent who will be completing the FAFSA. Ask your ex-husband to rollover your daughter’s Coverdell account into a new account where you or your daughter are listed as the account owner. Such a rollover will not be considered to be a taxable transfer.
Another option is to wait until after you file the FAFSA for your daughter’s senior year in college to take a distribution from her Coverdell account.
Who applies for the Stafford loan under the following scenario: My daughter lives with her mother. We are divorced. Her mother has no savings, very poor credit (low 500 FICO score) and is in arrears on many debts, but earns a salary of approximately $80,000. Even though her mother is responsible for completing the FAFSA, I will be paying for as much of my daughter’s college education as I can because her mom has no money. I intend to apply for the Stafford under my name and with my financial information. Because her mom’s information was entered on the FAFSA but my information will be entered on the Stafford loan, does this present a problem? — Robert D.
The Stafford loan is a student loan and will be borrowed by your daughter. Annual loan limits on the Stafford loan for a dependent student range from $5,500 as a college freshman to $7,500 as a college senior. You are thinking of the Parent PLUS loan, which is borrowed by a parent. The annual loan limit on the PLUS loan is the full cost of attendance minus other aid received. The Stafford loan is prefered because it has lower interest rates and fees than the PLUS loan.
While a non-custodial parent is normally not considered a parent for federal student aid purposes, the regulations at 34 CFR 682.201(c) and 34 CFR 685.200(c) permit the non-custodial parent to borrow from the PLUS loan program to help pay for a child’s college costs. The total PLUS loan amounts borrowed by both parents may not exceed the cost of attendance minus other aid received.
However, it may be advantageous to have your ex-wife to apply for a PLUS loan instead. If a parent is denied a Parent PLUS loan because of an adverse credit history (e.g., a current delinquency of 90 or more days is sufficient), the student becomes eligible for increased unsubsidized Stafford loan limits. These are the same limits available to independent students, ranging from $9,500 as a college freshman to $12,500 as a college senior. Since your ex-wife probably has an adverse credit history, her PLUS loan application will be denied. It may not even be necessary for her to apply for the PLUS loan, since the regulations at 34 CFR 682.201(a)(3) and 34 CFR 685.203(c) permit colleges to grant the higher Stafford loan limits to students whose “parent likely will be precluded by exceptional circumstances” from borrowing under the PLUS loan program. Note that once your daughter is granted the higher unsubsidized Stafford loan limits, you cannot obtain a Parent PLUS loan yourself or your daughter will lose access to the higher loan limits.
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