The federal financial aid formula and the institutional formula used by many private colleges differ in notable ways, including how heavily they assess the income and assets of parents and students. But you should pay particular attention to two key differences.
First, while the federal formula ignores home equity, it’s considered in the institutional methodology. You hear about parents who use their savings to buy an overly large home or undertake elaborate remodeling projects with an eye to increasing aid eligibility. That may help with the federal methodology, but it may not increase aid eligibility if your children plan to attend a private college.
Second, if a couple is divorced, the federal formula focuses solely on the finances of the custodial parent and, if remarried, the finances of his or her new spouse. The custodial parent is typically the parent with whom a child has spent the most nights over the past year or who provides the bulk of the child’s financial support.
By contrast, with the institutional methodology, both parents may be considered, as well as the finances of any new spouses. One implication: If your child isn’t likely to attend a college where the institutional formula is used, you should give careful thought to who should be listed as the custodial parent.
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