Financial Aid with Self-Employed Parents

Paying for College
1

<p>My parents do not understand how financial aid will pan out for us. They own their own business for 19 years (legal consulting) and the income varies greatly from year to year. Also, my mom heard that the AGI posted on tax returns is not respected for self-employed persons, the idea being that income is hidden.</p>

<p>How will my parents' S corporation tax return be examined? Will the home office costs, telephones, etc be added back into the AGI?</p>

<p>We simply do not know what range we fall in. I am afraid to apply to many schools ED until I know how these matters will be treated. Thanks</p>

2

<p>Small business owners and the self-employed in general have far more flexibility in the FA process than the typical wage earner. I would not be afraid of your family filing for FA at all. In my experience, small business owners get treated very favorably by the financial aid process.</p>

<p>Now there may be a few instances out there where someone got reamed in an FA audit, but those are the exceptions, not the rule.</p>

<p>Make sure you are applying to school’s with generous track records. Make sure your applying to 6 to 10 schools. Make sure you do your homework, and you’ll likely do very well through this process.</p>

<p>Of course, if your parent’s AGI was $250k… then you’ve got a different problem.</p>

3

<p>My husband is self-employed (S corp) and I have a “regular” job. I doubt we will get any FA due to our AGI. However, we will definitely submit a FAFSA. If I’m not mistaken the FAFSA is required for kids to borrow an unsub Stafford. </p>

<p>For a variety of reasons (not just cost), we will not allow our kids to apply anywhere ED.</p>

4

<p>The business net income may be $140,000, but the AGI (after business deductions, interest, phones, travel, etc) is closer to $80,000. My mom is afraid that the AGI number may not be accepted. She read somewhere that phone expenses, travel, and other basic expenses are often added back in to the income pool.</p>

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<p>And how would I research which schools give the best financial aid? Apart from HYPS, coupled with this year’s endowment drops, I’m not sure, I can understand the financial aid thinking of various schools. Any suggestions?</p>

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<p>Your mom is right. At most Profile schools the AGI will not stand. They will add back much of the expenses and losses. They are nowhere as generous as the IRS. Do not apply ED if your family will not be comfortable paying the EFC on the $140K. And I’m not sure how they treat the value of a business, but I think that will be looked at among their assets.</p>

<p>You’ll do much better at FAFSA only schools.</p>

<p>I would call the aid office at the school you’re considering applying to ED and have this discussion with them.</p>

7

<p>Whiteeagle – I do not know about a schedule S corporation, but I do know that colleges definitely ask to see schedule C’s and DO add back in many deductions, such as travel expenses, home-office deductions, & the like. Because that is separate from the FAFSA process, they have a lot of discretion in that regard, and its worthwhile to write a letter explaining expenses to the financial aid department, if there are strong reasons to show that these are required by the business.</p>

<p>Do NOT apply ED anywhere with your circumstances -you are correct in anticipating that you may have unexpected results depending on individual college policies as to how they treat the self-employment income.</p>

<p>The ONLY way you are going to be able to find out is to talk with the financial aid department at each college, but they may be unwilling to give you detailed information as to their internal policies. I personally don’t think its worth the effort – unless you had a school where you wanted to apply ED, and want some advance assurance from THAT school only. </p>

<p>However, you also said that your parents income fluctuates a lot from year to year. You need to realize that wherever you go, your financial aid will always be calculated on the previous year’s income. So if 2009 is a bad year for your parents, you could start school in 2010 with a generous grant – and then see it all disappear in 2011 if 2010 was a good year. So you may need to talk to your parents about what they are willing to commit to your education, no matter what – and whether they are able and willing to take out PLUS loans if needed. You might also look seriously for merit based aid, because that generally is guaranteed to stay stable if you meet specified academic requirements. A $15K annual merit scholarship that is guaranteed may be better in your situation than a $20K grant the first year that could be reduced to $8K the following year. </p>

<p>A good rule of thumb is that for every $2 more that your parents earn each year, you will lose $1 in aid. It’s actually not quite that bad (more like 45% than 50%) – but the math is easier to just assume that need-based aid will be cut by roughly half the amount of increased income. </p>

<p>Your best bet is to apply to a wide variety of schools, looking for both need based and merit awards, and including your in-state publics – and then compare aid packages in the spring after you are accepted.</p>

8

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Not true. Your paper EFC will be lower at those schools, but there are not FAFSA-only schools that I am aware of that guarantee to meet full need with grants & subsidized loans. If the overall COA is lower, such as with your in-state public – you may be ok. (The public universities in my state would have gapped my daughter by about $5000-- but that still would have cost less than the private college, which meets “full need”, but calculates our contribution to be $10-$15K above the FAFSA EFC). </p>

<p>But at a private school that does not promise to meet full need, then you may end up with a financial aid award consisting almost entirely of loans, with your parents expected to bear the brunt of expenses with a PLUS loan. Those schools tend to leverage their aid – they will give generous aid to some student they admit, but skimp with others.</p>

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<p>I could be wrong but my reasoning was that FAFSA schools won’t count the parents’ business as an asset, but Profile schools will. I’ve seen Profile schools attach value to small businesses that the owners thought were really unreasonable.</p>

<p>Also, won’t FAFSA schools accept the AGI?</p>

<p>Unless we’re talking HYPS, how much need based aid will the OP even qualify for if they up the number from the AGI to say $110K and call the business an asset?</p>

10

<p>Hmom, it doesn’t matter what the EFC is if the school doesn’t meet full need. I thought along the same lines as you did when my daughter applied to NYU – they only wanted the FAFSA, and because I’m a single parent and own a home, I have 2 strikes against me with the Profile that don’t weigh into the FAFSA… but NYU only offered my daughter a grant of about $8000 against a COA of around $50K - they would have expected me to borrow $30K the first year on a PLUS loan, on top of my daughter’s loans and work study.</p>

<p>The schools that purport to meet full need use the CSS Profile for a REASON – they are willing to generously subsidize their students, but they want to know about all assets and income. They are NOT going to turn a blind eye to income that is excluded from FAFSA or may be buried in a tax return. </p>

<p>The FAFSA only schools don’t have to do that either – just because they don’t use the profile doesn’t prevent them from applying whatever methodology they want when it comes to alloting their own grant aid. They may have their own forms to ask for additional information, and they certainly may ask for tax returns and go over them looking for income or assets that was not counted in the FAFSA.</p>

<p>FAFSA governs eligibility for federal aid, only: Pell grants, subsidized loans, work study.</p>

<p>The OP MAY do better at a FAFSA only school, particularly at a public college where the overall COA is lower-- but certainly cannot count on that. Among private colleges, the most generous ones all use the Profile.</p>

<p>I think people really misunderstand the FAFSA and how it works in relation to financial aid. It is used to calculate eligibility for federal aid – and federal aid brings more money to the colleges, so colleges are very happy to have students who are Pell eligible and will be able to qualify for subsidized loans: that is money that goes straight into their coffers. But that doesn’t mean that they are going to make up the difference between the federal aid and whatever their cost of attendance is, with grants or institutional loans. </p>

<p>That bottom line, federal aid eligibility is the same no matter whether the school asks for the Profile or not. My daughter has qualified for Pell grants for 2 of her 4 years at college, and her private college is very happy to take the federal dollars while at the same time expecting me to come up with $16-$20K per year, despite a FAFSA EFC in the $3-$4K range. And yes, I’m sure they do add stuff back from my schedule C – they have told me as much. (And yes, this is one of those 100% need guaranteed colleges – again, they get to say what “need” is).</p>

<p>I don’t think I’ve been treated unfairly because of the self-employment situation. There are some advantages I do have because of self-employment – some things that work against me for financial aid, some things that work in my favor. But I have heard some stories of people running into huge problems – it depends on the nature of the work and accounting. I’ve got a low-overhead occupation, so there’s not a huge amount of stuff to add back anyway. But I can’t know the OP’s situation. </p>

<p>I do know that the colleges that tend to be most generous with need-based aid are also the ones who will be using the CSS Profile. So you cut off a lot of potential aid if you rule them out because of the documentation they require.</p>

11

<p>Thanks for this information. I was hoping to apply ED but now I see I won’t. My mom says our deductions are very legitimate and parsed by the accountant, but she had heard that the AGI number wouldn’t hold. </p>

<p>We did not even consider that a value might be put to our business; my parents struggle year to year to even have a business.</p>

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<p>The student is going to go much farther if they look for the track records and not a promise to meet full need.</p>

<p>There are plenty of schools out there with very generous histories which have no “promise”.</p>

<p>And if they don’t meet 100% of need, it is far from meaning nothing. What if they meet 99%, or 95% or 90%? That can still mean a whole lot of money.</p>

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<p>We did not even consider that a value might be put to our business; my parents struggle year to year to even have a business. <<</p>

<p>Ask any accountant, there are a dozen different ways to value a business. Make sure that your accountant knows that you want numbers that show the lowest reasonable valuation for the business possible. You do not want the valuation you would take to the bank. Those are for two very different purposes.</p>

<p>If the colleges want to revalue your business, make them work to do it.</p>

14

<p>I’m in this boat. I feel your pain. Sorry to see that single Mom NYU scenario…that’s ME this Spring. My D loves NYU, but…although I’m not “technicallY” self employed (I’m employed by a corporation, but … like OP… it’s an S Corp) - I still have to report as 100% mine…all business profits, etc. Even if those are profits I need to use for the business. So I earn the money, then pay taxes on it as if it’s income. Then use the REST of it to pay myself a real income, and pay taxes on THAT amount again as its run through payroll. The biz might look like it makes money but it’s really all used just to pay taxes every year. So I’m very worried about how the figures are pulled from the 1040 (etc.). </p>

<p>Guess we’ll be informed, cross our fingers, wait patiently (aaargh!), and know that we’re not alone in this situation and they’ve been using this form a long time. I’m sure the kinks are worked out and…in the end…it is what it is.</p>

15

<p>It’s useful to have the numbers and paperwork in order, but colleges will still use their own standards to value assets. I’m self employed as a free-lancer – no employees, work from home, no inventory, etc. – basically my “business” is me – but my son’s first college still insisted on assigning a value, and they didn’t like the number I gave them. They insisted on assigning a value the equivalent of my previous year’s earning. I had earned income of about $35K or so; they valued my business at $35K. Obviously it didn’t make sense – if I got sick or couldn’t work, my income would be 0. I tried to explain to them that I didn’t have the kind of business that could be marketed or sold – to no available. I just had to eat the numbers and live with it.</p>

<p>That being said, that college was more generous than most others. I think one aspect of financial aid is that when colleges are giving out very large grants to middle-class families, they start going over stuff with a fine tooth comb. </p>

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<p>That’s also a common misunderstanding of the financial aid process. A college with reported stats that it mets 95% of need does not meet 95% of need for each of its students – it could just as easily be meeting 100% of need for 95% of them, and 0 for the other 5%. (This is common in schools that leverage aid – they don’t fund their borderline applicants, and it is a real risk if applying to a reach school that doesn’t guarantee to meet need for everyone; on the other hand, a college with a fairly low percentage of need met can be very generous to the students on the very top of its applicant pool. Most colleges that do not meet full need leverage their aid to manage enrollment – if you are in the top 5-10% of the applicant pool you might end up with a financial aid package that is very sweet).</p>

<p>Colleges jigger those stats, somewhat, too. I know for a fact that some colleges falsely report the data… they claim to meet a very high percentage, but they don’t “count” students who are not getting aid for various reasons (turned in paperwork late, came off waitlist, etc.). Also, the colleges are defining what they mean by “full need” met. Colleges sometimes package their aid with a large amount of loans and work study, or use the offer of a campus job to meet need. I have seen awards to freshman including $5000-$6000 of work study in the package – there is NO WAY that the student will earn that, especially as a first year. (Freshmen are the least sophisticated about getting campus work, so they tend to end up with the worst and lowest paying jobs, and work-study hour rates can be minimum wage or barely above that). </p>

<p>So you really need to get behind those figures and do some math – look at what percentage of students applied for aid, what percentage were found eligible, what percentage received grants, the average grant amount, the average loan amount, etc. Do NOT take the college-reported percentage at face value. (The reason that I say I know for a fact that colleges misreport is that I have found discrepencies when looking at these numbers). </p>

<p>They can pretty much do anything they want, including applying arbitrary rules of thumb like the one above. I could “appeal” a financial aid order, but there is no required process that any college has to follow. </p>

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[quote]

If the colleges want to revalue your business, make them work to do it.</p>

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<p>R124687, NYU uses a tiered system for its financial aid. The top 5% of its applicant pool get very generous aid. There’s another fairly large band of admitted students that will be offered grants in the range of $8-$10K, no matter how low their EFC; if the students “appeal” the school might increase the grant by $1-$2K. And then the bottom of their applicant pool gets nothing. (“Top” might depend on which school is applied to - admissions standards vary somewhat among the different schools – its not just a matter of GPA or test scores. It’s a matter of the school’s priorities. For example, Tisch might be a lot more likely to offer top money based on talent than test scores.)</p>

<p>Just be clear with your daughter that attendance is contingent on money and NYU has a reputation for being stingy with aid overall. And educate yourself as to how financial aid is packaged - NYU packages its awards in a particularly deceptive manner. (They make it look like they have “met” full need by listing the PLUS loan as aid).</p>

<p>I let my daughter deal with the appeal of NYU aid on her own. She went to NY for their admitted student event with a file in hand, met with the financial aid people – she reported that they were very nice, and also very direct with her. But from beginning to end it was clear that the money was simply not enough. However, I think that there was a benefit in my daughter’s experience applying and in handling some of the financial aid process on her own, and since my daughter ended up attending another NYC school that offered better aid, the trip to NY certainly was not wasted.</p>

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<p>I agree with all you’ve said Calmom. I guess what I was trying to say is that in the case of the OP given the income and small business ownership, by the time the Profile schools get done finding the family’s every last cent, her FAFSA state school will probably look like a bargain.</p>

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<p>I’ve reviewed hundreds if not thousands of financial aid awards over years of experience, and I’ve nailed financial award projections time and time again. I think the misunderstanding is somewhere else.</p>

19

<p>In general, is only yearly income a factor in obtaining financial aid or do they also analyze one’s assets ? Thanks.</p>

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<p>The parent’s assets and income, as well as the student’s assets and income will be factored along with a laundry list of secondary and tertiary items.</p>