High Adjusted Gross Income but low actual income

Paying for College
1

<p>A question about what I might expect, if anything, in financial aid for my son who will be a junior in high school this fall. I live in California, am a single mother, and am living on savings plus some consulting income while I start up my own company. Remember, this is California so don't be shocked by my seemingly high income and mortgage payments. Here's my situation as best as I can estimate for 2007, and I expect 2008 to be very similar:</p>

<p>Adjusted gross income: $80,000
Mortgage interest: $60,000
Property taxes: $20,000</p>

<p>Net income is pretty much zero. However, since FAFSA takes the AGI and ignores schedule A expenses, my EFC is around $20,000. To come up with $20,000/year for my son, I'd have to dig even deeper into my savings at least until my business becomes viable. I've also read the article in SmartMoney regarding Schedule C expenses being automatically disallowed and added back in as income. Am I pretty much out of luck as far as expecting any aid from the UCs or Cal States schools? And even more out of luck for private colleges where the equity I have in my house gets added into the equation?</p>

<p>Thanks for any words of advice.</p>

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<p>on the plus side- unless your business is tied somehow to being in CA- you can relocate to an area with cheaper living costs</p>

<p>on the down side- its been my experience that before tax income is considered much heavier than AGI- particulary with schools that use PROFILE
this might help</p>

<p>or</a> this</p>

3

<p>All I can say is that your timing is perfect -- now is when these issues need to be looked at and not in the spring of senior year.</p>

<p>small business owners/self-employed have a very challenging time with financial aid at colleges (both profile and FAFSA).</p>

<p>I would suggest doing as much research as you can (there is quite a bit here on CC and on the internet) and read some books about FA -- How to go to college without going broke is often recommended (a new edition comes out each year).</p>

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<p>$60,000 in mortgage interest per year???</p>

<p>that's higher than my AGI!</p>

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<p>v-mom:</p>

<p>you might consider schools that offer merit money. And, yes, if your fafsa efc is ~$20k, you will not likely receive aid at the in-state publics. Cal, with a high cost of attendance at $23-24k (for a public), would probably just offer a loan to cover the difference. The Cal States will expect you to be full pay.</p>

<p>Some private colleges do cap home equity at a multiple of earnings, and/or at the federal housing index, which helps those long-time homeowners in high cost states.</p>

<p><a href="http://www.finaid.org/calculators/federalhousing.phtml%5B/url%5D"&gt;http://www.finaid.org/calculators/federalhousing.phtml&lt;/a&gt;&lt;/p>

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<p>FAFSA doesn't disallow Schedule C expenses, nor does Profile (some Profile schools disallow some Schedule C expenses).</p>

<p>You've got 80K in income (AGI)-- I'd look at options to get that down by looking more carefully at your Schedule C business expenses to legally reduce your effective net income from the business. Think office-in-home (that will allow you to get a % of your mortgage payment off the Schedule A, where it doesn't help financial-aid-wise) and onto the Schedule C (where it works to reduce your net income from business and your AGI). As a consultant starting your business, you should be taking business mileage, cell phone, computer expenses, furniture, advertising, some travel, and tons of other things as expenses. I'm surprised that "some consulting" leaves you with a net 80K in net income-- are you sure you've got that right? </p>

<p>Then look at the Adjustments to Income (lines 23 - 37 on the 1040) and see if there's anything there that will get your AGI down further. Health savings account deduction. Half your self-employment tax. Self-employed health insurance premiums (this can be a HUGE benefit if you're paying your own health insurance for you and the family-- if you set it up correctly, it could drop your AGI by 10K). The retirement deductions in this section won't help because while they reduce the AGI, they get added back in by the FAFSA and Profile formulas.</p>

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<p>"I might have to dig deeper into my savings...."</p>

<p>Most financial aid offices will expect these savings to be on the table for college, unless they are in an account earmarked for retirement.</p>

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<p>Thanks for all of your responses.</p>

<p>"...relocate to an area with cheaper living costs..." - yes in theory this would be possible but I have a 2nd son who'll be a sophomore this fall and it would be nice to have the option of both going to public schools here in CA. </p>

<p>"..How to go to college without going broke..." thanks - I'll look for this book.</p>

<p>"...$60,000 in mortgage interest per year???..." yes, it's crazy but appreciation has averaged 5%/year in my town for the past 5 years so interest more than makes up for this cost.</p>

<p>"..you might consider schools that offer merit money..." unfortunately my son is bright but an underachiever. He's going to work on bringing his grades up this year and will study for his SAT.</p>

<p>"...FAFSA doesn't disallow Schedule C expenses.." not explicitly disallowed, but unfortunately in practice it seems to be the case (from the SmartMoney article): "In practice, however, calls to a number of highly rated private colleges, including M.I.T., Princeton University, Swarthmore College, Sarah Lawrence College and Wesleyan University, suggest that the typical approach taken by financial-aid officials is simply to disallow such Schedule C expense deductions as "meals, travel and lodging and depreciation," while allowing only half the amount reported for "automobile expenses." Nor is the practice limited to schools in the Northeast. The College Board sponsors seminars like Briggs' in other regions of the country, and the practice of disallowing freelance expense deductions appears to be widespread. Stanford University in California, for example, takes a similar approach. As a group, only public universities don't pose such a problem, since most just rely on the FAFSA form, and generally don't even ask for Schedule C information."</p>

<p>Thank you sblake7 for the specifics on the 1040 - I'll take a look at last year's taxes and see what I can do for this year. I have an S corp so net income of my business gets added to my personal income from Schedule E, and the only adjustment on my 1040 is typically for 1/2 of self-employment tax. I'm pretty sure my AGI will be in the 80K range this year but will probably be less in 2008.</p>

<p>"Most financial aid offices will expect these savings to be on the table..." yes, understood.</p>

<p>So overall the message I'm getting is that I won't have much of a case for adjusting my EFC downward despite the fact that my net income is less than zero. Thanks everyone for your comments.</p>

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<p>60,000 in mortgage interest per year???..." yes, it's crazy but appreciation has averaged 5%/year in my town for the past 5 years so interest more than makes up for this cost.</p>

<p>can you refinance?
it just seems high-
schools may expect you to tap equity- D's did, so we did have to refinance-
I can see why you wouldn't want to move since you still have another at home- but its been our experience, schools dont' necessarily take into consideration costs of living.
However- while at many schools those who are self employed are scrutinized harshly re assets and income- it does vary and there is likely a school where your son will have a "hook" which will make him very attractive.
But I can't really give specifics- other than NYU aid no good :(
I would also look at western undergraduate exchange
He may be able to find a school that appeals, that will cost even less than attending a CA school instate.</p>

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<p>I just refinanced :( I have substantial equity in the home but refinancing again wouldn't make sense - too expensive, plus I have enough in savings to live on for a few more years while my business proves itself (or not).</p>

<p>Thank you for the Western Undergraduate Exchange link - I hadn't heard of this, but it's a really interesting idea.</p>

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<p>""...$60,000 in mortgage interest per year???..." yes, it's crazy but appreciation has averaged 5%/year in my town for the past 5 years so interest more than makes up for this cost."</p>

<p>what does appreciation have to do with mortgage?</p>

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<p>People need to recognize that the EFC is not necessarily expected to be paid out of current income. (Indeed it rarely can be.) We are assumed to have been saving.</p>

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<p>"what does appreciation have to do with mortgage?" It has to do with the choice of how to allocate money given a range of investment options, and the leverage of real estate investment vs other types of investments. At the current rate of appreciation, my mortgage payment has a 1-year average return of 60%. Your mileage may vary.</p>

<p>"We are assumed to have been saving." absolutely correct, I have been saving which is why I can afford to take the risk of starting a new business. And I can dig even deeper into savings to pay my sons' college expenses. I'd just like to educate myself on what I can realistically expect in the way of financial aid while my net income is so low.</p>

<p>Thanks all!</p>

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<p>^ so it seems that you have a multi-million $ property - investment.</p>

<p>You may be cash poor, but you have other assets available to draw on. You may get a pass at FAFSA only schools, but PROFILE schools will be not as kind.</p>

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<p>IN my experience, both public and private FAFSA schools DO add back in some schedule C expenses, like depreciation, which they do not see as a hard cost of doing business. They do leave most of them- advertising, phone, etc. So make sure you are maximizing those hard costs. It is easy for a start up, with no net income to slide on tracking some of those, but they would make a big difference. </p>

<p>Get an HSA insurance plan, dedcut the premiums and shelter from future fin aid the money deposited to the HSA account.</p>

<p>You only get credit for 1/2 the Self Employment tax anyway, so that does not really help.</p>

<p>Put the max into your IRAs, etc to both be smart and to shelter that asset $ from future finaid calculations.</p>

<p>Mainly, make sure you are maxing your expense deductions, esp in "hard cost" categories.</p>

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<p>I'm in agreement with most of the above posters. Your income and assets (including non-retirement savings) will be looked at for the purpose of financing college costs. You say you have the money to support a $60K interest per year mortgage portion AND have enough savings to live for a couple more years as you establish your business. I hate to say it, but I think the finaid folks will also think you have enough money to finance college.</p>

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<p>Thanks again for the additional comments. I took a closer look at my 2006 returns (I use an accountant for both my corporation & my personal taxes). I have no Schedule C income/loss at all. Everything comes through on Schedule E (S corp income/loss). Since Schedule E is NET income, it already has everything I could deduct netted out - travel expenses, phone, computer hardware, etc - everything my corporation pays as a cost of doing business. So I'm assuming this is good news as there's no risk of having financial aid offices adding anything from Schedule E back in as they might on Schedule C expenses, right? All I can really do is to continue making sure that I'm capturing all legitimate business expenses and including them in my corporate Schedule K-1, which then gets entered on my individual Schedule E.</p>