Please help me understand FinAid implications of my new small business. Have I screwed our family?

Paying for College
1

I hope someone can help me make sense of this. It is keeping me up at night!

D is a junior at a school that uses the CSS Profile. The first year we could not even come close to affording the payments, so out of desperation for extra income I started a small business selling vintage furniture. It has been -to my utter surprise- very successful and grown quickly. (It is still a one-person business with no employees, though. I just work 65 hours a week at it :slight_smile: )

I do my own accounting using quickbooks. A young CPA helped me set that up, but he is not very experienced and cannot answer the questions below.

Here’s the problem: this year so far, I have put over $10,000 MORE of our household income INTO the business (to buy inventory) than we have taken out. I’m scared to death that I made a REALLY bad decision vis a vis financial aid. (It was a good decision for the future of the business, though.)

From a quick look at my accounting software, it looks like my gross sales so far are $85,500 and my net income is around $32,000. I know that net will decrease when I do taxes because of deductions not included in my accounting like car use and home office, so that helps for FAFSA, as I understand it, but not for CSS.

The thing that is NOT showing here is that I actually did not earn that $32,000, but rather invested all that plus >$10,000 more back into the business, where it is in the form of inventory. As I understand it, that is not an expense until I actually sell those items, when it becomes a Cost of Goods Sold expense. But that won’t be until next year. So, in terms of actual income that our family made, it’s actually negative.

If that $32,000 income is added to my husband’s salary, it’s going to mean we’ll owe probably 5x what we have been paying for her tuition. That would cripple us. (Also, will the value of that inventory - about $79,000- be considered as something that will raise our EFC even more?!?!!? Oh no, I didn’t even think of THAT!)

Is there something I am misunderstanding here, or is the above correct. Should I just try to get rid of all that inventory right away, just wholesale it to someone or give it away?

I really appreciate your help!

2

The CSS will also be using prior-prior year, so as I understand it, the income will not count until next year? However, your business is an asset that will be assessed as of the date you file the Profile. I believe assets are assessed at 5%.

You can try running different scenarios in the College Board EFC estimator. I am not sure how well it calculates business assets though. Sometimes they simplify the less common cases.

https://bigfuture.collegeboard.org/pay-for-college/paying-your-share/expected-family-contribution-calculator#

If you choose to spend 10,000 of income on your business that you should have saved for paying tuition, that will not be a basis for a financial aid appeal. Hopefully, you will be able to sell some of this furniture before the bills come due.

3

Yeah, it’s just that when I decided to invest in the business, I had not through through the implications that it would raise the tuition so much. If the tuition stayed the same, we would have been fine. Turns out I am terrible at this. I feel like such an idiot. I have no idea what we’re going to do. Maybe I should just donate my whole inventory to Salvation Army?

4

Congratulations on your business. Your 2016 business income will not be counted until.the 2018-2019 financial aid forms are filed. What year will.your,kiddo,be in college in 2018-2019?

5

If your child is a junior, you won’t be using the 2016 income at all. Assets? That’s a different matter, but it is still inventory of the business, not a direct dollar for dollar asset of yours…

If you started the business to make extra money for college, I assume you have used some of the money for college, so all the profit is not going back into the business?

6

If your daughter is a junior for the current academic year (2016-2017), and she’s on track to graduate in the spring of 2018, then 2016 income will have absolutely no impact on any need-based financial aid decisions. Both FAFSA and Profile will use 2015 income and tax information in assessing need-based aid for the 2017-2018 academic year (your daughter’s last undergraduate year, right?).

7

I think the concern the OP has is perhaps the value of the business and if that will impact the financial aid award.

@BelknapPoint the Profile does ask for the value of businesses.

8

I took the post to mean that OP was worried about business income for 2016 and business assets.

9

I wouldn’t do anything drastic like donating all your inventory until you talk to an qualified accountant and financial aid advisor. Advice on this board is sometimes “you get what you pay for.”

Unlike the FAFSA, the Profile does not publish its formulas, though it is generally believed that assets are assessed at 5 percent of their worth. But, every college can use the information on the Profile differently. You would need to ask the financial aid office at your child’s school if you need to know exactly how they will assess a business. There may be an exclusion (i.e. only assets over X dollars are assessed) that you should know about.

This year’s aid is done, you’re just waiting to see how next year’s will be assessed, right? And when does the school want your Profile? Probably March or so for returning students? (I’m just guessing but most financial aid offices are working on offers for incoming freshmen before then.) You should have time to sell some of it even if you have to liquidate some at a loss. Your assets will be as of the date you file the Profile.

10

@BelknapPoint she is worried about it all.

Income won’t matter until 2018-2019…but the value of the business could.

Still…to the OP…put aside some of your business profit to pay for additional college costs. And be thankful that your business seems to be taking off. You won’t be paying additional college costs forever…and this business sounds like it will benefit you in the future!

11

What is the value of a relatively new business selling vintage furniture? No “Brand” to speak of; no hard assets other than inventory, no long term cash flow or business relationships or goodwill to speak of.

So it’s not like this is a million dollar business. If there is 45K in inventory, what other elements of this business are relevant for valuation purposes? No patents, no technologies, proprietary processes…

What am I missing here?

12

One meets-full-need school that I am familiar with just announced that their financial aid deadline for returning students will be six-and-a-half months sooner starting right now, moving up from May 1 to mid-October, as a result of the recent change in the FAFSA release date. So parents of current students who thought that they had until next spring to get their stuff together for the 2017-2018 academic year are all of a sudden having to move rather quickly. I guess that the school will process returning students first, then ED applicants, and finally RD applicants.

It will be interesting to see if other schools will make a similar change.

13

But really…getting everything together for an October filing should NOT be an issue. The FAFSA and Profile will be using 2015 tax info for the 2017-2018 forms. That info,should be readily available…now.

14

No one should be worried about reporting income or tax information. Filling out FAFSA is a realtively easy (usually). Profile can be a different matter. But the main thing with notice of a new deadline that’s a little more than one month away is the aspect of asset management and planning spending.

15

I think that you should call your school and ask what will they be looking at and what years income to determine your need based aid for school year 2017-2018.

While the fafsa uses prior prior, it does not mean that that the CSS profile can not ask about your current situation because a school can ask for anything it wants when it comes to giving out their own institutional aid…

you can even ask your school to give you a pre-read.

16

I am a bit confused, if you have reinvested the net income of $32,000 plus $10,000 of personal income back into the business, did you actually make any profit that helped your family pay for college costs?

It seems that the business income won’t matter for Oct aid forms because 2015 income will be used, but you might want to sell some of the inventory before October to reduce assets.

I agree with thumper that if the business is profitable and you enjoy it, you might want to continue with it, but maybe reduce the inventory such as you only buy more inventory with part of the business income, and not use family income. But an accountant can give you better advice than me.

17

@thumper1 My D is a junior this year, so we just have one more year to worry about (2017-18 school year, her junior year.)

I’m not sure I understand. Don’t my current year tax returns inform the financial aid for the next school year? in 2016, I filed the FAFSA and CSS in February, using my 2015 tax returns. That information was used by the college to calculate our cost for the 2016-2017 school year. Right?

18

@ everyone - thank you all SO much for taking the time to respond here. I’m reading all of these replies and everyone keeps saying that only the 2015 income is going to be used to figure out what we owe for 2017/2018 school year. I’m so confused!!! If that is the case, why does the prior year tax return automatically go to the college each spring?

19

Yes, they made a change when FAFSA and CSS profile can be filed. Instead of in January, they now become available the October before. Subsequently earlier income year is used, no longer prior year, but prior prior year.

So you filed 2016/17 aid forms with 2015 income, and for 2017/18 aid forms (which will be available on Oct 1, 2016), you will use 2015 income again. That wil be for your D’s senior year.

2016 income would be used on 2018/19 aid forms, but your D would be graduated by then.

20

Oh!!! Does this have to do with the changes to FAFSA this year?