We own many properties and this is our only source of income. Our income is low but we have a lot of equity in these properties (over $700,000). We make about 10% income off the equity. Because we have equity will we not qualify for any aid. Do they expect us to sell the properties to pay for school but then we will loose our income and couldn’t survive. The properties are in a LLC and Im just not sure what I should do. Any help would be appreciated
I don’t think schools will expect you to do anything. They’ll tell you how much their college will cost, but how you come up with the money is up to you. I wouldn’t expect them to give you extra aid when you’re holding $700k in real estate though.
What state are you in? Does your child qualify for merit aid? I’d make sure they have financial safeties on their list.
If your income is so low you can qualify for automatic $0 or simplified assets, you may be okay at a FAFSA only school. Other than that, you’ll be looked at as having huge assets and expected to pay for college.
A lot of very rich people take no salary but are expected to be full pay for their kids going to school - Bill Gates, Mitt Romney just live off their assets.
He OP says their income is 10% of $700,000 which would be too high an income for simplified needs or auto $0 EFC.
But it’s not that that hard to get a $70k gross income down to a $49,999 AGI with IRA contributions or other above the line deductions. They’d need another qualifier like displaced worker. May not do much to unearth a lot of FA, but that would depend on the school and other factors.
Rental income isn’t earned income so not eligible to make IRA contributions.
“Do they expect us to sell the properties to pay for school but then we will loose our income and couldn’t survive.”
Nearly every small business owner, farmer, and small landlord that I know has sent their kids to in-state public schools. The only exceptions that I have seen are (i) People with spouses who make a lot of money (usually in high tech); (ii) A few farmers that I know whose farms are not in the US (I know a few farmers in Canada). The problem is that both your equity in your properties and your income from the property are counted, and you can’t get to the equity without losing the income.
In principle you could also look for schools that give significant merit aid.
Generally I think that you are in the same situation as every other person that I know who owns a small business: You are stuck with your in-state public schools unless you can find something else that is comparably priced with merit aid.
You can probably get equity loan instead of selling the property to fund the education.
The properties are in LLC. The parents are getting paid 70K as income from LLC. The question is would they need to include value of LLC in their FA.
“You can probably get equity loan instead of selling the property to fund the education”
Fine, but they will have to pay off the loans based on 70k of income. Even without the equity the schools are going to expect them to take on as much debt as they can reasonably service with 70k of income. Given the equity, schools expect them to take on extra debt, or cash out some of the equity. They don’t have income to service this additional debt, and if they cash out part of their equity then they will have even less income.
10% return on equity in a reliable not-highly-risky investment is a VERY good return, which probably requires some significant time on their part for example in maintaining the properties. There almost certainly is no reasonable way to get more out of their properties.
Hopefully OP has good in-state public schools and can find a way to put together enough money to pay for their in-state public schools. One option that we found, motivated by a daughter who wanted a small school and noticed that our in-state public was very large, was small universities out of the country (but nearby for folks like us in the northeast corner of the US) which are academically very good, located in beautiful and safe communities, and for international students about the same price as our in-state publics.
If you use schedule c you will get dinged. We derive a good chunk of cash flow from our rentals that sustain us and our rentals are the largest chunk of our retirement so the idea of equity loans was not advised…it is no different thAn taking loans from a 401k. We figured out how much we could actually pay out of income and went from there because our EFC is high.
We have 3 kids so we have been making tuition payments for a decade with another semester to go. It blows my mind how much money has been spent and the fact that it was almost half our annual cash inflow but it is also gratifying to know just how hard we were able to clamp down on spending and how frugal we could be and it made me feel safer about retirement. We did have to lower voluntary saving this entire time but the properties were not simultaneously burdened. In the middle of all this I took a step back job for the benefits so that dropped medical insurance hugely increasing cash flow and the small salary paid the household bills and still make small deposits to a 401k and fund an HSA. Your mileage may vary and my advice is to keep your eye on the endgame. If your budget is in the neighborhood of $30,000 there are tons of options for colleges and if your kids can max out college loans you can probably manage out of current income if you aren’t saddled by personal debt outside the rentals.
We found the most interesting thing was our expected costs were virtually the same from instate public’s (full pay) and the privates that were on the kids’ lists. Good luck!
Not sure how it works with an LLC, but as a C corp, my earnings pass through to our personal return. I would guess that if the OP and spouse are the owners of the LLC and the properties, a Profile school will see that as assets.
If one has $700K in assets, one can refinance the properties if need be to cover costs, if the student doesn’t get merit aid.
Worth to check it out with an account. JYM626 - are you sure you are not an S corp instead of C corp? As a C corp, you could be double taxed.
can’t refinance because income too low and if I sell one of the properties my already low monthly income will be much less and couldn’t survive here in los angeles.
Worst case scenario: your kid takes the CC to UC or CSU route like so many other California kids. Which isn’t that bad a deal when you think about it. Not every state has such a strong, well-coordinated system of higher education.
What is your fafsa. EFC
Fill out the FAFSA to be sure but, my guess is that there will be little to no need based aid from any CA public school. As a fellow California land Barron, i feel your pain. You may not believe it but, with a $700k net worth, CA considers you rich…and wants you to be one of the minority of families to pay the full rate. . As someone who knows a LOT more about finance and investing than I do financial aid, I strongly advise against borrowing (either against your property or in the form of student loans) to fund your kids education. From your comments above, you simply won’t be able to manage the debt service over time and will be forced to liquidate at an inopportune time. If your kids have high stats or unique attributes, they may earn scholarships/merit aid at a private school like LMU or USD, making them more affordable than a comparable public option. If not, then, as suggested by @happymomof1 CC to a CSU is a very viable option, one that they can help pay for with a part time job. This path has been successfully used by millions and millions of Californians, me included.
The state promised a free year of CC to anyone who wants it beginning next year,
http://www.sacbee.com/news/local/education/article183929856.html
Of course, this is California, where promises for such things come quickly, the legislature is still trying to figure out how to pay for it.
Even if that doesn’t happen, attending a CC full time costs less than $2500 a year. They vary somewhat due to facility fees but, most of the CSUs are less than $8k per year for tuition, fees, parking and books. 2 years at each will cost $21k. I know that sounds like a lot but, it is easily doable working 15 hours a week at an on or near-campus Starbucks or similar.
You didn’t get to where you are by not working hard and being resourceful. There are lots of options open to you… work through them one step at a time. It sounds like, right now, step one is knowing your EFC. That will help you narrow things down to a manageable puzzle. I will also tell you that most net price calculators over-state the cost of things other than direct fees/tuition to the school. It might also be helpful to tour your local CC and CSU to see what they have to say about your kid’s true cost of attending. In my experience, they are all really knowledgeable and happy to help a parent facing their first college bills.
5 years ago, you knew this day was coming … what was your plan then?