Writer wants help figuring out how financial aid offices will assess self-employment

Paying for College
1

<p>I’m a self-employed author/writing teacher and have been so for over 20 years. I am a sole proprietor and have never incorporated my business. I file a 1040 and put my business expenses on a Schedule C. My income varies from year to year. I have never been married and file as head of household, deducting both kids on my taxes.</p>

<p>Most of my business expenses are rent (for places I teach), supplies, advertising, phone, website design and upkeep, consultants, and some continuing education for me. I do claim a home office and a small amount of depreciation for old office equipment, none of which would have resale value.</p>

<p>I’ve tried punching my numbers into a variety of financial aid calculators (MIT, Stanford, Princeton, College Board, etc) and have gotten wildly different estimates of my EFC. And on this board I read continually that EFC has little to do with what colleges expect a family contribution to be. I feel really confused about what colleges will expect of me financially and that is making it really hard to be realistic with my son about his applications and aspirations.</p>

<p>He, by the way, is a top student, a NMF with excellent GPA and scores, “in the pool” at elite schools (if he gets very, very lucky) and eligible for merit aid if he lowers his sites from his reach schools to schools where he’d be at the top of the applicant pool. He is not valedictorian and there's no legacy for him. He’s applying mostly to privates and a couple of California publics. I’ve written for feedback on his college choices on another thread.</p>

<p>On this thread, I really would like to hear from other self-employed people about how they’ve been treated (and scrutinized) when applying for aid. And how things turned out. Specifically.</p>

<p>I feel like it would be a lot easier if I had a “normal” job and a straight W-2, but I don’t. I need to understand how my circumstances will be looked at by financial aid offices, in both public and private institutions, so I can help guide my son to make fiscally realistic choices.</p>

<p>Here are some of my questions:</p>

<p>Which of my business expenses will be accepted and which will be dinged? How can I figure out how colleges will assess my income (as compared to the AGI on my tax returns)?</p>

<p>What kind of documentation and other back-up materials will colleges ask for and at what point? As a self-employed person, what kind of verification will they be asking for?</p>

<p>How many years of tax returns will be requested?</p>

<p>Will my business be assessed with a value? As a self-employed writer/teacher, there is nothing of value in my business but me (and maybe my laptop). I couldn’t sell the business; no one else could take it over. It’s completely based on me: my reputation and my track record. One financial aid counselor I went to said my business would have a value of 0 because it has no value in the world as an asset. But on this board, I’ve read that despite that fact, colleges will give my business an assessed value and make that part of my resources. Is this really true? </p>

<p>I own a house worth $275,000 and owe $90K on it. Home equity is my biggest asset. Savings, I have somewhere around $15,000, maybe less. I had cancer a few years back and that pretty much wiped out our college savings. </p>

<p>I also have a SEP and a Roth for my retirement, but have been told these will not be counted in college calculations. My accountant says if I don’t touch this retirement money I will actually be able to retire some day. </p>

<p>I stopped contributing to my SEP in 2010, so that is one deduction that will not show up (or be added back in) to my 2010 returns. I know that any Roth contributions I make won't help me in terms of financial aid either.</p>

<p>My son has no assets of his own. I have both kids (senior son, freshman in hs daughter) in a private school, where they each receive a generous scholarship. We pay $5000/each per child and that cost will continue for my daughter, hopefully at the current rate. I know some schools take this into expenditure into account and others won’t.</p>

<p>2009 was a good year for me, I grossed $120K and after expenses, business income was $57K, AGI on my return was $46K. This year (2010—our base year), I expect to make half of that and the other figures would shift down accordingly.</p>

<p>What do I need to know as a self-employed person? What should I expect?</p>

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<p>For FAFSA-only public schools, if a business has less than 100 employees, the assets of the business are not considered. And your home equity and retirement assets are off-limits as well.</p>

<p>Private schools can pretty much do whatever they want. I’ve been told that they will generally add back in so-called “phantom” expenses, such as depreciation, that don’t actually cost any money out of pocket. They will ask how much you have in retirement savings, but no one really knows what they do with this number. IMO (and I have no basis for this) they will look at your retirement assets in relation to your other assets. If you have too much in retirement assets you may be penalized because they feel you weren’t saving enough for college but instead were funding your retirement. They all have different rules about how they count home equity as well.</p>

<p>Unfortunately there is little detailed information available because every school does their own thing and they don’t say what they do.</p>

<p>With significant recent medical expenses you may want to tell the schools so they can take that into consideration.</p>

<p>Your best bet may be to call each college and talk to an FA person and explain your situation and ask them how it will be handled. It’s a lot of phone time but I don’t know of any other way to find out other than waiting for the FA package after he’s accepted.</p>

3

<p>Do the kids have a non-custodial parent? If so, the schools that give the best aid will want his income info.</p>

<p>2009 was a good year for me, I grossed $120K and after expenses, business income was $57K, AGI on my return was $46K. This year (2010—our base year), I expect to make half of that and the other figures would shift down accordingly.</p>

<p>Dumb question…is the difference between the $120k gross and the $46k AGI because of business related rent and such? That seems like a big difference. I realize that this is for 2009 and you say that 2010 will be about half that. Does that mean you expect 2010 income to be about $60k and AGI to be about $23k? </p>

<p>Having an AGI of about $23k may not be believable to the FA office once they’re told that you’re also spending $10k per year for 2 kids in private school for the 2010 - 11 school year. Do you see what I mean? Or maybe I have the numbers wrong.</p>

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<p>

Business income was $57K, then you subtract out your exemptions and standard or itemized deductions to get to the AGI.</p>

<p>Business expenses of more than 50% aren’t necessarily high at all, depending on the business. Still, expenses that high may give an FA officer a lot of room to claw them back.</p>

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<p>Hopefully Kelsmom and Swimcatsmom will see this thread and respond. They will know the answers. </p>

<p>:)</p>

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<p>I file 1040 Schedule C. I did my calculations with both my AGI and business gross. All schools have come up with EFC between those numbers-- in general, closer to the number from my AGI <em>however</em> I have a much smaller spread between the numbers. I would have to look but I think my business deductions were less than 30% of gross business income. I do not know exactly how the schools broke down costs.</p>

<p>In general, the top tier schools were more generous when applying for aid. State schools just used my AGI (from the FAFSA) but didn’t necessarily meet need.</p>

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<p>I have an S corp, and my experience has been very similar to 2 collegewego. My son goes to a profile school that claims to meet 96% of need. Based on his aid, it appears as if they do not add back in any of my business expenses. However, my expenses are also only about 30% of my business income.</p>

<p>The EFC from my son’s school is about 15K more than our federal EFC, but I’ve always assumed that is a result of home equity of 300K assessed at about 5%, not a result of “adding” back business expenses. Don’t forget, when you list the value of your home it should be based on what you could get for a quick sale (there are old posts on this)</p>

<p>The problem remains that each school will handle the situation differently, and not many are up front about how they calculate need. Since you pay rent on a place of business, they may eliminate your home office expenses. Any depreciation could also be added back in. </p>

<p>You do not have to put a “value” on your business (I’m also a teacher). For schools that require the profile you will have to fill out the business farm supplement and will have to itemize any expenses over $1000.</p>

<p>Also, you do report retirement savings on the profile as well. Remember, each profile school can use their own formula to determine need, so some may look at retirement funds when determining need.</p>

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<p>In my family’s experience, the tricky thing about need based aid with fluctuating income is that aid will be contracyclical. As you can see from this chart: [Project</a> on Student Debt: What’s the Bottom Line?](<a href=“http://www.projectonstudentdebt.org/ncoa_chart.php]Project”>http://www.projectonstudentdebt.org/ncoa_chart.php) there is a big difference in the most generous schools on how they treat an income of 60k and 120k.</p>

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<p>college_ruled, that link you sent was very useful, even better was the original site it came from. To those who’ve responded, sorry I haven’t been visible on my own thread, but my internet went out and I’m just able to get back on line! I’m happy to hear from any other self-employed folks about their experiences.</p>

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<p>My husband is self-employed and we get a good amount of aid for our daughter. It’s hard to say whether or not the school adds back in the business deductions because her package doesn’t say how they calculated it. He doesn’t have anywhere near your business expenses so it would be hard to make a comparison anyway. When my daughter was applying to schools I made a very specific inquiry to the financial aid office regarding the “value” of his business and they gave me a straight answer. Perhaps you could ask the FA offices directly, explaining that this is not something the calculators cover clearly.</p>

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<p>We were verified by a state school and the finaid officer did add back depreciation and home office deductions, otherwise they just took our AGI amount.</p>

<p>I would suggest applying to a batch of both FAFSA & Profile schools. FAFSA schools often gap or use loans to fill the need and Profile schools vary widely on their interpretation of your need</p>