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Business Owners Have a Big Advantage When Paying For College

Business Owners Have a Big Advantage When Paying For College

Small business owners have some unique advantages when it comes to lowering the cost of college, often by thousands of dollars a year.

The big drivers in determining college costs are income and assets.

Small Business Not Assessed Under FAFSA Rules

Under current FAFSA rules, assets (a business with under 100 employees) are not assessed when determining the Expected Family Contribution (EFC). Considering that assets are assessed at 5.64%, it can be a big advantage for many small business owners to hold assets in their business, rather than in personal accounts, during the college years.

Even bigger savings, however, can be realized by reducing adjusted gross income, which is assessed at a whopping 47% under FAFSA rules.

Because of the high assessment on income, some business owners can find it quite beneficial to lower their income and to restructure their business as a non-pass-through entity, like a C corporation.   Any retained income is, then, ignored on the FAFSA. The potential savings on college costs are usually much more than the increased tax on corporate profits.

Important! Small business value is expected to be reported on the 2024/2025 FAFSA as part of the FAFSA Simplification Act, passed in 2020. 

Business Owners Can Take Loans, Hire Family Members and Take Advantage of Retirement Contributions

Should the business owner need additional funds for personal expenses, he can always take a loan from the business—all perfectly legal under FAFSA guidelines.

There’s even more a business owner can do by hiring their spouse. One example is to set up a medical reimbursement plan (IRS Section 105) to pay for the family’s estimated medical costs. These expenses would then reduce the business income for medical expenses paid.

Business owners should research replacing a personal retirement plan with a business retirement plan to avoid assessment on contributions.

Business owners can also hire their children. Not only are there tax advantages in doing this but the first $7,040 of each child’s gross income is not assessed under FAFSA rules.

It is important to add that assets should never be held by the business owner’s children because child assets are assessed at 20%. Furthermore, unlike parents, children have no asset protection allowance.

Children Can Save For College With Their Own Roth Account

Children, however, can save their assets within their own Roth IRA, which is not counted in the financial aid formula. Also, the 10% penalty prior to age 591/2 is waived if the child uses those funds to pay for qualified education expenses. You will want to use funds from a Roth with caution so that it does not inflate your EFC and possibly reduce your financial aid.

None of these or other college funding strategies should be attempted without the guidance of an advisor who is knowledgeable of college funding rules. Even a CPA without this knowledge can cause you to end up losing thousands of dollars in financial aid.

Billie Jo Weis

After receiving her BA in Accounting from San Jose State University and quickly attaining her CPA license, Billie Jo gained over 20 years of experience in accounting and finance at a variety of companies including Symantec Corp, Thomas Weisel Partners (a San Francisco investment firm), several Silicon Valley startups and at a Certified Public Accounting firm serving high net worth individuals with their taxes.

She has assisted hundreds of college-bound families with strategies on how to pay the least amount for college and she is also the Head of the Appeals Team.

Billie Jo Weis is a mother of three high school boys. With a passion for family success, she has devoted the past 15 years to her boys' athletic, social and academic lives, including volunteer work at her children’s schools with such programs as Junior Achievement.

Billie Jo is driven and passionate about helping families with financial strategies on how to find the most cost-efficient options to pay for college. With three teenagers in high school, Billie Jo knows first-hand the challenges and concerns of preparing for the cost of college.

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