How small business owners can save big on college
Small business owners with college-bound children can save thousands of dollars a year if they plan ahead and adopt a few simple strategies. While it's best to plan when children are young, even some last-minute tips can cut parents' costs. Here are some items business people should put on their to-do lists, and a few steps to avoid.
Do hold assets in your business account during the college years
Under FAFSA rules, assets of a business with fewer than 100 employees are not assessed when determining the Expected Family Contribution, or EFC. Considering that assets are assessed at a rate of 5.64 percent, it makes sense for many small business owners to hold assets in their business, rather than personal accounts, during the college years.
Convert a sole proprietorship to an S Corp to shelter non-retirement assets, saving thousands under FAFSA guidelines.
Do restructure your business entity to reduce adjusted gross income
Because adjusted gross income can be assessed up to a whopping 47 percent under FAFSA rules, restructuring the nature of the business entity can result in big savings. Some options:
Converting your "pass-through income" S Corp entity to a C Corp can potentially save you thousands of dollars while lowering your personal income for purposes of the FAFSA. Since you can control your personal income and retain some of the income in the business, you could lower your EFE.
Association members who are business owners can also take a personal loan from the business is personal funds are needed and it is all perfectly legal under FAFSA guidelines. Please consult your legal and accounting professionals before making any changes to your business.
Do consider hiring your spouse and/or children
When business owners hire their spouses and/or children, they can set up a medical reimbursement plan (IRS Section 105) to pay for the family's estimated medical costs of up to $5,000 per year. And when they hire their children as employees, they not only receive tax advantages but a FAFSA advantage as well: the first $6,570 of each child's gross income is not assessed under FAFSA rules.
Don't save in a student's name
For EFC purposes, savings in a parent's name -- in excess of their asset protection allowance -- is assessed at 5.64 percent. The asset protection allowance for a typical college family is currently around $19,500.
Assets held in a student's name, however, are assessed at 20 percent or 25 percent, depending on the methodology the school uses to calculate EFC. So if Grandma gives a child $30,000 to put in his college savings account, it adds at least $6,000 to the family's EFC. To make matters worse, students don't have an asset protection allowance -- another reason not to hold assets in the student's name.
Don't pay for college with a grandparent-owned 529
According to FAFSA rules, money paid out of a Grandparent's 529 is considered untaxed income for the student. That means for every dollar a grandparent pays over the student's gross income protection allowance of $6,570, the student is assessed at fifty cents on the dollar.
So, if Grandma sends $16,300 dollars directly to a college for a student's first year's tuition, it raises the family's EFC by an additional $5,000. And if that student has already reached their income protection allowance, the EFC could rise by over $8,000.
Don't use or borrow retirement funds
It's true that the government waives the 10 percent early withdrawal penalty when a parent withdraws money from an IRA to pay for college. But the FAFSA calculates that withdrawal as added income, typically assessed at 47 percent.
Don't miss out on key tax deductions & credits
Parents sometimes make an error by paying their entire college costs out of their 529s, only to learn that they can no longer claim the American Opportunity Tax credit. Because the parent has already received a tax benefit from the tax-free distribution of their 529, the federal government considers claiming a $2,500 tax credit as "double-dipping," which is not allowed. Business owners should work with their tax advisers to avoid this trap.
Do learn the different methodologies for calculating the EFC
Under Federal Methodology, which most public universities and a majority of private colleges use, home equity is not used to determine EFC. But home equity is assessed under Institutional Methodology, a formula some schools employ. Seek the advice from a college planning specialist before making decisions to employ mortgage strategies to fully understand how it will affect your personal situation.
Do learn how to use the award appeals process
Awards letters aren't final. They can be appealed. Changes in family income or unexpected medical expenses are both valid reasons to appeal. You may also be able to leverage a better offer from another college -- assuming the schools have similar rankings. For the best results, read up on how to write a good appeals letter before you act, or consult a local college coach who does this kind of work.
Do start early
Start planning for college when children are in middle school. Waiting until a child is a senior in high school may be too late -- at least for savings on the first year of college.
Do become acquainted with EFC reduction strategies
Talking to a trusted CPA can help. But to get the most complete picture, parents should seek the advice of an experienced college financial planning specialist.
• Jim Slowik is the chief college funding strategist of MyCollegePlanningTeam.com, an Illinois-based organization that brings together experts from both the academic and financial services communities who work in coordination to help families find the right college for the right price. Contact him at Jim@mycollegeplanningteam.com.