Loophole in Federal College Financial Aid Rules

Loophole in Federal College Financial Aid Rules

by Evelyn Saunders

If you are a business owner and have children ready to go to college, there is good news for you. Financial aid that was originally intended for the needy, can now be collected by business entrepreneurs for their children to go to college. A little-noticed loophole written into the federal college financial aid rules in a bill passed by Congress last year allows aid to children of all business owners.

Congress decreed that when determining how much each family can afford to contribute to a child's college education, the federal government should not consider the assets of owners of businesses with 100 full-time employees (in other words, the rich) or "Or fewer" is the saving grace. The insertion was made when considering that small-business owners should be treated the same as family farmers, who aren't expected to mortgage their property to pay for college. Note the federal government will consider the income of all business owners.

Since the cost of college tuition keeps on rising, a change in the law was needed because it can be difficult and expensive for owners of small businesses to tap the value of assets such as tools or inventory to pay tuition bills. One hundred employees is kind of stretching the need though. So ever since the bill was passed, accountants and financial planners have been searching and developing strategies to legally help wealthy entrepreneurs take advantage of this new federal definition of "need" by minimizing incomes and storing wealth as business assets.

For example, one financial consultant in Rochester, N.Y., helped a client move property worth $700,000 into a limited partnership in order to reduce taxes and improve his children's eligibility for need-based aid. This new exemption changes advice given from accountants to their clients with college-bound children.

This new exemption is a major advantage for small-business families. Another financial advisor reported allowing one client's child to qualify for a federally subsidized student loan even though the parent's business was worth more than a million. Before this exemption, the parents could have paid more than $70,000 a year for college tuition awarding the child no need-based aid.

How many will be able to take advantage of this is unknown. About 14 percent of the parents who file their profile aid application reported owning a business. The Census Bureau reports that 98 percent of the nation's businesses have 99 or fewer employees. Of course, college aid officers must obey federal rules in passing through federal Pell grants and Stafford loans. But some are refusing extra school-funded need-based scholarships to students from families with significant business assets in order to make sure our need-based aid and studentloans are going to the real neediest of students.