Keeping assets in family-owned business to beat FAFSA for financial aid

My neighbors live more extravagantly than I do (cars, vacations, home etc). As a result, I've saved a significant nest egg, and maybe they haven't. I don't want to subsidize their kids' college education with my kids' tuition dollars.

As I understand it, the FAFSA doesn't count IRAs,401ks,HSAs, cash value life insurance or the value of your house against you. I believe they also don't count the value of a family-owned business against you.

So I was thinking a family-owned real estate business that could hold significant value (in the real estate), without producing any income (due to depreciation) would allow me to stash my nest egg in a wealth-generating asset (rather than a big primary home, which I think might be more of a drain with maintenance and taxes). As an added bonus, as a real estate professional, I believe my spouse could deduct the losses off my w-2 income for tax purposes.

Interested in other ideas if people have thought about this, if there are any other capital-intensive businesses that might fit this bill, and if the real-estate business seems best, and would qualify as a family-owned business ...

Obviously the financial aid system is flawed, and I don't know the best way to fix it ... but I'd at least like to take advantage of what's there legally - albeit of potentially questionable ethicality.

This is why many schools are switching to the CSS Profile that catches this kind of cheating.

BrodyInsurance said:   Keep in mind that income is usually more important to the formula than assets. Additionally, lots of aid is in the form of loans, so playing games may just allow you to borrow more money than you actually want to borrow.

Unfortunately, we do have a system where the responsible people subsidize the irresponsible.

This. If you've got a decent household income -- say, above $80K (and quite probably, the threshold is much lower) -- you're not qualifying for any need-based money anyway, so moving all of this around is a waste of time.

txrandom said:   A somewhat related scenario. Assume I quit my job on December 31st 2012. I don't work during the 2013. I then apply for the FAFSA sometime in 2014. Does this make it really easy to get grants and cheap loans?

This is no such thing as "cheap loans" any more. The people you read about with 1% student loans for 30 years -- those days are gone. The best federal rate you can get is 6.x% (I think), and above a certain $$ amount, the rate goes up to 8%.

If you have no income in 2013, and are an independent adult (I'm assuming you're not 17), then you would be helped in determining whether you can get grants. But again, even the grants that people jump up and down about will typically only cover partial tuition at a community college -- you're not getting tens of thousands of dollars of Pell Grants.

txrandom said: A somewhat related scenario. Assume I quit my job on December 31st 2012. I don't work during the 2013. I then apply for the FAFSA sometime in 2014. Does this make it really easy to get grants and cheap loans?

Unfortunately, many financial aids are based on prior year's income. So, you will likely be out-of-luck if you lose your job anytime in the year you apply for financial aid. You will be at their mercy if they will use your current year lower income (the year you apply for aid) for aid determination.

There is that pesky question on the FAFSA though that asks if the student was given any gifts used to support themselves. So maybe it won't show the first year, but any non-parental/student assets will in the following years unless you lie.....ooo baby you're so excited, don't try and hide it.

I work in higher education and can answer these questions. The government uses a black-box formula to determine need for education. They expect a percent of parent income to go towards their childrens education, it matters not if you are a parent that is not helping your kids out, your income is counted. The government expects a great percentage of a childs income to go towards their own education. There's no real way to hide money in your immediate family, however, if you create a 529 account or something similar in a grandparents name, it does not show up on fafsa, so that's one way you can hide funds.
There are two type of stafford loans that are federal loans. These are subsidized and unsubsidized. The different is that a subsidized student has it's interest paid while the student is in college, the unsub does not...it garnishes interest while the student is in school. Repayment starts 6 months after graduation unless they are deferred. Any student that does a fafsa in the united states automatically qualifies for a stafford loan. These loans are in a students name only, there's no co-signer. The interest rate is 6.8% for the 2012-13 school year, but this rate may change due to legislation this summer.
This is my area of expertise, if there are any questions I'd be happy to answer them.

It's not a "black box" formula. The formula is published at http://ifap.ed.gov/efcformulaguide/attachments/082511EFCFormulaG... You can see what impacts each component has on the EFC bottom line. Note that parental assets are valued at 12% of income, in other words, the formula counts 12% of assets as current income. The EFC formula is steeply progressive, with 47% of adjusted annual income considered to be a parental contribution for AAI over $29,601 a year.

Private schools tend to use the CSS Profile, but most state schools - and the majority of regional private institutions - don't require it. Tier 1 and Tier 2 private schools tend to require it, but you would be surprised at the number of private schools that rely solely on the FAFSA.

arktc said:   Income is income and assets are assets, regardless of whether it's a business or something else.

Wrong. Nothing could be further from the truth.

Financial aid is a contact sport. Choosing not to play the game does not equate to winning.

The one thing that I have noticed is that while most normal incomes will not qualify for any free aid money, the lower the reported FAFSA income, the better the scholarship offers will be from the school. It is turning into a big used car game and with FAFSA, the "car dealers" (school administrators) can see exactly what you earn and what you own. No wonder colleges and university pricing has gone through the roof.

mimi6789 said:   So, you will likely be out-of-luck if you lose your job anytime in the year you apply for financial aid.

Not true. There are manual processes for addressing these situations.

bindercarrie said:   Aim for merit scholarships or affordable colleges: That's where you'll get the most return for you investment.

Not true.

With enough foresight -- and probably not much inconvenience -- one can save on the order of 50% or more on most any school in the top 20-30 national institutions.

It's just like cars. Possibly even used cars. Stop looking at sticker and start looking at "out the door" prices.

BEEFjerKAY said:   nebraskacornhusker said:   , if you create a 529 account or something similar in a grandparents name, it does not show up on fafsa, so that's one way you can hide funds ...
This is my area of expertise, if there are any questions I'd be happy to answer them.

But 529s in a grandparent's name do show up on CSS Profile. So, no, a 529 is not one way you can hide funds.

Trust me, the folks who play the other side of the gaming table from you know this stuff better than you probably do.

edit: As I have said here many many times, only chumps pay full price for college.

I guess I'd even take it a step further and say only chumps "save for college".

Not sure what you mean "the other side of the gaming table" unless you are referring to the consumer? I work in enrollment. Anyway, CSS is used in some form by about 200 schools, but some only use it for international students, it's a very small group of colleges in the aggregate. On the list of things to worry about, worrying about whether the school your child applies to is going to use CSS is really, really far down the list.

I misspoke when saying black box, it was the wrong term. For many students, including first-generation college students, they are very uninformed about how financial aid works and would not be able to use the provided worksheet to figure out what their aid would be. Most colleges do provide a financial aid estimator on their website that is typically available at least in the fall and sometimes year-round for students to estimate their financial aid.

ltcm said:   This. If you've got a decent household income -- say, above $80K (and quite probably, the threshold is much lower) -- you're not qualifying for any need-based money anyway, so moving all of this around is a waste of time.

Nonsense. But so long as enough people believe what you say, the rest of us will continue to profit.

Maybe when you get closer to 160k household income you have problems. But start your heavy duty planning when your child is in seventh grade and you can make a significant portion of that 80k evaporate off the fin aid forms.

arktc said:   In reality, lots of people don't get the aid they might be entitled to because of the following reasons

IMO, the #1 reason is because folks are too lazy to sit down and learn the game.

#2 reason, possibly #1 for some, is that once they do learn the game they figure it can't possibly be that illogical. So they disbelieve what they learned and revert to conventional wisdom. And flush their money into a 529.

#3 reason is that even once you get past #1 and #2 it takes some effort and a LOT of planning 5+ years prior to enrolling ... and the willingness to subject ones self to a high degree of financial examination.

arktc said:   BEEFjerKAY said:   mimi6789 said:   So, you will likely be out-of-luck if you lose your job anytime in the year you apply for financial aid.

Not true. There are manual processes for addressing these situations.

Agree, if you lose your job in the middle of the year, you can contact the school's financial aid office and talk to them about it. Depending on the school, they could make an aid adjustment due to change in financial circumstance or they might work with you on a payment plan or something else. This is not an uncommon circumstance, and many schools are used to dealing with it.

In reality, lots of people don't get the aid they might be entitled to because of the following reasons: 1) they don't apply in the first place maybe because they think they make too much money; 2) they make bad assumptions regarding what financial aid departments will do; and 3) they don't call the financial aid office to discuss the issue.

I know of cases where a financial aid office even said they would kick in financial aid because a parent said, I can afford what this school that is a competitor of yours is asking me to pay, but I can't afford what you're asking me to pay. Lo and behold, that parent got a fax later that afternoon that matched the competitor. Always ask.

Correct. Schools have benchmark schools that are typically other regional institutions with similar endowment sizes and will match financial aid packages.

You are typically eligible for a unemployment override if you or your parents have been out of work for 60-90 days. If you didn't work the entire previous year, didn't take any disbursements from retirement accounts, and have independent status then your EFC will most likely be zero. If your EFC is zero you will automatically be flagged for verification and will probably need to provide additional documentation possibly including a tax transcript which the government has made difficult to obtain.

BEEFjerKAY said:   arktc said:   But here's the real question: Do you think OP's relatively unsophisticated plan of "starting a business" will work?

I think OP's relatively unsophisticated plan is already more complicated than is necessary to accomplish his goals.

I'm not going to post the cliff notes here, but I did pm pointers to OP.

Financial aid is an incredibly stupid process ... that inherently benefits the rich and shafts the middle class and poor. While all while pretending to do the opposite.

I have a slightly different take. The rich don't need financial aid and the poor receive quite a bit. I think financial aid shafts the middle class. Students with efc's in the 13-20k range really take it on the chin.

BEEFjerKAY said:   arktc said:   But here's the real question: Do you think OP's relatively unsophisticated plan of "starting a business" will work?

I think OP's relatively unsophisticated plan is already more complicated than is necessary to accomplish his goals.

I'm not going to post the cliff notes here, but I did pm pointers to OP.

Financial aid is an incredibly stupid process ... that inherently benefits the rich and shafts the middle class and poor. While all while pretending to do the opposite.

I don't disagree that it's stupid. However, I think any school that gives any meaningful financial aid (e.g. Harvard, Yale, Princeton, etc.) has a more sophisticated process than you're suggesting and what OP's suggesting isn't nearly enough. A large number of parents for those schools do have very sophisticated arrangements, and the schools are pretty used to it.

As I mentioned, a lot of state schools may not catch certain things, but most of them don't give very much need-based financial aid in the first place. Happy to discuss with you offline if you'd prefer too -- I can certainly think of a few things, and Profile is helpful in formulating some of them as you said.

nebraskacornhusker said:   I have a slightly different take. The rich don't need financial aid and the poor receive quite a bit. I think financial aid shafts the middle class. Students with efc's in the 13-20k range really take it on the chin.

Depends on the school. but I'd tend to agree with you.

In practical terms, students with household incomes of 40-80k -- and whose parents did not take the time to learn the game -- needlessly overpay .. or more realistically, are forced to needlessly over borrow.

The rich might not need financial aid. But they can still get need-based aid if they are creative and aggressive. Read between the lines on the CSS Profile and you will start to get a sense of what people were able to get away with 10-20 years ago. Simply incredible stuff, like putting the family assets in the name of a younger child, etc etc.

The American sense of ingenuity is not dead. It's just been mis-applied to financial aid gaming.

arktc said:   I think any school that gives any meaningful financial aid (e.g. Harvard, Yale, Princeton, etc.) has a more sophisticated process than you're suggesting and what OP's suggesting isn't nearly enough.

I am quite familiar with those schools and their forms and processes.

There is a level of financial aid disclosure that goes beyond even CSS Profile. Even then, it's just one more set of hurdles to jump.

If your child is really destined for those schools, there are folks who can help you successfully game those systems.

nwill002 said:   When I get married this year I will have a 5yr old step daughter. Can we have the real dad claim her as dependent on taxesTypically, a dependent Child must have the same principal residence as the taxpayer for more than half the tax year