A few ideas to help plan for college savings & financial aid

If you have children that plan to attend college, you have opportunities to make it easier to pay for college.

And, if you happen to be a small business owner, one of the most favorable treatments for business owners is your ability to increase the amount of financial aid for which your child may qualify by lowering your “expected family contribution” (EFC).  The EFC is the baseline for calculating federal financial aid eligibility.  With tuition costs continuing to rise, the possibility to qualify for at least a small amount of aid is now entering the equation, especially for family-owned businesses.

Here are 4 ways business owners can plan for college savings and financial aid:

1. Keep business assets in business accounts:

In most cases, 5.64% of the value of parental assets is included when calculating the EFC. Qualified retirement plans and home equity are excluded. However, the assets of small, family-owned businesses (fewer than 100 employees and more than 50% family ownership) do not figure into EFC formula at all!  When you keep your business assets in your business accounts, especially nearing or during the college years, they will not factor into whether or not your family qualifies for aid.

For non-family-owned businesses, the assessment of business worth itself is included at very favorable discount rates, especially if the business value is under $660,000

2. Employ your children:

If you are able to employ your children in your business in legitimate job functions, there may be several benefits when it comes to college savings:

Your child can earn up to $6,660 (for the 2019-2020 reporting period) before their income is assessed under FAFSA rules. Whether with your company or another job, your child can qualify to use a Roth IRA for savings up to $6,000 of earned income. Roth IRA assets, like all qualified retirement plan assets, are not counted into the EFC. This can be a real benefit since student assets are included at 20 – 25% for the Expected Family Contribution.

If your child needs to withdraw from the Roth IRA account to pay for college, as long as it is for qualified education expenses, the 10% penalty for withdrawing funds before age 59 ½ is waived. Note:  be careful with timing the distributions because they will count as income in the period received.

Bonus!: You, as the employer, are not required to withhold Social Security or Medicare taxes if children are under the age of 18 and employed in a family-owned business.

3. Add capital to your business:

The Tax Cut and Jobs Act of 2018 (TCJA) tightened the ability to use the proceeds from home equity lines of credit (HELOCs) to help pay for college expenses.  Interest on HELOCs is now deductible only for substantial home improvements; interest on cash pulled out to pay for education expenses will not be tax-deductible.

However, if you own a home, you can take advantage of your home’s equity through a home equity loan or line of credit if you use it to fund your business. You can now take non-deductible, home equity loan interest payments as a deductible business expense.  This deduction can help reduce the income from your business for reporting as part of your Expected Family Contribution.  While this method may not apply to some business owners, if your need to add capital to grow your business coincides with the college-expense years, a home equity loan may be an attractive option.

4. Contribute to a 529 College Savings Plan:

Contribute to a 529 College Savings Plans, and the sooner you start, the better. It is one of the few remaining vehicles for tax-deferred growth outside of retirement plans. While savings will be included in the EFC asset totals (see farther above), it is a great way to have funds set aside for the actual expenses that your child needs to pay, even if some aid is awarded. Consider a low cost 529 plan (such as those managed by Vanguard) and consider using Target Date Funds in the 529 plan as investments that automatically get more conservative (lower volatility risk) as your child approaches college age… this simplifies your job so you don’t have to regularly change your asset allocation to adjust for the changing time frame.