A little-noticed loophole written into federal college financial aid rules allows the children of wealthy entrepreneurs to collect aid intended for the needy.
In a bill passed last year, 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 or fewer. Rep. Marilyn Musgrave of Colorado inserted this exemption, noting at the time that small-business owners should be treated the same as family farmers, who aren't expected to mortgage their property to pay for college. Musgrave, a Republican, did not respond to requests for comment. The federal government will still consider the income of all business owners.
A change in the law was needed because it can be difficult and expensive for owners of truly small businesses to tap the value of assets such as tools or inventory to pay tuition bills, says James A. Boyle, president of College Parents of America. But, he adds, "100 employees is kind of stretching it."
Accountants and financial planners are now developing strategies to help wealthy entrepreneurs take legal advantage of this new federal definition of "need" by minimizing incomes and storing wealth as business assets.
Matt Geherin, a financial consultant in Rochester, N.Y., helped a client move property worth $700,000 into a limited partnership to reduce taxes and improve his children's eligibility for need-based aid. The new exemption could "change our advice profoundly," he says.
Major advantage. Fred Amrein, a fee-only college funding adviser based in Wynnewood, Pa., says the new exemption allowed one client's child to qualify for a federally subsidized student loan this spring even though the parent's business was worth more than $1 million. Previously, the government would have estimated those parents could have paid more than $70,000 a year for tuition and thus would have awarded the child no need-based aid. "This is a major advantage for small-business families," Amrein says, adding, "I believe the size [of the exemption] is too large."
There are no data yet on how many well-off businesspeople could take advantage of this loophole. But the College Board, which administers a more detailed financial aid application for about 300 colleges that award need-based scholarships from their own endowments, says that about 14 percent of the parents who file their PROFILE aid application reported owning a business. And the Census Bureau reports that 98 percent of the nation's 5.8 million businesses have 99 or fewer employees.
While college aid officers must obey federal rules in passing through federal Pell grants and Stafford loans, some are refusing extra school-funded need-based scholarships to students from families with significant business assets. Says Margaret Rodriguez, the University of Michigan's senior associate director for financial aid: "We want to make sure our need-based aid is going to the neediest students."