As a small-business owner, I worry a lot. Strangely enough, it's not about my customers or the future of the economy. I worry about paying college tuition for my sons.
The funds that we invested in 15 years ago that were supposed to double in size to pay their tuition dropped in value during the Great Recession. Compounding returns
are a lot less eye-popping at the current 1 percent growth rate, compared with an 8 percent rate of return. In fact at 1 percent annual growth, it takes 72 years for your investment to double, instead of seven years at 8 percent.
So how do small-business owners pay for college? This is becoming increasingly difficult since college has become ridiculously expensive. My son's college costs $200 a class hour! Since 2000, the increase in the price of college has even outpaced the growth of health insurance premiums! The total outstanding U.S. student loan debt is growing at $3,000 a second
Minimize Your Share
Not only is this debt crippling our economy's future consumers, it is also hobbles parents who are business owners. Here is yet an additional area where college-bound students must become the CFOs of their own personal financial future. Planning has to be done wisely, since there are no scholarships or financial aid given out for retirement. Through a series of steps, every small-business owner can reduce what they need to pay for their children’s college tuition and preserve their assets for their future.
Tim Higgins’ book, Pay for College without Sacrificing Your Retirement, describes how to do this. To figure out if the college will give you financial aid (which does not need to be paid back), the business owner first needs to fill out a FASFA form and calculate his or her EFC (Expected Family Contribution). The FAFSA takes into account your financial assets and your adjusted gross income. Just like in tax planning, there are legal ways to lower both of these and therefore reduce your EFC. A large percent of students qualify for college financial aid, so why not your kids?
First, "control" your income by pulling as many expenses from your business into this year as legally possible and pushing as much income as legally possible into next year.
Next, here are additional strategies Tim recommends to reduce your income and assessable assets that can boost your chances for qualifying for financial aid:
1. Don’t overvalue your business. You need to include the value of your business—not the sale price—in your assets on the EFC. This is no time for your ego to get in the way. The form asks for the net worth of your business, so in this case, use the book value.
2. Contribute to a retirement plan. Most 401(k)s and IRA’s are not counted as assets in the EFC calculation. Move as many assets to these categories as possible based on your income.
3. Buy life insurance. If you can contribute for 10 years, then investing in some form of variable life insurance policy can build a cash value that is also shielded from the EFC.
4. Employ your spouse and children. Long live nepotism! There is an “employment expense allowance” in the EFC formula that allows deductions for some of the lower-earning spouse’s income. In addition, because of this income, the spouse can contribute to a tax-deductible retirement plan which shelters assets from the EFC calculation.
5. Establish a Section 127 Educational Assistance Plan. This allows employers to provide $5,250 per year to all employees as a benefit (and tax-deductible expense).
As always, consult your tax professional before pursuing any of these strategies.
Read more small-business advice from Barry Moltz.
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