February 21, 2007

Are financial aid offices biased agains small business owners?

Posted in FAFSA, Student Loan News at 4:48 PM by Joe From Boston

Here’s a really interesting article from SmartMoney.com about how private colleges and universities have a major bias against Small business owners.

A Financial-Aid Bias?

IF YOU HAVE a college-bound child in your home, I probably don’t need to tell you that April can be a stressful month. While high school seniors fret over what schools are going to admit them, their parents — along with the parents of current college freshmen, sophomores and juniors — anxiously wait to find out what next year’s financial-aid packages hold. I have to admit, however, that as we waited last year to hear from the four schools my daughter had applied to, I was relatively calm on both scores. Our daughter had already won early acceptance at M.I.T., and we thought it likely that she would get into the other schools she applied to. I, meanwhile, having seen the federal- and private-aid estimates of our financial need, was confident that we’d also be getting the assistance we’d require to be able to put our daughter through college without ending up in the poorhouse.

Well, I was right on one point: My daughter did indeed get accepted to her top picks. But along with those acceptance letters came the financial-aid packages. And those caught me off guard. That’s because they were about $4,000 to $5,000 a year less than I had anticipated.

It turns out that I’m not alone in my sticker shock. As a full-time freelance writer, I’m among the one in 11 American workers who is self-employed, and most private colleges and universities have a built-in bias against the self-employed when it comes to evaluating financial need. How so? They routinely disallow some of the most basic deductions we take for the expenses of conducting a small business — things like meals and entertainment, travel and depreciation. For the self-employed, these are a cost of doing business no different from a corporation’s spending on raw materials or advertising, but America’s private colleges add them back to income when they calculate the resources a family has available to pay for college.

It’s something that most self-employed parents may not realize, and with good reason: The financial-aid determination process is pretty much a black box. You put your data in, whether on the Free Application for Federal Student Aid (FAFSA) form handled by the U.S. Education Department or the College Scholarship Service (CSS) form processed by the College Board, send along last year’s tax forms and out the other end come scholarship and loan packages from the colleges that have accepted your child. How those numbers are determined is up to each school’s own financial-aid office. But there’s a surprising degree of sameness in the way these offices operate — and in the lack of explanation they provide to parents. And it’s no wonder they look so similar: They are all using the same playbook.

The College Board, a membership organization of most colleges and universities in the country, claims it doesn’t tell schools how to evaluate financial need. “We don’t tell them what to disallow or add back to income. That’s a decision made by each college,” says a College Board spokeswoman. In fact, however, the College Board does sponsor workshops that essentially do just that. For the past two decades in the Northeast, for instance, most college financial-aid directors have been attending the same annual workshop on evaluating parents’ financial-aid forms sponsored by the College Board and run by a Vermont-based accountant named James Briggs.

“He’s the guru,” says Heather McDonnell, financial-aid director at Sarah Lawrence College in Bronxville, New York. “We all schlepp up there once a year and he tells us what to look for. He makes it clear that when you walk into the world of the self-employed, basically there are a lot of people who present themselves in ways that are not exactly a reflection of their true cash-flow position.”

As a financial-aid officer at M.I.T. explains, freelancers who are willing to play fast and loose with the tax code may be misrepresenting some ordinary personal spending as business expenses. “You hear so much about people taking a whole group out to a restaurant and writing it off as a meal,” he says. Many school financial-aid officials say they are particularly skeptical about expense deductions when someone has a full-time salaried job, and the Schedule C is for a second-income activity.

Some of the caution is probably warranted. During an audit of FAFSA applications back in 1997, the U.S. Department of Education found that it had overawarded $109 million in Pell Grant scholarships because of fraud, though the overpayments weren’t just to students of self-employed families.

But for self-employed parents who don’t fudge their returns, the result is often financial-aid awards that are lower than they should be. After all, many of the expenses on Schedule C are the sort for which companies routinely reimburse their employees — and no financial-aid office would add a parent’s corporate expense accounts back to his or her income…

View the rest of the article here.


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