4 Guidelines For Claiming Rental Property As a Business on the FAFSA

Rental Property on the FAFSA has always been an area of contention in my mind.  The manner these assets are listed on the FAFSA can mean the difference of thousands of dollars in financial aid.   For the government to tell you what is and is not a business enterprise that is making money kind of frosts me.  The 2009-10 FAFSA Application and Verification Guide states the following…

At times a student or parent will claim rental property as a business.  Generally, it must be reported as real estate instead. A rental property would have to be part of a formally recognized business to be reported as such, and it usually would provide additional services like regular cleaning, linen, or maid service.

If at all possible, you want to claim real estate as a small business, and therefore qualify for the small business exemption on the FAFSA form.  Here are a few guidelines to follow which make claiming real estate as a business much easier.

1.  Organize under a separate legal entity – Don’t hold rental properties directly in your name and expect them to fly with a financial aid officer.  They should always be organized under a C-corp, S-corp, LLC, or similar entity.  This is by far the most important qualification to be considered a business asset.

2.  The more activity the better – If you just have one piece of property that you rent out, or if you have a vacation cottage on a lake that maybe you rent once or twice during a season; don’t expect that to be considered a business asset.  The more activity you have in real estate the better.  You need to be able to demonstrate substantial levels of material participation and activity.  If you have multiple properties and active participation in managing them, it will strengthen your case.  This is one area where going big and acquiring more assets will help you.

3.  Show associated activity – The following activities showing in your corporation may also indicate more business activity, rather than just rentals:

  • Develops or redevelops
  • Constructs or reconstructs
  • Acquires
  • Converts
  • Operates or Manages
  • Brokers
  • Other business activity associated with the property

4.  Other activities – There are other signs or activities which will add weight to listing real estate as a business operation:

  • Registering for appropriate state and local permits
  • An employer identification number (EIN)
  • Fictitious name registration or DBA for the business
  • Separate business checking account

These four guidelines will definitely strengthen your hand in getting that small business exclusion on the FAFSA form.  But it is not a black and white standard.  Some schools will let you keep the exclusion, others will not.  My recommendation is when in doubt, list the property as a business.  Make the school take the initiative to prove it otherwise.

SAFRA – Big Reform in the Student Aid Industry

On March 30, 2010, President Obama signed the Student Aid Fiscal Responsibility Act (SAFRA) into law. This landmark piece of reform legislation is intended to reboot the floundering student loan industry by redirecting all new federal loans through the Department of Education, bolstering several pro-financial aid initiatives, and ending the hotly-contested Federal Family Education Loan (FFEL) Program. I would like to walk you through these changes, explain how they will affect the average student, and attempt to answer any burning questions you may have about them.

FFEL, and Why It’s Going Away

The Federal Family Education Loan Program was established in 1965 as a way to provide access to college for students requiring financial aid. At the time, the government was not participating heavily in the origination of student loans, but recognized the need. In order to create a less credit-heavy lending option for students, the government began to allow private banks to originate loans for students that were backed with federal funds. Essentially, this created a near risk-free environment for private banks to lend money to students and earn interest on the borrowed funds. Further, these banks have been paid subsidies as an incentive to create these loans; the result is them getting paid by the government to make a student loan that is guaranteed money for the bank, even if the borrower defaults. The long and short: the banks win on both sides of the equation, and make a ton of money doing very little.

To add insult to the injury, many FFEL lenders have been accused of purposely providing poor customer service in an attempt to increase delinquency rates. This difference can be easily seen when one looks at the default rates for 2009: 7.2% for FFEL, 4.8% for the Direct Loan program (data sourced from ED.gov.) This activity supposedly is overlooked due to the much larger commission a FFEL bank’s collection department is authorized to take for recovering a defaulted FFEL student loan; in some cases it has been reported to be as high as 38.5% of the loan’s balance (The Huffington Post).

The effect of the SAFRA bill is these subsidies and current relationships between private bank and the federal government dissolve. Ideally, this will liberate up to $61 billion over the next 10 years to be reinvested in other initiatives (such as the Pell Grant program) and potentially pay down some of the federal deficit. Keep in mind that much of this is sensationalism however, considering the fact that our total deficit is currently in the region of $12.7 trillion; the estimated $10 billion would be a drop in the bucket toward paying down our national debt, but every bit counts.

Federal Student Loan Restructuring

As of July 2010, all new federal student loans will be originated through the Department of Education’s Federal Direct Loan Program (FDLP). In the past, FFEL banks were allowed to originate federal loans, but due to the issues listed above and shady practices, Congress has reached a consensus that the program is overdue for the guillotine and needs to end. Thus, the relationship between private bank and government is set to change in a way that is mostly invisible to the borrower. This difference is in the execution: although new loans will be created by FDLP, the government will now require private banks and non-profit entities to compete in order to service them. They plan to make this attractive to their former FFEL partners by paying premium and competitive market rates for the first 100,000 loans serviced per bank. The end result is this: the Department of Education makes your loan, but the customer service is handled by a private bank or large non-profit. Supposedly this will provide a higher quality experience for borrowers, but the reality of the change is yet to be seen.

As someone with a lot of experience with finance and the business world, I personally do not understand why a private bank would want to service federal loans. It can’t be lucrative enough to make the entire process worthwhile, and no extra funds appear on the banks’ balance sheets because the government is handling the money on both sides of the equation. My sixth sense says there are other kickbacks in place for the banks involved (possibly tax breaks, or something similar.) It is likely that lobbyists and media will be keeping a very close eye on whatever transpires in this arena; if you are interested in following how this process is evolving, check a trusted news source (such as the Wall Street Journal) regularly.

If you are currently a student or parental borrower, your existing federal loans will remain unchanged by this switch. The only difference you may see going forward is if you attend a FFEL school; they will be migrating to the Direct Loan Program in the next six months. Originally, most schools were one or the other exclusively depending on what type of benefits they could get for their students from each institution. After July, any new loans you take out will all be through FDLP, at a lower interest rate, and with a more flexible array of repayment plans.

Improvements to the IBR Program

Income Based Repayment (IBR) is one of the best things to ever happen to student borrowers. Essentially, if your total payments for the year equate to higher than 15% of your annual income, you are eligible to have your payments drastically lowered. For instance, under IBR, an income of $15,000 (for a household size of one) or less would make your monthly payment on all federal student loans $0. That’s right, no payments at all. As the household size increases, the maximum income level to qualify for IBR rises as well. The Student Loan Network has assembled a great chart on Income Based Repayment information that presents the data in an easy-to-digest format.

The benefits of IBR don’t stop there. In addition to potentially having your monthly payments significantly reduced (or eliminated), you actually can have the loans forgiven if they are in good standing and all payments are made on time for a certain amount of time. In some cases, federal student loans will be forgiven after 10 years (this is based on a “hot fields” list of desirable professions) and 25 years for everyone else. If you are wondering what is exactly meant by loan “forgiveness”, it means your loan gets cancelled, and you no longer have to pay it back or have the debt sitting on your credit history.

So what are the technical changes to this program? Thanks to a $1.5 billion infusion of funds provided by cutting the FFEL program, eligibility requirements are going to be relaxed further and loan forgiveness will be accelerated. Assuming no amendments or further changes to SAFRA, starting in 2014, the payments to income ratio for eligibility is being dropped to 10%. This is fantastic given the amount of debt the average student graduates with (federal and otherwise) and allows for greater ability to manage finances and afford living costs. Additionally, instead of the previous 25-year period before loan forgiveness, the program is being accelerated to 20 years. This is an absolutely major win for responsible student borrowers.

Ongoing Pell Grant Enhancements

The Pell Grant program is widely appreciated in the financial aid industry as a resource of funds for low-income individuals to help afford the cost of education. Although the purchasing power parity of this type of grant has fallen sharply over the years — largely due to inflation and the rapid growth of tuition costs — it is still a significant help to needy students that does not require repayment. The majority of the cost savings from cutting the FFEL program are planned on being redirected to the Pell Grant program, infusing an estimated $49.5 billion over the next 10 years.

The effects of this investment are adding at least a million more recipients per year, raising the award amounts, and linking future grant awards to popular economic indicators in the future. Currently, the maximum Pell Grant award is set to be $5,550 for 2010; the new legislation increases the award up to $5,975 in 2019. In addition, the Pell Grant program is going to be linked to the Consumer Price Index (CPI) starting in 2014, which will help the grant awards keep pace with inflation and maintain their buying power.

What The Changes Mean To You

As a current or future student borrower, the massive overhaul probably seems intimidating and difficult to understand. The bottom line of the legislation is to improve access to financial aid and make school more affordable for all levels of family income. For low income families, this comes in the form of increased grants; for everyone else, improved repayment programs and a simplified loan application process. Very little will be different on the front end for most students and parents, and again, there will be no change to existing loans.

If you are concerned about finding money for school, keep in mind that there are options other than federal aid available too. Scholarships are an excellent resource because they do not need to be paid back and you can find them in amounts ranging up into the thousands of dollars. Websites like StudentScholarshipSearch.com and ScholarshipPoints.com are quite popular for finding scholarship money and cost nothing to join. In the end, affording college is always a balance of savings, smart borrowing, and maximizing the amount of scholarships and grants possible to finance your education. It is entirely possible to get a degree without putting yourself into insane amounts of debt, so take the time to read informative financial aid literature and educate yourself on finding money for school.

How to Lower Your EFC to Zero – Become Self-Employed

You can lower your EFC to zero and automatically maximize your federal and college financial aid by becoming self-employed and controlling your own W-2. This is certainly not what most financial aid advisors will advise you to do, but it is the way that college financial aid works. It’s the federal government’s big secret that they prefer people did not know.

The FAFSA student aid form, the CSS profile, and a university’s own independent financial aid form rely on the parents and students W-2 income. Assuming that you aren’t unemployed, there is an enormous benefit to becoming self-employed. You can form a corporation, such as an S-Corp, and control the income on your own W-2.

I would advise you to secure a competent CPA who is well versed in the college financial aid process. The CPA should be able to guide you regarding the best type of corporation to form. There are General Corporations, S-Corps, LLC or Limited Liability Company’s and Partnerships. They each have their own advantages and disadvantages.

The universities will usually request copies of all tax documents filed so you need to be sure that they are filled out correctly. And please be sure that when you the mail the tax documents to the school, they’re the ones you filed with the federal government. There are those who modify tax documents to receive financial aid. That would be committing tax fraud and it’s not something you want to do.

What type of business can you create?

  1. If you’re an accountant, form your own CPA firm.
  2. If you’re a plumber or electrician, attain all the licenses and certifications you need and become self-employed;
  3. If you’re a carpenter, become a licensed contractor;

It really doesn’t matter what you do, as long as you can provide a service and do it independently, you should be able to form some sort of licensed company.

For the 2010- 2011 college year, the magic number for your W-2 income on the FAFSA form is under $49,999. This places you on the simplified federal worksheet which eliminates the need for you to declare any of your assets.

Now the key to getting your EFC down to zero is to lower your w-2 income to under $30,000 and also qualify for one of the federal assistance programs such as Food Stamps or the Free Lunch Program. In addition, your income for the previous year must have been less than $49,999.

To see how a family qualifies for one of these federal aid programs, I went to the NYC food stamp program eligibility screening tool and created a factious family of four, with an income of $30,000 and two children – one eighteen, and one twelve. The result – the family was eligible for the NYS food stamp program. This eligibility will automatically reduce the EFC to zero and maximize your child’s college aid.

To test this yourself visit: https://www.mybenefits.ny.gov/selfservice/. The maximum gross income to qualify for food stamp as of October 1, 2009 was $28,668 for a family of four, with each additional family member adding $4,872 to the total.

In addition,

  • Make sure your child works off the books or does volunteer work during the previous year that you apply for aid – the previous year’s income is the income that’s looked at;
  • Also don’t let the students grandparents load up your child’s account with money. Once your child begins college, ask the grandparents to provide funds in cash.

Your child’s income has a detrimental effect on college aid because 50% of it is taken into account during the FAFSA calculations.

Securing some amount of college financial aid is certainly feasible for most of us, but there is a huge benefit for those who are self-employed.

How To Get Dental School Grants

Dental School Grants

Many children know from a young age what it is that they want to become in life. They are able to choose their profession at an early age if parents are encouraging enough and know how to direct them without pushing them from one side to another.

There are many children in this world who do not have the opportunity to grow up in a financially stable environment, which is why it sometimes might seem hard for them to follow their dream and apply to a college, as all of them ask for a consistent financial support.

Dental School is a big part of the Medical School and both of them usually require a lot of money. Being a dental practitioner is one expensive dream, but once it has been realized, the fruits of success exceed by far all the financial stumbling and compromises that might have been done along the way.

General facts about Dental School

There are two major directions in every dental school: dental hygiene school and the school of dentistry. Those who attend the dental hygiene school will obtain a license as soon as they graduate. Those who choose to go to the school of dentistry are more likely to become dental surgeons and specialists, but their training process is a bit more complex as compared to the previous set of students. They have to complete an undergraduate degree in a major that is oriented more towards science. Then, in order to continue with their dental education, they need to look and apply to a specialized school of dentistry.

Financial Aid

Since dental hygienists can complete their professional preparation as undergraduates, it is a lot easier for them to find grants and scholarships that will secure their entire educational period. On the other hand, those who apply for the school of dentistry will have a harder time in finding financial aid, as they will be enrolled as post-graduates, thus competing for smaller funding resources.

Most of the times, in order to sustain their education, students will search for grants and scholarships that bear the name of gift aid. The money they get cannot be returned and they can use it however they wish in their educational process.

This money will come from private sources, such as different organizations, estates or individuals or from public sources which are known to be funded by taxes.

How to get Financial Aid

The first thing you need to do is to go through a thorough research process. The sum of money a student can get depends on his family’s contribution or how much money he can provide for this purpose. Before applying for a financial aid, all colleges require their potential students to fill out the form called the Free Application for Federal Student Aid or the FAFSA. The information placed in this document will give the government a concrete image related to the amount of money the family is able to contribute to the education of the student, without causing a financial chaos that would lead to a tremendous financial burden.

The students who are able to pay most of their education are not considered to be appropriate for receiving this aid. Moreover, every grant has its own rules and conditions students need to meet in order to be considered eligible.

Then, there are also the merit based grants which are given to students for their excellent academic results. Just like the other type of grants, this one does not need any repayment to be made. The number for this type of grants is limited, so the competition can be quite heated.