Saving for College or Retirement?

That's the new mid-life crisis for small business owners

Barry Moltz has redefined the midlife crisis.

Like many, he spent his 20s, 30s and much of his 40s advancing his career and building businesses along the way. He put off having children until later in life so that he could provide more financial stability for his family.

In 2010, the crisis hit him. In this case, it wasn’t about a fancy sports car or a sudden urge to make a career change. No, this was a crisis about the future — a college education for his son, or a secure retirement for himself.

Moltz suspects this could be a new normal.

“It’s really sad that in America we have to pay $250,000 for a college education, but most of us want the best for our kids,” says Moltz, a business consultant, radio host, author and blogger who has started three companies in his career. “Every dollar we spend on our kids’ college education is a dollar less we have to spend on retirement.”

Moltz recently shared this story during a day-long workshop, “How to Get Your Business Unstuck,” at the Northeast Wisconsin Entrepreneur Networking Day (NEW END) in Appleton. He says he began saving for his children’s education early, noting that for 10 years prior he had made investments that were supposed to double and pay for his son’s education. The Great Recession wiped out 35 percent of that, and with returns now at 1 percent, the outlook is bleak.

For small-business owners, this crisis often has a compounding problem of its own. While many have seen their businesses struggle, the value of the business on paper can make it appear they have additional assets to finance their child’s education.

Since many small-business owners include their business as part of their personal taxes, it can have an adverse effect in determining financial aid by increasing the amount of the federal “expected family contribution” to a child’s education.

But much like tax planning, there are ways to reduce that expected contribution, and to keep the assets of a family business from working against your child when it comes to college financial aid.
This is an all-too-common problem for the nation’s small-business owners, says Mark Kantrowitz, a financial aid and college planning author who publishes the FastWeb.com and Finaid.org Web sites. Preparation and documentation will be key to reducing that expected contribution, he says.
“You will need to have information that shows the assets and income from that business are not available to the family for college,” Kantrowitz says. “It’s all driven by documentation.”

Small-business owners should work with a financial planner, Moltz says, just like they do for retirement and taxes, and utilize strategies for reducing the expected financial contribution wherever they can. Available options range from employing your child or spouse to making sure you have the right kind of retirement plans that aren’t counted as assets.

“Any way we can reduce that contribution to our child’s education, that’s more that we have for retirement,” Moltz says.

It all starts with the Free Application for Federal Student Aid, or FAFSA, which should be filed every year by a student, whether they think they qualify or not. This form will require tax and financial information and will be used to determine the expected family contribution.

Since it is the starting point, it is important that families take the time to complete the form properly and ask questions of school financial aid officials, says Sara Holman, financial aid director for Lawrence University.

“The FAFSA collects a lot of information, but it does not always reflect the family’s current situation,” Holman says. “But people don’t ask us. We want to help. It can be daunting. But don’t be afraid to ask the questions. We want to help people get aid to go to school.”
Owning a business does not mean your child won’t get any student aid.

Depending on how the business is organized, its assets and income may not have to be reported. Exceptions are made on the FAFSA form for family-owned or controlled businesses that employ fewer than 100 people. However, if your business is reported on your personal taxes – if it’s organized as a Subchapter S – then you may still have issues you need to appeal.

It’s also important to remember there are different kinds of aid. Need-based aid may not be as readily available to families with a higher expected contribution. However, many will still qualify for various types of student loans.

“Financial aid is not an easy process,” says Meghann Krueger, associate director of financial aid for the University of Wisconsin-Oshkosh. “Our main objective is to have folks be able to afford college.”
Loans are considered financial aid, and the federal student loan programs provide loans in several flavors depending on needs and assets, from subsidized loans with interest rates at 3.4 percent to unsubsidized loans with interest rates at 7 percent.

If you are still not happy with the results, don’t be afraid to consult with the financial aid staff and ask them to reconsider, says Steven Schuetz, vice president for admission, financial aid and marketing at Ripon College.

While each school is different, they do have the ability to make professional judgments when it comes to financial aid awards, including how much the income and assets from a small-business should come into play.

The challenges of financial aid and business ownership should not be seen as an obstacle to attending a private school, Schuetz says. Indeed, private schools may have more flexibility because of school-based programs that are funded by the institution’s endowment. Additionally, there are usually many merit-based awards from grade-point average to leadership to community service.
“There may be a big difference in the sticker price and what the student winds up actually paying,” Schuetz says. “There is a lot of opportunity before we even get to family income to reduce the student’s contribution.”