As a widow who will have not only one  but two daughters in college in just a few months, I’ve been dutifully completing multiple financial aid forms on the off-chance that I may now qualify for a bit of assistance above the partial merit scholarships that my older daughter currently receives and that my younger daughter has been offered. Back when my husband was around, the process was easier – not just because my husband did the work of filling out the forms, but also because my husband’s status as a W-2 employee was most compatible with the kind of information requested by most financial aid offices.  Once the financial aid office had the W-2 in hand, they didn’t seem to care about gathering any more information about my law firm income (perhaps because my husband’s salary alone disqualified us from any aid).

But now that I’m the sole provider, my law firm tax returns are the only source of information that the college has to go by.  As a result, I don’t have a W-2 to upload (which the online forms request), and although I have multiple 1099s from my corporate and non-profit clients (which are also requested), they actually under-report my income given that at least 25 percent of my income comes from individual clients or tiny community groups who don’t complete 1099s for legal services.  So I’m not sure why it’s necessary for fifteen to twenty 1099’s to accompany my financial aid form.

Yet even as I’ve dutifully uploaded and sent forms, I’ve received follow up questions from the ten schools that my daughter has applied to asking for my W-2, my 1099s, my partnership income. When I call and attempt to explain that I’m a business owner taxed as a sole-prop – not an employee or an independent contractor, there’s radio silence in response (message to colleges: maybe you ought to staff your financial aid office with people who know what they’re doing – or else provide the students who are handling the calls with some training). Two weeks ago, I spent a full workday following up with the office and I expect another round sometime next week.

Focusing on these financial aid issues also got me thinking about the unhidden costs of running a small practice as a family’s sole provider that go unreported on financial aid forms. For example:

(1) Solos and smalls cover the cost of their health insurance.  Though tax deductions for premiums may be available for self-employed the deductions still won’t cover the entire coverage cost – not to mention dollars spent meeting those $5000 deductibles. Meanwhile, employees with health coverage subsidized by employers receive an effective benefit of several hundred dollars a month (i.e., the employer’s contribution to the cost) which isn’t taxed at all.

(2) Self-employed solos and smalls may have difficulty getting loans. As Realty Business News observed back in January “the current financial system was not set up with the self-employed in mind.” Most solos don’t have the kind of income documentation like W-2s that lenders want to see before granting a loan. The 2008 mortgage crisis only made matters worse as banks tightened the standards for all loans. As a result, solos and smalls paying for their kids college no longer have their homes as a safety net if they experience a cash flow crisis when tuition payments are due as they may not be able to access home equity at favorable rates or secure a smaller mortgage if they sell their existing home to downsize.

Fortunately, the less-than-ideal situation for self-employed seeking loans is improving. Among other things, as the gig economy grows, financial institutions now realize the need to adapt their current processes. Plus, new research shows that the prevailing assumptions of the self-employed as higher credit risks isn’t accurate.

(3) Solos and smalls who self-support their family – either as a widow like myself or a single parent without a partner in the picture – face a double whammy, lacking both access to credit and back-up income from a spouse. The higher risk can mean greater reliance on high-interest credit cards when times are tight – again, resulting in greater expenses that aren’t necessarily reflected on a financial aid form.

The college financial aid offices’ repeated requests for documentation of income that as a solo, I simply don’t have, is really just another one of life’s annoyances —  up there with other administrivia like probate, gathering documents for estate taxes and trust accounts . Ultimately, the “risk premium” of small firm practice isn’t substantial enough to move my financial application into the “needs aid” pile, or to make the difference between my daughters going to college or not (Best college investment advice ever: marry the smartest guy in the room who will sneakily foist his prodigious math skills on your daughters thus enabling them to qualify for partial merit scholarships). But for those solos and smalls and single parents who struggle a bit more, financial aid offices and other lenders ought to find a way to take account of the solo risk premium in awarding aid, and think about better adapting the process to the needs of the self-employed.


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