For the past two college admissions cycles, parents of college-bound teens who own small businesses or family farms have been treated dismally.
In 2024, rules governing the federal financial aid system began to harshly penalize these parents. Dropping a decades-old practice, the Free Application for Federal Student Aid began including the net worth of family farms and small family businesses in aid calculations. For countless households, the change in aid destroyed their chances of qualifying for need-based aid from the federal government and thousands of higher education institutions.
This draconian deal ended July 1 due to a provision of the One Big Beautiful Bill. Starting with the 2026-2027 admission season, the assets of a small business or family farm will once again not be counted in the aid calculation.
This new change to the FAFSA will significantly improve, in some cases, a family’s chances of receiving need-based aid. Below is an example contrasting the old rule with the new one:
A family restaurant has $250,000 worth of kitchen equipment, tables and chairs, linens, cutlery, plates, inventory, and everything else needed to run the place. Using the formula above, the company’s net worth would have increased a family’s student aid rate by $14,100.
The EFS indicates the minimum a household is expected to pay for one year of college. A household’s SAI is partially determined by multiplying assets by up to 5.64%. Under the new rule, the restaurant’s net worth would not be reported as an asset. Instead, only assets like taxable investment accounts and college accounts would be included in the FAFSA formula, along with income.
Rules Check: Who Really Qualifies?
While exclusion returns, a family business must meet certain criteria to protect business assets. Here are the two main ones:
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The company must employ 100 or fewer full-time or full-time equivalent employees. If a client runs a company with 105 employees, the company’s entire net worth will still be disclosed.
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The business must be owned and strictly controlled by the family. Family includes anyone directly related by birth or marriage to the people listed on the household’s FAFSA. Additionally, the family must own more than 50% of the voting rights.
If your client owns an LLC as a 50/50 partnership with an unrelated third party, the business does not qualify for the exclusion. If the family does not own a majority (51% or more) of voting control, the 50% equity interest in the client’s business would be fully reported as an investment asset.
Income versus assets: what still counts
It is important to understand that excluding small businesses protects capital but not cash flow.
For example, while the restaurant’s $250,000 net valuation would be ignored, any income generated by that business would still flow directly to the FAFSA. You would do this through the IRS Data Exchange, which is an IRS tool that allows the FAFSA to directly access a household’s income tax returns.
If the business is a pass-through entity, such as an S corporation, LLC, or sole proprietorship, the net business income reported on Schedule C or Schedule K-1 will still affect the income portion of the SAI formula. Wages paid to the parent or student remain fully visible.
Because income still drives the federal financial aid formula, it makes sense to use standard tax planning measures. For example, a business owner could adjust the timing of equipment purchases or change bonus allocations to reduce net income transferred during critical FAFSA base years.
Even if your client leaves 100% of the business profits inside the business checking account to fund next year’s inventory, the IRS and FAFSA consider that net profit as personal income for that year.
CSS Profile and Family Businesses
While the FAFSA now treats business assets more favorably to parents, the CSS Profile, which is used by more than 200 mostly private colleges and universities, does not. These schools use the CSS Profile to award their own institutional aid, while the vast majority of private and state institutions only use the FAFSA for this purpose.
The Profile requires parents to report the net worth of their businesses or farms. If a client is in this category, the CSS profile typically requires completion of the Commercial/Agricultural Supplement form.
The CSS profile evaluates parent assets up to 5%, so net business assets can be included in that formula. However, many schools host some of the commercial assets on a gradual scale. It makes sense to ask any school on a client’s list how they evaluate business assets.