FAFSA Now Excludes Small Business Assets From Aid Calc
For the past two college-admission cycles, parents of college-bound teenagers who own small businesses or family farms have been treated shabbily.
Back in 2024, the rules governing the federal financial aid system began harshly penalizing these parents. Tossing aside a decades-old practice, the Free Application for Federal Student Aid began including the net value of family farms and small family businesses in aid calculations. For countless households, the aid change shattered their chances of qualifying for need-based aid from the federal government and from thousands of higher-ed institutions.
This draconian treatment ended on July 1 due to a provision of the One Big Beautiful Bill Act. Starting with the 2026-2027 admission season, the assets of a small business or family farm will once again not count in aid calculations.
This new FAFSA change will, in some cases, significantly improve a family’s chances for need-based aid. Here is an example contrasting the previous rule versus the new one:
A family-owned restaurant has $250,000 worth of kitchen equipment, tables and chairs, linen, cutlery, dishes, inventory and everything else needed to run the place. Using the previous formula, the net value of the business would have increased a family’s Student Aid Index by $14,100.
The SAI indicates the minimum a household would be expected to pay for one year of college. A household’s SAI is partially determined by multiplying the assets by up to 5.64%. Under the new rule, the restaurant’s net value would not be reported as an asset. Instead, only assets such as taxable investment accounts and college accounts would be included in the FAFSA formula, along with income.
Vetting the Rules: Who Actually Qualifies?
While the exclusion is back, a family business must meet certain criteria to shield business assets. Here are the two primary ones:
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The business must employ 100 or fewer full-time or full-time equivalent employees. If a client runs a company with 105 employees, the entire net worth of the enterprise would still be disclosed.
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The business must be strictly owned and controlled by the family. Family includes anyone directly related by birth or marriage to the people listed on the household FAFSA. In addition, the family must hold 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 higher) of the voting control, the client’s 50% share of the business’s net worth would be fully reported as an investment asset.
Income vs. Assets: What Still Counts
It’s important to understand that the small-business exclusion shields equity but not cash flow.
For instance, while the $250,000 net valuation of the restaurant would be ignored, any income generated by that business would still flow directly onto the FAFSA. It would do so via the IRS Data Exchange, which is an IRS tool that enables 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. Salaries paid to the parents or the student remain fully visible.
Because income still drives the federal financial aid formula, it makes sense to use standard tax-planning moves. For instance, a business owner could adjust the timing of equipment purchases or shift bonus allocations to reduce pass-through net income during the critical FAFSA base years.
Even if your client leaves 100% of the company’s profit inside the business checking account to fund next year’s inventory, the IRS and the FAFSA view that net profit as personal income for that year.
CSS Profile and Family Businesses
While the FAFSA now treats business assets more favorably for parents, the CSS Profile, which more than 200 mostly private colleges and universities use, 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 does require parents to report the net value of their businesses or farms. If a client is in this category, the CSS Profile typically requires completion of the Business/Farm Supplement form.
The CSS Profile assesses parent assets at up to 5%, so net business assets can be included in that formula. However, many schools shelter some of the business assets on a graduated scale. It makes sense to ask any schools on a client’s list how they assess business assets.
