College Financial-Aid Loophole: Wealthy Parents Transfer Guardianship of Their Teens to Get Aid

Several universities in Illinois say they are looking into the practice, which is legal. “Our financial-aid resources are limited and the practice of wealthy parents transferring the guardianship of their children to qualify for need-based financial aid—or so-called opportunity hoarding—takes away resources from middle- and low-income students,” said Andrew Borst, director of undergraduate enrollment at the University of Illinois. “This is legal, but we question the ethics.”

One Chicago-area woman told The Wall Street Journal that she transferred guardianship of her then 17-year-old daughter to her business partner last year. While her household income is greater than $250,000 a year, she said, she and her husband have spent about $600,000 putting several older children through college and have no equity in their home, which is valued at about $1.2 million, according to the property website Zillow. She said she has little cash on hand and little saved for her daughter’s education.

Transferring her daughter’s guardianship was largely a matter of paperwork, the mother said. Her business partner attended a court hearing with an attorney. She, her husband and her daughter didn’t even need to show up, she said. Once the guardianship was transferred, the teen only had to claim the $4,200 in income she earned through her summer job, the mother said.

Today, her daughter attends a private college on the West Coast which costs $65,000 in annual tuition, she said. The daughter received a $27,000 merit scholarship and an additional $20,000 in need-based aid, including a federal Pell grant, which she won’t have to pay back. The daughter is responsible for $18,000 a year, which her grandparents pay, the woman said.

The woman and another Chicago-area parent who spoke to the Journal said they followed the strategy laid out by a college consultant company called Destination College, based in Lincolnshire, Ill. The company says on its website it has saved families as much $40,000 a year per student. The website doesn’t specify how.

The owner of the company, Lora Georgieva, didn’t respond to requests for comment. Other people who said they are clients of the firm and spoke to the Journal said they were asked to sign a confidentiality agreement to not disclose her strategy of transferring guardianship.

The Education Department is looking at such transfers through its investigative arm, its Inspector General Office, said a person familiar with the matter. The office has suggested that the Education Department add clarifying language to the Federal Student Aid handbook. The suggested language, this person said, is: “If a student enters into a legal guardianship, but continues to receive medical and financial support from their parents, they do not meet the definition of a legal guardianship and are still considered a dependent student.”

The Journal’s review of more than 1,000 probate court cases filed in 2018 in Lake County, Ill., turned up 38 cases in which a judge granted the transfer of guardianship to a teenager in his or her junior or senior year of high school. Most of the families live in homes valued around $500,000. Several of those homes were valued at more than $1 million, according to property sites including Zillow.

In court documents, a petitioner is asked why he or she should become a guardian. Nearly all of the 38 cases use some version of this language: “The guardian can provide educational and financial support and opportunities to the minor that her parents could not otherwise provide.”

Mari Berlin is one of the attorneys at the Chicago firm of Kabbe Law Group who has represented about 25 families who have transferred guardianship for the purposes of securing independent student status, which can generate more financial aid.

“The guardianship law was written very broadly,” Ms. Berlin said. “Judges were given an immense amount of discretion. The standard is, best interest of the child, and I think it’s hard to argue that this is not in the student’s best interest.”

The University of Illinois notified the Education Department last year after a teenager mentioned the strategy to her high-school guidance counselor in suburban Chicago. The counselor notified the University of Illinois, where the student had applied, Mr. Borst said.

On her admissions application, the student indicated she lived with her parents in an affluent Chicago suburb, but on her financial-aid application she said she was independent, a university financial-aid officer discovered. That made the student eligible for thousands of dollars in need-based aid from the federal government, the state of Illinois and the university, Mr. Borst said.

Admissions officers found 15 students whom they had accepted who had recently legally transferred guardianship. The school said it will likely withhold institutionally funded need-based aid “until we are satisfied that students who have transferred guardianship don’t have other financial resources available,” Mr. Borst said.

Apart from the university aid, the students each are receiving up to $11,785 in state and federal aid, he said.

“They are gaming the system, whether it is legal or not doesn’t make it any less unsavory,” said Justin Draeger, CEO and president of the National Association of Student Financial Aid Administrators.

A man who says he is a client of Destination College said his mother became the guardian of two of his daughters, including one who will attend college this fall. His daughter received need-based aid at some schools but not at others, he said.

The issue of gaming college admissions entered the public realm this year when William “Rick” Singer, CEO of an admissions consultancy, was charged for running a scam in which he helped students cheat on their college entrance exams and bribed college athletic coaches to get students into elite universities. Mr. Singer has pleaded guilty to four felonies and is cooperating with the case that includes charges against 51 total, including 34 parents.

Write to Douglas Belkin at doug.belkin@wsj.com