Your Home & College Financial Aid
We invited our friend Danilo Umali, Principal at Game Theory College Planners, to help educate us about how home ownership can impact college financial aid. Please read on for some very helpful information!
Your home is your castle. So it should come as no surprise that when I inform families that their hard-earned home equity can drastically impact their financial aid, I get a lot of very strong responses. “How could they?” “That’s not right!” These are all common responses. Yes, colleges can look at your home equity and decide to lower your financial aid. Yes, they really can do this.
I’ll start by saying there are three basic sources of financial aid. There is government aid, institutional aid, and outside scholarships. The focus of this article is on the largest and most generous source of aid: institutional aid. Many families bringing in less than $50K a year in income are the only families that qualify for federal government grants. So we’ll focus on the rules that govern institutional aid since this will impact the largest number of homeowners.
When it comes to financial aid, all colleges examine the family’s financial footprint when deciding how to award financial aid and scholarships. From a basic perspective, colleges view the family from two distinct lenses.
The first lens is the “income” lens. This does not necessarily disqualify a family for aid (even if you make over $1 million dollars a year), but rather categorizes them. The income determines the type of aid that is potentially awarded in a family’s particular situation. Lower income earners get a greater share of need-based aid whereas higher income earners earn a greater proportion of merit aid. The amount of the award from the same college can be exactly the same to two different families, but the classification of the award can be different, determined primarily by the family’s income. Colleges know that families “live and spend” to their income level and that financial aid can be effectively used to influence their decision to pick one college over another.
The “asset” lens is a completely different view point. Liquid assets show a college that a family has access to capital outside of their income stream. These families have spending power that does not affect their lifestyle, so Influencing college selection in these scenarios is less likely with financial aid. In some instances, you will see a significant reduction in both need and merit-based financial aid. This is what perpetuates the myth that “I make too much” to get aid. It’s not what you make, it’s what you keep.
Let’s talk about your home. We are not worried about home value, but rather your home equity as it relates to your mortgage. The FAFSA (Free Application for Federal Student Aid) actually exempts your home equity as an asset and is thus non-reportable to the college. There are however, over 300 colleges that use the CSS PROFILE FORM. In this instance, your primary residence is reported and your home equity is assessed against your aid AS AN ASSET. In some instances, the equity is assessed as a percentage of aid that is deducted. Other colleges may assess a dollar-for-dollar reduction in aid. Remember, this aid is from an institutional and private source, so the rules here can vary drastically. The rules can also vary greatly from year to year at the same college.
If you’ve made it this far, I am sure you are already confused by now. Understand that many colleges (that use the CSS Profile Form) are becoming increasingly reluctant to assess your home equity against you. With housing prices and fluctuating market conditions, your home equity has become less of an interest to these colleges. But as markets change, how colleges access your home equity can change. If this is still a concern, know that there are strategies that can “shelter” your home equity from prying colleges should you apply to a large percentage of “Profile” schools.
If you own additional properties or draw rental income, this can also pose an additional set of complications. If your property holdings are significant but your income is modest, you may want to consult with an expert. You need to ensure your real estate portfolio does not destroy your ability to obtain college aid and scholarships. Also, how your properties are titled can make a difference as to how these assets are reported to the college. Again, you may want to consult with a college planning expert when dealing with college aid. CPAs, Accountants, and Certified Financial Advisors are typically not equipped to navigate this area.