Your Home Equity Can Affect College Aid
By Robert Castillo, ADPA®
The college application process can be a headache for any high school senior but paying for tuition is easily a parent’s worst nightmare. Perhaps the most terrifying part of picking schools is figuring out how much aid a university is willing to offer. Calling a college’s financial aid office can start you in the right direction, but it is always best to start the process under the guidance of your financial planner. This rings especially true for families whose finances are more complicated. There are many tricks to know when applying for college financial aid, but perhaps one of the biggest tips is knowing whether your home equity will serve as a huge disadvantage.
Most people have heard about the government’s Free Application For Federal Student Aid (FAFSA), used for determining qualification for federal grants and loans, but many are unfamiliar with the College Scholarship Service (CSS) Profile. The CSS Profile was created by the College Board for nonfederal financial aid and it is used by several hundred schools, many of which are elite, private institutions. While the CSS Profile and the FAFSA are similar, one key difference with the CSS Profile is that many of the colleges that require it considers home equity as an asset when calculating college aid. For some families, this could mean a difference of thousands of dollars in financial aid.
The CSS Profile asks applicants for details on real estate to determine their amount of equity. The way in which this information is used can have great consequences for some families. For example, some schools do not consider home equity to be an asset at all like Harvard or Caltech. Other schools consider 100% of home equity to be an asset, as in the case with Boston College. Then there are schools that only consider a portion of home equity as an asset, like Cornell University. In the latter case, the schools consider household income when calculating how much home equity will count as an asset. Cornell will limit home equity to 1 ½-times the family’s adjusted gross income:
For a family with $600,000 in home equity making $200,000 a year, home equity is capped at $300,000 ($200,000 x 1.5).
Schools use assets to determine how much parents can contribute towards college expenses, so getting a break on home equity can mean a difference of pay thousands of dollars more for tuition. Typically, the expected family contribution (EFC) is calculated at about 5% of assets. At Cornell, a family with $300,000 in home equity will be expected to pay $15,000 a year. However, had the actual home equity been used, the family would be expected to pay $30,000 a year.
The formulas that schools use to calculate aid can be much more complex than what I have described above, so it is best to do your homework and learn the process for each university your child hopes to attend. Your financial planner can help you get started by using forecasting tools to determine how much aid you can expect.
Securities offered through LPL Financial, Member FINRA (http://www.finra.org/)/SIPC (https://www.sipc.org/). Investment advice offered through Gerber Kawasaki Inc, a registered investment advisor. Gerber Kawasaki and Gerber Kawasaki Financial Advisors are separate entities from LPL Financial. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which course of action may be appropriate for you, consult your financial advisor. No strategy assures the success or protects against loss.
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