Whether your clients qualify for financial aid will sometimes boil down to one question:
How much equity do you have in your home?
Taking a look at a client’s home equity is especially important if their children want to attend expensive private colleges, as pricey private institutions are more likely to take a family’s home equity into consideration when fashioning financial aid packages.
Here are five things you need to know about home equity and college costs.
1. The vast majority of colleges and universities in this country do not consider home equity. In fact, among state universities, currently only five of them assess home equity for financial aid purposes.
The state schools that do consider home equity are:
- College of William & Mary;
- Georgia Institute of Technology;
- University of Michigan;
- University of North Carolina; and
- University of Virginia.
Most schools don’t consider home equity because they use only the Free Application for Federal Student Aid (FAFSA) when determining aid eligibility.
The FAFSA does not ask about a household’s equity of a primary home and parents should absolutely not include this figure when the application asks about parental assets. It does want to know about the equity in investment property and vacation homes.
2. Roughly 200 colleges and universities that use a secondary aid application called the CSS Profile do want to know about the equity in a primary home. While these institutions use the FAFSA to determine who qualifies for state and federal aid, they use the CSS Profile to determine who will qualify for their own institutional assistance.
Compared with the FAFSA, the CSS Profile dives much deeper into a household’s income and assets, including home equity.
Profile institutions include most of the nation’s most recognizable private institutions, along with many other selective colleges. You can find the names of all the CSS Profile colleges by visiting the website.
3. How CSS Profile colleges treat home equity can be divided up in the following three major ways:
Assess It All
Some schools assess the full equity of a family’s home. Home equity is assessed at up to 5% just like other pertinent parental assets. So if a family has $500,000 in home equity, the CSS Profile formula would reduce financial aid eligibility by $25,000.
Schools that are in this category include:
- American University;
- Boston College;
- Brandeis University;
- Fordham University;
- Loyola University Maryland;
- Northeastern University;
- New York University;
- Occidental College;
- Syracuse University; and
- Tulane University.
Link Home Equity With Income
Some schools link income to home equity so people who are house rich but have more modest cash reserves won’t get penalized.
Let’s say, for example, that a family makes $100,000 a year, but has $600,000 in home equity. With this much equity, the eligibility for aid would drop by $30,000.
The hit wouldn’t be as bad if a student applied to a school that tied home equity to income. I’ve seen schools that cap home equity at anywhere from 1% to 4% of income.
Here’s how it would work with a school that uses a cap of 1.2 times income.
1.2% x 600,000 = $7,200
In this example, the family would have its aid eligibility drop by $7,200 instead of $30,000.
Schools that use an income cap include the following:
- Amherst College (1.2x)
- Bucknell University (2x)
- Cornell University (1.2x)
- Emerson College (3x)
- Grinnell College (2x)
- Johns Hopkins University (1x)
- Kenyon College (4x)
- Lewis and Clark College (2x)
- Rice University (2x)
- Trinity College (3x)
- University of Richmond (2x)
- Villanova University (1.5x)
- Wake Forest University (2x)
Ignore Home Equity
A minority of Profile colleges don’t consider the equity in a primary home at all. Obviously, this is the best of the three options for families.
Institutions that are in this category include:
- California Institute of Technology;
- DePauw University;
- George Washington University;
- Gettysburg College;
- Harvard University;
- Massachusetts Institute of Technology;
- Stanford University;
- University of Southern California;
- Ursinus College; and
- Whitman College.
4. How do you determine what your home equity is? I’d recommend choosing the method that will result in the lowest home-equity figure.
That are a variety of options out there, including using home value estimates on real estate websites like Redfin, Trulia and Zillow. When I typed my address into all three sites, the Redfin estimate was nearly $91,000 less than Zillow and Trulia, so I would obviously use that one.
Another option is to use recent comps of home sales in your neighborhood. I would not have used that method because a home comp a block away from my house sold recently for $300,000 more than the Trulia and Zillow estimate.
One more alternative is to use the federal Housing Price Index Calculator.
5. Finally, you can appeal a financial aid award that assessed your home equity. Some families wouldn’t even know that home equity was used in the calculation, but you can tell them otherwise. To get an idea of how home equity might impact aid, parents should run the school’s net price calculator with the home equity and then without the equity and see what the difference, if any, is.
Lynn O’Shaughnessy, a nationally recognized college expert, offers an online course—Savvy College Planning—exclusively for financial advisors. Click here to get Lynn’s guide, Finding the Most Generous Colleges.