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The Home Equity Drag on Financial Aid

The Home Equity Drag on Financial Aid

For some colleges, home equity figures heavily in financial aid calculations. For others, not at all. Your clients should know which is which before their kids apply.

A father from New Jersey contacted me recently with some puzzling figures.

Mike, a laid-off engineer, has been researching college costs because his daughter is a high school senior. Many of the institutions on his bright daughter’s list are extremely expensive. They include such schools as Princeton, Columbia, Georgetown, Swarthmore, Northeastern, Skidmore, Villanova and Boston College.

The price tags haven’t intimidated Mike. After spending a great deal of time poking around on my blog (, he understands that price tags are meaningless. Two thirds of families in this country don’t pay full price. In fact, the only figure that matters to Mike is the net price that a school will charge his family. This is equally true for your clients.

As I mentioned in a previous column, it should be easy for your clients to determine the net price of any school (the cost of attendance minus any grants and scholarships). Parents simply have to use a school’s net price calculator to obtain a personalized estimate of what the cost would be based on such factors as the family’s finances and a student’s academic profile. This is the first admission season where all schools, thanks to a federal mandate, must post these calculators on their websites.

With time on his hands, Mike tried the net price calculator of 34 colleges and universities. Before I share some of the figures, keep in mind that Mike is unemployed, his wife isn’t working and nearly all their investment assets are squirreled away in retirement accounts. The assets in retirement accounts almost never impact financial aid. In fact, the Free Application for Federal Student Aid (FAFSA), which is the universal aid application that colleges use, doesn’t even inquire about qualified retirement funds.

Initially, I found some of Mike’s aid package estimates just as puzzling as he did, while others were in line with what I would expect. According to the net-price-calculator results, the most elite schools, such as the Ivies, would provide excellent need-based financial aid to this family that calculates its yearly income at $17,000.

According to the calculator results, for instance, the net price at the University of Pennsylvania was $70 and at Georgetown it was $198.

Even better, the net price at Franklin & Marshall and Dickinson colleges, two respected liberal arts colleges in Pennsylvania, was $0. Here are some of the other bargain-basement prices:

Haverford College $2,087
Colgate University $2,026
Bucknell University $2,500
Princeton University $2,620

What shocked me, however, were the schools that barely budged in price. Boston College was the biggest outlier. For Mike’s daughter, Boston College’s net price was $40,728.

Here are some of the other expensive net prices:

Loyola University Maryland $40,530
Swarthmore College $39,980
University of Rochester $38,500
Lafayette College $35,320
Villanova University $39,000

Keep in mind that Boston College and the other schools with high net prices were looking at the same data as the schools charging modest prices. So why the huge discrepancy?

I solved the mystery when Mike showed me the inputs he used for the calculations. The figure that triggered the wild swing in prices was Mike’s home equity. Mike estimated his home equity at $800,000.

To test that it was the home equity that made the difference, I had Mike redo all his calculations and pretend that he had no home equity. Sure enough the aid rose at the schools that had initially offered him poor aid packages.

I found the home equity impact fascinating because schools are often loath to share how big a factor home equity is when they are calculating an applicant’s financial aid package.

Most colleges and universities, I should emphasize, don’t consider home equity at all. These schools use the FAFSA, which doesn’t even ask families if they own a home. So at the majority of schools, Mike’s $800,000 in home equity wouldn’t reduce his daughter’s aid package by even a dollar.

The institutions that do care about home equity include the roughly 250 institutions that use an additional aid application called the CSS/Financial Aid PROFILE.  Nearly all the schools using the PROFILE are private and include many elite institutions. The PROFILE, which is a creation of the College Board, requires that families include their home equity. PROFILE schools each determine how they will handle this asset. 

Typically schools will impose some type of cap on home equity that’s tied to the household’s income. For financial aid purposes, for instance, a school might say that home equity can’t exceed more than 2.5 times family income. This would protect families like Mike’s that is house rich and cash poor.  Others institutions, however, are going to conclude that parents sitting on lots of home equity can pay much more for college even if their finances are dire. Obviously, Mike is going to avoid those latter institutions.

Bottom Line:  The best way to determine how home equity will influence a financial aid package is to use a school’s net price calculator. Plug in the figures with and without home equity to measure the impact.


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