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How Home Equity and Other Assets Impact Financial Aid

The focus on qualifying for need-based aid will often be a misplaced worry among your clients. What’s important is getting a discount off the price.

Many parents worry that their assets will hurt their chances for college financial aid.

For many parents, however, this is an unnecessary worry. That’s because most people have the majority of their savings in retirement accounts. And financial aid formulas do not assess money in qualified retirement accounts.

As a practical matter, a household’s income has a much bigger impact on whether a family will qualify for need-based financial aid. The Free Application for Federal Student Aid, for instance, assesses up to 47% of parental income when calculating need.

In contrast, the aid formulas assess relevant parental assets at no more than 5.64%.

The focus on qualifying for need-based aid will often be a misplaced worry among your clients. What’s important is getting a discount off the price.

Your clients shouldn’t worry if that money comes from need-based aid or merit awards, which are given regardless of need. It doesn’t matter, for instance, if a family receives a $25,000 award in a financial aid package or $25,000 in merit aid, or if it comes as a combination of both.

Parents, who won’t qualify for need-based aid and don’t want to pay full price or can’t, should look for schools that give merit awards (and most of them do).

Misplaced Fear of Saving for College

It’s extremely important that you explain this reality to parents, who often feel good about themselves for saving when their kids are little, but grow resentful of their savings when their children are nearing college age. They believe they will be punished for having saved, while those who didn’t prepare for college costs in advance are the ones who will benefit.

The fear that non-savers will be the winners, however, is far from the reality. Much of the need-based financial aid dispensed to students comes in the form of loans.

Families can boost their chances of covering their college tab by saving as much as possible. Every dollar saved is a dollar less that households have to borrow. And every borrowed $1 will cost about $2 by the time borrowers repay the debt.

The Home Equity Impact

For parents who live in metro areas on the coasts, as well as other expensive zip codes, the asset that could ruin their chances for need-based aid at private colleges is their home equity.

Public universities and private colleges that only use the FAFSA don’t consider home equity of the primary residence when calculating financial need. But home equity is fair game for most of the nation’s elite and selective private universities and colleges.

These private institutions require parents to fill out the CSS Profile, which roughly 200 colleges and universities, nearly all private, use to determine who will get their own institutional money. These schools still require applicants to file the FAFSA to pinpoint who qualifies for federal and state money.

The College Board website has a list of participating institutions and programs.

The CSS Profile treats a family’s home equity as a parent asset. All relevant parent assets, whether they are 529 plans, savings accounts or taxable brokerage accounts, are assessed at 5%.

Home equity can be a blow to families who might otherwise qualify for need-based aid at private institutions that only provide need-based. This can happen at the expensive private schools that say they meet 100% of financial need. (Only a few dozen schools fit into that category.) Since the most popular, private universities are surpassing $75,000 in their cost of attendance, a growing number of affluent families could qualify for need-based aid at these institutions.

While most private schools give discounts to the vast majority of their students, many of the most highly ranked private colleges give few if any merit scholarships, but they say they meet 100% of need. So for a small percentage of private colleges, not qualifying for need-based financial aid will mean the family will pay full price if their home equity is significant. I would strongly argue that families who become ineligible for need-based aid because of their home equity should look elsewhere for a school.

Here’s an example: Boston College says it meets 100% of a student’s need, but it also assesses 100% of a family’s home equity. If a student doesn’t qualify for financial aid because of the home equity, they almost certainly will pay full price because only 1% of freshmen receive institutional merit scholarships.

An easy way for your clients to determine how a school will treat home equity is to use the institution’s net price calculator. Run the calculator with the home equity, and try it again without it and see if your net cost changes.

While some private colleges like Boston College use the full home equity, others link home equity to a family’s income. For instance, a college may assess home equity at 5% but limit what is assessed by linking it to household income. Schools take this approach to limit the impact that a house would have on a family’s ability to afford college.

A small number of Profile institutions don’t use home equity at all, including California Institute of Technology, Gettysburg College, Hamilton College, Harvard University, Massachusetts Institute of Technology, Princeton, University, University of Chicago and Whitman College.

Many Profile colleges that assess 100% of home equity say that families can appeal. But that is disingenuous because most parents wouldn’t even know this was possible or wouldn’t know how home equity impacted their child’s award.

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. 

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