How does home equity impact financial aid?
Let me know if this scenario sounds familiar to you:
- Parents with children in high school
- A mortgage balance on your primary residence
- A little bit of cash on the sidelines
With this scenario, we’re often asked the question; “Would paying off my mortgage early save on costs of college?” Like the answer with many college questions, we’re going to have to resort to “it depends”. Sit tight though and let’s dive in on the implications by the different schools on your child’s list.
FAFSA schools – For most public institutions (think about state schools like UMass), the answer is that home equity doesn’t even come into the financial aid calculation. For these schools that calculate your financial aid using the FAFSA, home equity isn’t a piece of the calculation.
Let’s go back to that first question on paying off your mortgage early with cash. While parent assets (Your cash on the sidelines) is counted on the FAFSA, it is counted at a small percentage in comparison to your income.
For most students applying to these schools that use the FAFSA, income is by far the most meaningful piece of the financial aid calculation. Therefore, spending down cash (an asset) to pay off your mortgage early will have little impact on financial aid. Where it can have an impact, however, and possibly in a negative way is reducing cash on hand that can be put toward other goals (e.g. such as saving for retirement or other long term goals).
CSS Profile schools – For many private institutions (think about Boston College for this example), they dig a little deeper into your finances to calculate your financial aid. Instead of just asking you to fill out the FAFSA, they also ask you to fill out another form called the CSS Profile to calculate your financial aid.
This form is a bit more “invasive” into your finances and does consider the equity in your home as an asset towards your ability to pay for college.
Let’s again look at the above example in paying down your mortgage with cash. In this example, using cash to pay down your mortgage reduces an asset. But at the same time, it increases an asset with a larger home equity value. The result of this transaction is essentially a “wash” for financial aid proposes.
These examples are meant to be basic in nature, and your personal situation may have outstanding circumstances that can have a greater impact on need based financial aid eligibility.
For questions about your personal situation, feel free to reach out, I’m happy to help.
All the best,
Andrew Holmes, Certified College Planning Specialist™
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