How Home Equity is Treated in the Financial Aid Process

Home equity is the market value of your home minus any outstanding mortgage debt. How home equity is considered when awarding financial aid varies depending on which forms colleges ask families to complete: the FAFSA and/or the CSS Profile.

• FAFSA: When completing the FAFSA, you are instructed not to report the value of your primary home as an asset, and the amount of equity you have built in your home has no impact on your federal financial aid eligibility. If your student is applying exclusively to schools that require only the FAFSA, and your only real estate asset is your primary residence, your home equity will not be part of the financial aid calculation.

• CSS Profile: Home equity may matter at colleges that require the CSS Profile in addition to the FAFSA. These are primarily selective private colleges, along with a small number of public institutions. Many of these schools use home equity as part of their institutional financial aid methodology when evaluating a family's ability to contribute toward college costs.

If you own a second home, vacation property, or rental property, both the FAFSA and CSS Profile collect information about the equity in those properties, and they are treated as parent assets.

Equity in Your Primary Residence 

Schools that require the CSS Profile ask families to report both the market value of their primary residence and any remaining debt. However, colleges vary considerably in how they use this information. Some schools assess 100% of the equity in the primary residence as a parent asset. Other schools ignore primary home equity altogether, taking an approach similar to the FAFSA.

A third group of schools caps the amount of home equity that will be considered in the financial aid formula. Common caps range from 1.2 times parent income to 2 times parent income.

Example: Family Income of $200,000

School with a 1.2x Income Cap:

• Home equity of $220,000 → $220,000 considered

• Home equity of $280,000 → $240,000 considered

• Home equity of $500,000 → $240,000 considered

School with a 2x Income Cap:

• Home equity of $220,000 → $220,000 considered

• Home equity of $280,000 → $280,000 considered

• Home equity of $500,000 → $400,000 considered

Home Equity as an Asset

Many families assume home equity is treated differently from other assets because it is not readily accessible. However, schools that include home equity in their calculations generally assess it the same way they assess cash, savings, or investments. For example, if assets are assessed at 5%, having $100,000 in home equity could increase a family's calculated contribution (Student Aid Index or SAI) by approximately $5,000.

Using the same 5% asset assessment rate, the amount of home equity included in the formula can have a meaningful impact on aid eligibility.

For a family earning $200,000:

• A school that caps home equity at $240,000 could increase the family's SAI by approximately $12,000.

• A school that caps home equity at $400,000 could increase the family's SAI by approximately $20,000.

How to Find Out if a University Considers Home Equity

To find out how a university treats home equity, one of the best tools available is the Net Price Calculator (NPC) provided by each university on their finance aid website. By running the NPC with your home equity included, and then rerunning it without that information, you may be able to gauge how home equity impacts the financial aid formula.

You can also contact the financial aid office directly and ask if they consider primary home equity and if home equity is capped. Keep in mind that these questions only apply to a family's primary residence. Equity in investment properties, rental properties, and vacation homes is generally considered fully available for financial aid purposes.

Using Home Equity to Pay for College

Some families consider borrowing against their home to help pay college costs. Before doing so, it is important to understand how the school treats home equity. If a college does not consider primary home equity, borrowing against your home is unlikely to improve financial aid eligibility. Similarly, if a school caps home equity and you are already at that cap, increasing mortgage debt may have little or no impact on aid eligibility.

Finally, be mindful of where borrowed funds are held. If the proceeds of a home equity loan are deposited into a checking or savings account, those funds may become a reportable asset and could negatively affect future financial aid eligibility.