How Home Equity Affects Financial Aid

Will the equity in your home affect your child’s need-based financial aid eligibility? As with so many aspects of the college application and financing processes, it depends! Home equity is not an asset to be reported on the FAFSA. If your child is applying to a college that only requires a FAFSA to apply for aid, any equity in your home will not affect financial aid eligibility. And, happily, 90% of colleges fall into this category. However, if your child is applying to one of the 400 colleges and universities who require the CSS Profile, you will be asked to report the equity in your home. At least some portion, if not all, of your equity will likely be included as an asset in the college’s institutional need analysis, referred to as Institutional Methodology. Instead of using the EFC from the FAFSA, Profile schools use the family contribution they calculate from the CSS Profile to determine the amount and type of institutional funding they can offer. The CSS Profile will ask you to provide the following information about your home: purchase price, purchase year, current value, and current debt. Their financial aid system will calculate the equity by subtracting the debt from the current value. Their system will also estimate their own value based on the purchase year and purchase price. If higher than your reported value, they may use their own calculation. Then they may include all, or a portion, of the equity as a parent asset. Parent assets on the CSS Profile are assessed at about 5%, so if you have $100,000 in home equity, that will raise the parent contribution by $5,000. Some colleges will automatically “cap” the amount of home equity they use, acknowledging the limits that banks put on borrowing against your home based upon your income. For example, a college’s home equity cap could be 1.2x or 2.0x the total parent income. What does this mean? If a family with $100,000 in home equity has an annual income of $40,000, and the college caps at 1.2x, then they would only use $48,000 of the equity in their calculations. At the typical 5% assessment rate, this capped equity would raise the parent contribution by $2,400 instead of $5,000. The beauty of the CSS Profile is that a college can do whatever they want in awarding their institutional aid. They may decide cap home equity at a different rate for some students, depending on how much financial aid they want to offer. When speaking with families who have disclosed to me that they have a significant amount of equity in their home and are in the eligibility range for need-based grant, I often suggest that they reach out to their financial aid counselor to appeal their aid package. Even if there is no special circumstance that would typically warrant an appeal, the financial aid committee may cap the home equity to open up some need-based grant eligibility. You won’t know until you ask!