Home Equity

Paying for College
21

No. Your home equity is what is considered. Not your monthly mortgage payment.

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22

Prior to the 2017 TCJA, the main advantage of a home equity loan for college expenses was that the interest was deductible. The TCJA ended that until 2026. It is unclear what will come out of this congress and administration on that front, but if they do nothing then under current law interest on home equity loans used for college would be deductible (and the SALT limit removed as well).

So the answer to your question depends upon your tax situation and pending legislation.

I personally see no problem with using home equity as part of a well-considered financial plan. Marginal tax rate, loan rate, and opportunity costs of using other options all factor in.

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23

So some quick background. Most colleges use either the FAFSA or the CSS Profile to evaluate need aid applications, and the CSS colleges are the ones who might consider home equity.

Then the CSS has something called the Institutional Methodology, which you can think of as a sort of default approach. But CSS colleges can and do customize their formulas. So, a CSS college can choose to eliminate consideration of home equity, or assess it in a different way than the IM.

OK, but in the IM, my understanding is that it assesses NET home equity as a parental asset. What that means is the CSS Profile will ask you about both your homeā€™s current market value and your home debt amount (if any). It will then assess the difference at the standard parental asset rate, which is about 5%, and that is each year.

To my knowledge, the IM does not factor in how you have structured your mortgage. So if you have a shorter term and higher amortized montly payments, to my knowledge that will not result in a lower assessment of net home equity.

But again, CSS colleges can do whatever they want to in the end, they are not bound to follow the IM.

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24

Every college has its own formula for determining the awarding of institutional need based aid (thatā€™s IM). Reallyā€¦there can be wide variability in aid awards even from schools that meet full need for all.

But as notedā€¦itā€™s your equity, not your loan payment that is considered.

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25

COL is not a factor, many end up in the donut hole for this reason with little to no FA.

26

Yes, the Institutional Methodology is from The College Board, and colleges using the CSS Profile may choose to use it as is, use it with modification, or not use it at all (using whatever they themselves choose to use).

27

I note that is actually one of the things that CSS colleges can choose to do.

28

Some CSS schools donā€™t hit home equity so they donā€™t ask these questions.

For schools that do factor home equity into oneā€™s financial picture (and assuming an accurate NPC), one can figure out at what rate a given schoolā€™s IM formula hits home equity by running the NPC with and without the homeā€™s net equity inputs.

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29

Yes, sorry, I was intending to refer specifically to the default IM approach to assessing home equity as a parental asset. Again CSS colleges can, and sometimes do, vary from the default IM approach by not considering home equity at all.

By the way, as explained in one of those IM documents linked above, parental assets in the IM are assessed at a progressive rate, and there are also some standard deductions. What this means is in some cases where the parents do not have a lot of assets, home equity might not be assessed at all, and in other cases it might be assessed at only something like a 3% rate. But if you get far enough out in the formula, it gets assessed at a marginal 5% rate.

And again, this is just the default IM approach, colleges can and do come up with their own formulas and schedules for home equity, or again not assess it at all.

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30

Agreed, thereā€™s huge variability out there in how itā€™s handled. One other common situation is to cap home equity impact based on a certain level of income. Many of the most selective CSS schools have excellent NPCs, so one can reverse engineer whatā€™s happening with home equity.

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31

And a lot of colleges will cap the home equity ā€œhitā€ at a multiple of income, such as 1.5 income, 2 times income, etc.

Maybe thatā€™s just another way of saying what you already posted!

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