Still confused about home equity for primary residence - FAFSA and CSS/Profile

Paying for College
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<p>What I understand so far, please correct me if I’m wrong:

  1. FAFSA does not consider primary residence home equity at all - no college that takes FAFSA only will consider how much of your primary residence you own
  2. CSS/Profile does consider primary residence home equity
  3. Schools that use CSS/Profile can still choose to use primary residence home equity or not
  4. And the NPC for each school should reflect whether or not that school considers primary residence home equity</p>

<p>What I don’t understand, is people talking about “no cap” and 1.2x cap and 2.4x cap based on income. Does that mean that if my spouse and I make $150,000 per year, the school ignores 2.4 * $150,000 = $360,000 of home equity, and then past that we are expected to use that as cash? I don’t think vice versa makes sense (that 2.4x is the most we can pay a portion of for college).</p>

<p>And someone mentioned 5% of the home equity - so if we had $100,000 over that limit, would we be expected to pay $5,000 per year from our home equity, which would be added to our EFC calculated based on everything else?</p>

<p>Finally - as the home equity decreases, let’s say we pay our $35,000 EFC from it for year 1 of college, now we have only $65,000 left in the home equity, so our EFC would be reduced to $3,250?</p>

<p>We are looking for schools that only take FAFSA and not CSS/Profile, but we also don’t want to limit him if some schools don’t consider home equity.</p>

<p>(and is there a list of schools and how they treat a primary residence?)</p>

<p>As always, THANK YOU for any responses. The FA issue is so confusing. When you are talking care of extended family, it is difficult to make sure everybody is accounted for.</p>

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<p>Yes. I found and posted a list in another thread that has the CSS/Profile schools that do not consider home equity in making FA decisions. I can’t find it right now, but it’s out there.</p>

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<p>Thank you both. And I’ll take a look for that list.</p>

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<p>It looks like you have a lot of good information and are ahead of many in financial aid knowledge. It is confusing. Just keep googling and reading books and going to all those free seminars and asking the financial aid officers. I have been digging into this and will share what I have learned. </p>

<p>There are 3 types of EFC assessment:
Federal, from FAFSA - mainly public schools
Institutional - created by College Board - mostly private schools, with some publics
Consensus - Section 568 schools - small group of highly selective schools
Your 1-4 points are correct.
Some schools use the Consensus Methodology . It has a cap of 1.2 x your income when assessing how much of your equity they will put into your pile of Reportable Asset Value. So, yes, if you have $400,000 in equity; but make $150,000, they will only put $180,000 of your equity into your Asset Pile.
Then they add all your other assets, (except 401k), subtract some allowances, and expect parents to pay 5% of that pile, per year. If you have no other assets, your contribution from your assets would be $9000.</p>

<p>I understand that in the “cap” scenario, which some schools use under the Institutional Meth, many schools do limit the home assessed value at 2.4x income. Again, if you make $150,000, your home value would be $360,000, as you said. Then they would subtract your mortgage from 360,000 to get the available equity to throw into our asset pile.</p>

<p>Only you can do the math on your particular home and mortgage. For us, the IM works much better. The CM may knock one college off my son’s list. Also, the College Board IM is a guideline that every school uses slightly differently. </p>

<p>You could call each of your son’s potential schools and ask how they treat equity. Do the NPC’s on each one, and it will give you a good guide. I found that all my son’s schools were within $5000 of each other, with the top and bottom costs being $10,000 apart. Don’t assume FAFSA-only schools are cheaper - it’s often the opposite! My D applied to three FAFSA only schools, and the federal and school aid was a big ZERO on every one. The fact that a school asks for Profile info means they actually have money to give.</p>

<p>As always, search out schools where your son’s ACT/SAT is at the 75% or higher. Avoid high profile out of state public schools. Look for value in the midwest, mountain states and SEC.</p>

<p>And, I tell my kids constantly that they may not get to attend their first choice, but I promise they will get to go to a good school where they will be happy and successful. </p>

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<p>How do you decrease the home equity? Is it due to a drop in property value or you took out an equity loan? Or you have a higher income and cap now? It is not clear to me how you pay from the equity.</p>

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<p>Depends on the policy of your schools. Most do NOT meet full need, so a change in home equity might not net you a nickel more in need based aid.</p>

<p>It sounds like the OP is planning to use a home equity loan. I’ll give my free advice…if you plan to take $35,000 in loans for each of four years, this college is not affordable…and will leave you with more than$100,000 in debt.</p>

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<p>We have a HELOC, which is a home equity line of credit. We switched our fixed-rate mortgage for it, so we can access the money that we paid off on our house (we had 80% of our house owed initially, big mortgage payment, and now we have paid it down some so we have room to pay for college, if that is our best option). You use checks from the HELOC, or move money from the HELOC to checking to pay bills. A home equity loan is different, and more similar to a mortgage. It is sometimes called a second mortgage. All we owe on our house is in a HELOC now and we have a maximum that is above that, which we can access to pay for college.</p>

<p>I was using $100,000 as a round number, we have more than enough in our HELOC to cover $140,000 which is four years of EFC $35,000. We are looking at taking 401k loans too, but those are higher interest so payment per month would be more. But the HELOC interest goes to the bank, and the 401k interest goes back to us (weird but I think that is how it is - your future retired self is loaning money to you).</p>

<p>I forgot about the full need issue, and I’m not sure if the NPCs reflect that or just if they consider home equity on the primary residence or not. Lafayette is $56,000 per year for us according to their NPC, and MIT is $36,000 per year according to their NPC - all with the exact same information provided. I did find that Olin College of Engineering appears to ignore home equity.</p>

<p>The 1.2x income, 2.4x income, and no cap thing relates to family income not being able to cover paying back the HELOC or home equity loan. If you only make $50,000 per year, you can’t take on the debt associated with accessing your home’s equity. It’s “there” but you can’t get it. If a school had no cap for home equity being considered, and someone is lucky enough to own a million-dollar property free and clear but doesn’t make much money so can barely pay the property taxes, that school would be out of reach for that family. But other schools with caps would likely be in reach.</p>

<p>Thank you to CC for helping us understand FA :)</p>

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<p>Okay. Now I understand what you mean. So you may have a lower equity for the next year. However, make sure the school does require CSS profile for Financial aid renewal, otherwise, you may need to talk to the FA office to notify the change. For instance, UMich requires both CSS profile and FAFSA for freshmen, while only FAFSA is required for renewal.</p>

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<p>I’m a bit confused again. Are the following correct?</p>

<p>A) If my son files CSS/Profile and FAFSA before freshman year, and our situation does not change significantly, his aid would remain the same (assuming also that he doesn’t get poor grades or something else to kick him out of merit aid), and we would not need to file the two FA forms again in his college career.
B) If our situation does change significantly, for example if I or my spouse get laid off, he can refile CSS/Profile or FAFSA at any time.</p>

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<p>A) I think the first half is generally true and the second half would depends on the school. Most likely, one need to submit new info every year at least with FAFSA.</p>

<p>B) You only submit FAFSA once a year. If there is any sudden change in family income, one should contact the FA to seek help.</p>

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<p>Generally, no. Most schools will require you to file the FA forms every year in order to be considered for institutional aid.</p>

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<p>For need based aid, you will need to apply every year, giving the financials for that year.</p>

<p>Some schools don’t require financial aid application forms in subsequent years for MERIT aid continuation.</p>

<p>It is certainly your business how your family funds college costs. $140,000 in loan payments will be huge, even using a heloc. Your interest won’t be much, but your principal would be about $1400 per month for at least 10 years, that is a lot of debt.</p>

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<p>Okay, so we’ll be on the lookout for that, thank you.</p>

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<p>I agree with @thumper1 that $140k in loan is a lot. It is around 5-6 times of national average for debt after college. You probably want to think it through how much you can really afford and leave some room for certain potential changes (e.g. if it take longer than 4 years to finish the degree or considering med school afterward).</p>

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<p>What is the average college related debt for a family making $150,000 per year? Do they honestly think a family like that has $140,000 cash in the bank?</p>

<p>Where does it come from if not a loan?</p>

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<p>-Prior savings (you have been putting money aside for college, right?)
-Present earnings/assets
-Future earnings/assets (paying off loans)</p>

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<p>If you take out a mortgage that was 5%, and you pay it off instead of saving for college, as long as you have money available in a HELOC, you were “making” 5%, right?</p>

<p>And if we put aside cash for college in a savings account, the best we could do is 0.5%. If we took out a 529, we’d have significant limitations on how to use that money, our HELOC we can use for anything.</p>

<p>So - if you have to choose between paying off your mortgage, and saving for college, which is the most logical thing to do? Why would we choose a 529 or other college savings plan, while we are paying a mortgage each month?</p>

<p>We have put zero dollars aside for college. It will come from 401k loans and the HELOC. We have paid down a good amount of our house, and will pay for college from that, or he will take out his own loans. IMHO, if he owes us that $140,000, he can pay it back in 10 or 20 years as gifts.</p>

<p>We really don’t want him to have to have any loans with anyone other than ourselves, and we don’t even have to make them loans, because sending your kid to college can’t be considered a gift (and sending anyone else’s kid to college is not subject to gift tax either).</p>

<p>Not to mention that if the 529 was in his name, it would go to the college at a higher rate than our money would.</p>

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<p>The S&P 500 has had an average annual return exceeding 8% over the past 18 years. Investing in a savings account for a long term goal like college would be silly, unless you are extremely risk averse. A monthly investment of $300, starting when a current high school senior was born, in a low-expense S&P 500 index fund would be worth about $140k today.</p>

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<p>Depends on your definition of “significant.” If 529 money is used for non-educational purposes (and it can be), the earnings (but not the contributions) are taxed at normal rates, with an additional 10% penalty. But there are other options for 529 money that the original beneficiary doesn’t use for qualified expenses.</p>

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<p>Umm… because you want to avoid the dilemma that you face now? Lots of people pay a mortgage and save for college at the same time.</p>

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<p>That’s a problem.</p>

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<p>Repayment of a loan is not a gift.</p>

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<p>It can be, depending on how it’s done.</p>

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<p>Not true. 529 assets, at least for FAFSA purposes, are always considered to be parental assets, even if the student is the owner. Anyways, when you say “in his name,” you probably mean he is the named beneficiary, and not the account owner. This is the most common way that a 529 is set up, with the parent as the owner and the child/student as the beneficiary.</p>

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<p>And a 529 plan was available in 1997? It looks like the original law went on the books in 1996, but I don’t know when the state plans started. Also don’t know when they became popular, certainly I never heard of them until perhaps 5 years ago.</p>

<p>To be honest, since I teach college, I never was sure that all my children would go to college, nor do I think they have to. Too many kids go to college. We are actually still considering whether my son will work next year instead of go to college.</p>

<p>Paying tuition for a non-relative directly to the college is not subject to gift tax, according to what I’ve read. It is the best way for grandma or whomever to pay for a student’s college and not be subject to the $14,000 per year limit.</p>

<p>If we make it an official loan, that is different than “I know my parents paid for my college, and I’m going to pay them back”. We would not make it an official loan. He is our flesh and blood and we can float it.</p>

<p>My understanding is that if you do not use the 529 for the student named, there are two choices - move it to a sibling or eventually a child of the original named student, or take out money subject to penalties. I like a HELOC better. With family members who need help on occasion, sometimes in the thousands or tens of thousands range, and possibly paying completely for long-term care for one parent, if the it hit the fan, the flexibility of a HELOC, barring my house evaporating around me, and the bank pulling our HELOC or going broke (the other millions of their clients might have a worse time than we do), makes more sense to us.</p>

<p>I don’t have a dilemma, I want to make a smart choice. I don’t want to be taken advantage of like my parents were taken advantage of when I went to college. They were given misinformation and paid tens of thousands of dollars too much. There are many articles about colleges upping their tuitions, around 200% since the early 90s, and giving many students aid so the real cost is much less. Based on what I know about their salaries then and mine now, salaries went up maybe 100% and tuition went up 200%. Books didn’t even double, unless you go to a school that seeks out expensive books (freshman textbook in my class goes for $240, and you can get an older almost identical edition for $20 - $40).</p>

<p>We are risk-averse. My 401k is making 6% and I am happy about it. Paying off our HELOC “makes us” 3% and we are happy about it. We don’t own stocks or other investments. </p>

<p>(oh, and a final note- doesn’t the state run the 529 plans? Have you looked at NJ’s credit rating lately? Don’t, it will make you sick. I have had my pay frozen because I work for the state. My 401k is with a private firm although the state is my employer - I do not have a state pension at all and that makes me happy too.)</p>

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<p>One important thing…if you sell your house, that HELOC will become due at the time of your home closing. This has the potential to leave you with $140,000 less money from the sale of your home than you would have without this HELOC. </p>

<p>Of course, this is your choice. </p>

<p>We made the decision years ago not to fund anything but house things using our house! In other words…we didn’t pay for other things using loans against our home.</p>