Another thought…
For the schools…I would guess this would be exchanging one asset type (money in the bank) for another (home equity).
If the family really has $400,000 in a savings account…that WILL affect the family contribution at at all schools.
On the fafsa and Profile, the equity in a secondary piece of real estate will be fully assessed as an asset. So if the parents have $400,000 in savings…and borrow from relatives…not a mortgage…they will have $650,000 in equity in this rental property.