How Will Having an Open Line of Credit Affect my FAFSA?

Featured Stories

Filter By Categories

If you have an open line of credit, perhaps based on the equity in your home, then you may be wondering how that affects your eligibility to receive federal financial aid.  Before filling out your Free Application for Federal Student Aid (FAFSA), it is important to understand how the U.S. Department of Education treats different forms of credit.

Open Credit Lines

If you need an ongoing source of credit, whether to cover some college expenses or other unexpected costs, then an open line of credit from a private lender is a very viable option.  The most substantial lines of credit are typically based on the equity in your home. However, if you have an excellent credit score and healthy credit history, then you may still qualify for a modest line of personal credit.  The best part: Having an open line of credit does not reduce your eligibility to receive federal financial aid. Since you only draw down the credit line on an as-needed basis, rather than receiving a large cash disbursement in the form of a loan, you are not penalized by the FAFSA’s need analysis methodology.  In the case of lines of credit for home equity, the equity is considered to remain in the home, so home equity is ignored by the FAFSA methodology.  In addition, depending on the nature and purposes of the line of credit, the interest paid may be tax-deductible.

Outstanding Personal Loans

Similar to an open line of credit, having an outstanding personal loan does not reduce your eligibility to receive federal financial aid.  For purposes of determining your Expected Family Contribution, the FAFSA’s need analysis methodology only considers loans that are secured by an asset that is reported on the FAFSA (for example, a loan on investment real estate counts, but not consumer debt or a mortgage on your primary residence).  However, the FAFSA does consider bank and brokerage account balances, so if you can afford to do so, consider drawing down your cash accounts to pay off debt. Not only will you reduce your overall interest expense on the debt, but a lower cash balance will reduce your overall Expected Family Contribution.

Credit Card Debt

Just like with personal loans, having outstanding credit card debt does not decrease your eligibility to receive federal student loans.  Since credit card debt is not secured by any underlying asset, it is not reported on the FAFSA. However, if you can afford to do so, consider tapping into your savings or other cash accounts to pay down credit card debt before submitting your FAFSA.  Not only will the reduced cash balance lower your Expected Family Contribution, but you will pay less total interest on the outstanding debt.

Sign up for updates

Popular Tags

Financial Aid and Scholarships* Cost of College* paying for college financial aid FAFSA grants and scholarships Student Loans* Saving for College* federal student loans college tuition 529 plan cost of attendance expected family contribution college financial planning financial aid award private student loans Salary and Career* taxes college savings plan room and board on-campus housing college expenses federal financial aid merit scholarships budgeting for college edmit hidden gems merit-based financial aid parent PLUS loan private universities public universities college applications living expenses CSS profile college costs edmit team education expenses financial need income application fees financial aid appeal off-campus housing loan forgiveness affordable college career college majors loan repayment student loan assistance work-study application fee waivers degree programs edmit scholarship institutional aid SAT choosing a college choosing a major in-state tuition net price prepaid tuition plans private scholarships repayment plans ACT budget college search free tuition international students internships need-based financial aid need-blind colleges qualified higher education expenses southern colleges standardized testing tuition discount tuition guarantee tuition payment plans 401k UGMA UTMA applying to college college ranking systems college spending college visits credit score discretionary income education savings accounts fees full ride scholarship grants health insurance options investment ivy league schools liberal arts degree meal plans midwestern colleges need-aware colleges out-of-state tuition retirement savings school-based scholarships student loan debt western colleges 568 presidents group Inversant MEFA asset protection allowance best price campus life college advisor college deposit concurrent enrollment cost by region cost by state crowdfunding dorms educational expenses esports fee waivers financial literacy fraternities and sororities full tuition gap year home equity loan income share agreements line of credit medical expenses military benefits new england colleges out-of-state students percent need met private college consultant saving small business state aid state schools student bank accounts student organizations title IV schools travel expenses tuition decreases tuition increases tuition insurance tuition reciprocity undocumented students