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How will having an open line of credit affect my FAFSA?

December 20, 2018

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 home equity lines of credit, the equity is considered to remain in the home, and 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.