Financial aid calculations are complex and factor income and assets differently and depend on the school. While most schools in the US use the Free Application for Federal Student Aid (FAFSA) to calculate their financial aid awards for students, several hundred - often the more selective private schools - use a form called the CSS Profile.
If you’re anticipating your college costs in the coming years, you may be wondering how your home equity will be counted. If you own a home, are you less likely to receive financial aid?
Let’s start with the good news. FAFSA considers the equity in your primary residence a non-reportable asset and most schools use only FAFSA to decide aid. (Note - this is just for your primary residence - your vacation home’s equity and the equity in your rental properties, if you have them, do count as reportable assets on the FAFSA.)
The CSS Profile offers a more detailed view of your finances to the financial aid office. With the CSS Profile, you will be asked to report the equity in your home. For the schools that then use your home equity when calculating their aid, you might expect it to be treated like your other assets and assessed at around 5%. So this means if you have $400,000 in home equity, your child’s aid could drop by $20,000 (yikes).
It’s not quite this simple, though, as every school that uses the CSS profile uses the information in the form differently. In the case of home equity, which is often a family’s largest asset, the calculations can vary widely and have a large impact on your aid. This is a case where schools in a similar bracket or tier might look very different in cost.
Some CSS profile schools will cap the home equity value in their financial aid calculations based on a multiplier of total parent income. For example, if the cap is 2x income and your income is $80,000, your home equity would cap out at $160,000. Thus, if you had $400,000 in home equity, the school’s calculation would only count $160,000 of that value. So instead of taking $20,000 financial aid hit, your child’s aid would go down by only $8,000 (5% x $160,000).
Other CSS Profile schools omit the home equity in their calculations altogether despite having access to the information via the form. Stanford, a CSS Profile school, recently announced that next year (2019-2020 academic year) it would stop capping home equity and begin excluding it completely from its financial aid calculations. This should be welcome news for those that live in regions like the Bay Area, where you can have a moderate income but still own a high-value home due to the high rate of growth of home prices in recent years.
There is an emerging trend among selective colleges (often the most generous colleges) toward excluding home equity. Harvard, Princeton, and MIT also exclude it from their considerations, for example. If Stanford is any indication, board of trustees for top tier universities see removing home equity from financial aid calculations as the next step in enhancing already robust financial aid programs. This could be a huge help for middle class families.
Check Edmit’s calculator to see how the schools your son or daughter is applying to will count your home equity and get an estimate of the impact on your financial aid.
(The list of schools that cap versus those that exclude home equity changes constantly. Always double check with the schools.)
Now, if a school excludes your home equity, you could reduce your expected financial contribution by paying down your mortgage. Is this a smart idea? It depends on your specific financial situation. If you have a $10 million net worth this most likely will not move the needle in regards to financial aid. If your net worth is much more modest and your son or daughter is on the cusp of receiving aid, such a move could boost their chances at receiving aid. Remember that your reportable assets are assessed at 5% (usually), so money moved from a reportable asset category to a non-reportable asset category could essentially have a 5% ROI boost because of additional aid received (assuming you would in fact receive additional aid).
If home equity is hitting your expected financial contribution hard, we urge you to appeal your financial aid award. Schools have the discretion to deviate from their official policy and limit the impact of your home equity on your child’s award, especially if you have few assets beyond your home equity.