Q: Can you please advise how owning a home will affect my
children's qualifying for college financial aid?
A: You are wise to question how the financial aid system
works. Just like our nation's tax system, the more you know, the better able
you will be to legally position your finances to maximize your children's
eligibility for aid.
For advice and counsel on this topic, I turn to veteran
financial aid expert Kalman Chany, author of Paying for College Without Going
Broke, 2009 Edition published by Princeton Review. (I've completed a summary of his book.) From a financial aid perspective, the federal financial aid analysis
ignores the home as an asset and also ignores the debt you owe on your home (as
well as other debt such as on consumer loans) when determining your financial
need. The financial aid process only considers debts against assets listed on
the forms. This would include real estate loans and margin loans against
"...the more selective colleges that elect to use the
institutional methodology (which looks at home equity) rather than the federal
methodology (which does not) do recognize one kind of debt - mortgages, first
and second, on your home," says Chany. These schools also include at least a
portion of the value of your home as an asset. For example, a number of highly
selective colleges count the value of your up to 2.4 times the parents' total
annual income. Some schools only count up to 1.2 times the parents' income
while others ignore it completely if a family's income is below a certain
The federal financial aid formula provides an "income
protection allowance (IPA)" - in other words, an estimate of how much of a
given family's income is needed to pay for living expenses (e.g. housing, food,
clothing, etc.). The IPA varies based upon the size of the family. For example,
a family of four, with one child in college, can supposedly live on $27,250.
Chany points out that the IPA, "...does not take into account the cost of living
in your part of the country."
For families living in or near a higher cost metropolitan
area such as Los Angeles, San Francisco, New York, where the cost of living is
quite a bit higher than average, Chany recommends that you provide each
college's financial aid office a detailed budget of what it actually costs your
family to live.
Because colleges do not recognize debts such as auto loans
and credit card debt, if you have sufficient assets available (which do count
against your aid) to pay down those loans, doing so will enhance your financial
In terms of valuing your home, Chany advises that the aid
forms are not asking what you could sell your home for if you took a number of
months to sell it but rather the price you get for it, "If you had to sell it
in a hurry - at firesale prices..."
Ultimately, using a home equity loan to help pay for college
expenses is worth considering because doing so reduces your equity in the
property which helps future aid awards from colleges that consider home equity
an asset. Chany also points out that home equity loans tend to be available at
reasonable interest rates (although I would caution that this is not the case
for those with less than solid credit scores) and the interest is generally tax
Copyright Eric Tyson, 2008 - 2013 all rights reserved.
Eric Tyson is the only best-selling personal finance author who has an extensive background as an hourly-based financial advisor and who does not accept speaking fees, endorsement deals or fees of any type from companies in the financial services industry or product or service providers recommended in his articles, books and his publications.