You’re getting ready for one of your children to leave the nest and embark on the next big adventure: a college education! When it comes time to pay for higher education, what happens if you don’t get the financial aid you expect? Can home equity affect your financial aid, and can it be one solution to paying for college? These questions can be daunting, especially during a time when COVID-19 is affecting education plans. We’ve got the details you need to know on how to use a home equity loan to pay off student loans.
How Do Colleges Determine Financial Aid?
Some colleges require different applications to consider your child’s financial aid package. Understanding the differences between them can help you create your best plan to finance your child’s education.
Nearly every college and university in the country requires the Free Application for Federal Student Aid (FAFSA) to calculate federal student aid. You need the FAFSA for Federal loans such as a Stafford loan. Many colleges use this form as their guideline for their own specific scholarships, grants, and work study offerings as well.
You’ll need you and your child’s Social Security numbers to apply, as well as financial documents, including the following:
- Income tax return
- Bank statements
- Investment information
- Records of untaxed income and gifts, if applicable
The financial information you provide determines your Expected Family Contribution (EFC), or the amount you’re expected to pay. If you have multiple children in college, the EFC is split between them.
The FAFSA application doesn’t ask about your home equity (although if you own real estate other than the house you live in, you’ll include those assets).
Nearly 400 colleges and universities use the College Scholarship Service (CSS) Profile for non-federal financial aid, like institutional grants and scholarships.
The CSS Profile includes home equity, small businesses you run, and other assets that the FAFSA doesn’t. If you’re divorced, the CSS Profile still requires financial information from all parents and guardians (including step-parents). The FAFSA only requires financial information from the parent the student lived with the most in the last 12 months. The schools your child is applying to may add their own questions about your family finances, as well. These variances can lead to big differences in how much financial aid each school offers.
Does Home Equity Hurt Financial Aid?
Sometimes it can feel like you need an advanced degree to catch all the nuances of how colleges use the CSS Profile. Some schools consider 100% of home equity as an asset when they calculate financial aid, which can cut deeply into how much need-based aid they offer. Other colleges or universities set their own income-based cap, usually 1.2 to 4 times the family’s annual income. And still other colleges don’t factor home equity into their financial aid equation at all, even if the CSS Profile includes this information.
Colleges and universities can change their financial aid calculation standards year-to-year. For example, Stanford University announced in 2018 that it wouldn’t consider home equity for financial aid calculations anymore. The best way for you to get the most up-to-date information is to contact the financial aid offices of the schools you’re considering.
Here are the main takeaways you need:
- If your child is applying to a school that only needs the FAFSA, your home equity is not a factor in determining aid.
- If a college uses the CSS Profile, they may be considering your home equity as an asset, they may not, or they may only consider a portion of your equity based on your income.
- If a college does consider your home equity, then it’s possible that high home equity could lead to less financial aid.
Should I Use Home Equity to Pay for College?
If high home equity is hurting your financial aid eligibility, is converting some of that equity to cash a good solution to pay for college?
Let’s be totally clear: draining your home equity to pay for your child’s college is not a wise course of action! Your home is one of your most important assets. You need a plan that helps you put your child through school without incurring too much debt, and that respects other vital parts of your life, like your home. It’s always wise to start by consulting a financial advisor who specializes in helping families navigate higher education expenses.
Home equity loan vs. HELOC
There are two traditional options to accessing home equity funds. One is a home equity loan. The other is a home equity line of credit, or HELOC. A HELOC does not give you money up front but allows you to draw from home equity the same way you’d use a credit card. Colleges may count home equity loan funds as an asset, but loans may come with better interest terms than HELOCs.
Home equity sharing
Many homeowners are familiar with loans and HELOCs, but not everyone knows that there are more options for home financing. Before diving in, you may want to get your home’s value appraised.
The way home a Home Value Investment works at Noah is that we invest in your home. Think of us almost as another member of your household (who doesn’t visit and eat all the good snacks). You get cash in exchange for our share in the your home value, which you can use for any goals you choose. You won’t add debt to your profile or have to make monthly payments. Instead, Noah gets a share when you sell or refinance your home, or in a cash payment at the end of your term. If your home increases in value, fantastic! We’ll celebrate that win with you and take a proportionate share of the home’s appreciation. If your home drops in value after our Initial Term period with you ends, we’ll be partners through that loss, too, and share in the depreciation.