Can You Hide Your Home Equity From a College?

I’ve gotten a couple of questions lately about whether cashing out home equity and putting it into an annuity is a legit way of increasing a family’s chances of getting financial aid.  
Consequently, I decided to share a post on the topic that I wrote earlier in this year in response to an email from a dad, who was interested in using the services of a CPA who said he could hide his home equity from financial aid formulas. Here is the salient part of his email:

Reader’s Question

Hi Lynn-
I just finished reading your book, The College Solution, which I thought was great, but I have a question that I was hoping you could answer.
On Page 241 you advise that the vast majority of schools don’t factor in home equity when determining need and that if an advisor suggests cashing in home equity for insurance or an annuity that I should run….
My situation is that I bought my home 20 years ago in the Northeast and have substantial home equity – it’s my largest investment.  An advisor I spoke with who is a fiduciary, CPA & CCPS has suggested to me that I cash in my home equity for a 5-10 year fixed annuity (which has no upfront fees) to make me qualify for need based financial assistance – Additionally, I have found that most of the schools (private) which my son is interested in have told me that they do, indeed, factor in home equity when determining need.
My question is – do you think I should run? – I believe I have developed a good relationship w/ this advisor, and I really do believe that he is acting in my best interests  – Am I missing something?, or would you still advise me to run?

My Response

Here is what I wrote back to Steve:
Unfortunately, there are some advisers with the CCPS (Certified College Planning Specialist) designation who are focused on selling financial products. Their answer to everything seems to be to raid the home equity and buy expensive life insurance or annuities. Some of the advisers with this designation use the college planning niche simply as a lead generator in hopes of eventually managing the rest of the family’s assets.
Before this CPA told you to hide your home equity, did he determine your Expected Family Contribution?

  • If your EFC is high, has he recommended that you look for schools that give merit aid instead?
  • Can he tell you what impact home equity has in particular on your EFC number?
  • Does he know how each school your son is applying to treat home equity since every institution is different?
  • Does he know how to evaluate schools to determine which are generous with need-based versus merit aid?

I bet the answer to all these questions is no. He may really have your best interest at heart, but that doesn’t mean he knows what he is doing beyond always recommending people hide their home equity, which I happen to think is unethical and almost never warranted anyway.
Here’s my advice: I’d run.

More Advice….

After I wrote that college blog post, I got a comment from Todd Weaver, a college consultant at Strategies for College in Canton, MA, with some great additional advice. Here is what Weaver said:
Your response mirrors what I tell my clients, verbatim. I wanted to add that most “college financial planners” do not realize (or more likely, do not advise their clients) that the very schools that look at home equity, are those that use the CSS Profile application, which has a question asking about non-qualified annuities. Non-qualified means it’s not inside an official retirement account like a 401(k) or IRA.
Regarding the annuity, question PA-120 (parent assets) on the CSS Profile (generally for the private, liberal arts colleges and universities) asks an applicant to list any non-qualified annuities.
Definitions of non qualified annuity on the Web:
• An Annuity purchased with after-tax dollars that is not part of a tax-qualified retirement plan. Money paid into a non-qualified Annuity is not tax deductible.
• a type of annuity that has no contribution limit and no required minimum distributions at age 70 1/2 (unlike qualified). It can be funded with after-tax dollars from any source and is available to any investor.
Therefore, if money is moved from home equity, for example, into an annuity, it is required to be on the CSS Profile and other institutional forms that some colleges may ask for additional information on. So a client will have moved a parent asset that is assessed at a maximum of 5.64% in the financial aid formulas, to another asset that will be assessed at the same amount. Only they will have paid a nice commission to the annuity provider in the process.

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  1. Lynn – thank you for shedding light on this important topic. I’d like to make one additional point about why it can often be a bad idea to take equity out of your home and put it into an annuity or some other investment/asset vehicle. You point out that this is, in effect, at best a break-even proposition since home equity is treated the same as other parental assets and assessed at 5.64%. However, it could end up being much worse for some individuals because many of the CSS colleges cap home equity – often at 2.5 times income. So, moving money out of home equity could actually have a huge detrimental effect on EFC. For example, consider a family with an income of $60,000 who have paid off their home and have $300,000 in equity. If they move that equity to another assessable asset (like an annuity), the entire $300,000 will be assessed at 5.64% in determining EFC. If applying to a CSS college that caps home equity, they would only have $150,000 assessed at 5.64% (2.5 times their income).

    1. HI Rich,
      Excellent point! That never occurred to me, but you are right since most schools cap home equity. Thanks for enlightening all of us!
      Lynn O’Shaughnessy

  2. The more salient point to be made is that this is hiding assets. If the strategy were to be successful, it takes resources (aid) away from those who have true need. Even if it were an acceptable practice, it’s highly unethical in my opinion.

    1. Paula — Thanks for your comment. You are absolutely right!!! I should have made that clear.
      Lynn O’Shaughnessy