Home Equity and Financial Aid

In this video, I am interviewing Paula Bishop, a CPA from Bellevue, WA, who has helped countless families over the years with financial aid questions, as well as with filling out the financial aid forms. I spoke to Paula at a college conference in Indianapolis about how home equity impacts financial aid.

Owning a primary home, regardless of how much equity it has, is irrelevant at the vast majority of colleges and universities that use the FAFSA exclusively. Home equity does matter, however, at many of the most prestigious private institutions and a few public universities.

Depending on how schools treat home equity, the chances of getting financial aid could blow up while at other institutions the odds wouldn’t be jeopardized even if a family is living in an exclusive zip code.

How Much Is a House Worth?

If you are applying to PROFILE schools, you will be expected to share what the house is valued at. Paula suggested that parents use whatever source provides the lowest home value that could include Zillow or other house comparison websites or recent sales in the neighborhood. Another resource is the federal House Price Index Calculator.

Some parents may want to use the assessed property valuation from the local taxing authority, but these valuations aren’t always based on current market values. These assessments are used to determine property tax owed and not what the owner could sell a home for.

There was a fascinating story in the Los Angeles Times last year that suggested that many Zillow home value estimates or zestimates as the site calls them are significantly flawed. Zillow says it has a median error rate of roughly 8%. On a home valued at $700,000, that’s a valuation discrepancy of $56,000. Zillow says that 17% of its home valuations are off by more than 20%. If a college uses Zillow to double check the value of your home, it could create a problem if it’s an overvalued estimate.

Here is the LA Times’ article:

Inaccurate Zillow ‘Zestimates’ a Source of Conflict Over Home Prices

In addition to inquiring about the home equity, the PROFILE will ask parents to supply the year the house was bought and the purchase price. This can serve as a backup for schools to judge whether the value that the parents provide is in the ballpark. Some schools will use online resources to judge whether parental figures are correct.

How A House Can Impact Financial Aid

Many schools that assess home equity for financial aid purposes do so by linking it to the family’s income. For instance, a school might assess home equity at no more than two times the family’s income. Let’s look at an example of how this would work:

  • Family’s income: $60,000
  • Home equity: $400,000

Normally, the schools that use the PROFILE formula would assess the home equity (as well as other parental assets) at 5% for financial aid purposes.

  400,000 x 5% = $20,000

In this example, the home equity value would have boosted the expected family contribution (EFC) by $20,000 (a huge hit!) if the school didn’t link the home equity to income.

But now let’s look at what happens when the school ties the home equity assessment to no more than two times the family’s income of $60,000.

$60,000 x 2 = $120,000

In this example, the school would only use $120,000 of home equity in this family’s aid calculation.

120,000 x 5% = $6,000

So in this example, the parent’s EFC would increase $6,000 rather than $20,000.

How Individual Schools Treat Home Equity

If a family hopes to qualify for need-based aid, it’s important to know how individual schools treat home equity. To help you with this effort, I am sharing Paula’s spreadsheet of the home-equity policies of 92 schools, which was updated in August 2017:

How PROFILE schools assess home equity.

Keep in mind that schools can change how they assess home equity at any time so don’t just depend on this list!

Schools that Ignore Home Equity

As you’ll see from Paula’s list, some PROFILE schools don’t consider home equity at all, which is obviously the best scenario. Institutions in this smallest category include:

  • Bard College
  • Bucknell University
  • California Institute of Technology
  • DePauw University
  • Hamilton College
  • Harvard University
  • Princeton University
  • University of Virginia
  • Whitman College

Schools That Hit Home Equity Hard

On the other extreme, some schools use the full weight of parents’ home equity to help determine financial need, which can seriously hurt aid changes.  Here are some examples:

  • American University
  • Bentley College
  • Boston College
  • Elon University
  • Emory University
  • College of the Holy Cross
  • Ithaca College
  • MIT
  • Northeastern University
  • Providence College
  • Rensselaer Polytechnic Institute
  • Roger Williams University
  • Stonehill College
  • Union College
  • University of Michigan
  • Washington & Lee College

Some schools that take this draconian approach will consider parent appeals, but how many families even know this is a possibility? In fact, parents typically won’t even know why their aid packages seem so paltry.

It’s highly unlikely that parents are going to trace a poor award back to their home equity. But now you now know that an appeal is possible.

Schools That Limit Home Equity Hit

Other institutions use a home-equity cap that’s tied to the family income so it’s less likely that someone who is house rich, but cash poor will be penalized. Here are a few schools in this category:

  • Amherst College (1.2x)
  • Brown University (3x)
  • Grinnell College (1.5x)
  • Haverford College (1.2x)
  • Lewis and Clark College (2x)
  • Kenyon College (4x)
  • Macalester College (2x)
  • Middlebury College (1.2x)
  • Muhlenberg College (1x)
  • Oberlin College (1.2x)
  • Reed College (2x)
  • Rice University (2.5x)
  • Stanford University (1.2x)
  • University of Chicago (2x)
  • Vanderbilt University (2.5x)
  • Vassar College (1.5x)
  • Wake Forest University (2x)
  • Washington University St. Louis (2.4x)

More Advice…

I recommend emailing schools to ask how they treat home equity so you have a record of their responses later on if you end up appealing a financial aid award.

Not all schools will be forthcoming with this information. When I, for instance, asked New York University (a school with notoriously poor financial aid) about how it treats home equity, it declined to say.

By the way, how schools treat home equity can also depend on how desirable an applicant is.

Finally, some institutions that only use the FAFSA may request information about your home equity on a supplemental form.

Let's Connect

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  1. We are considering paying off our primary home loan for two reasons: it will reduce the amount of non retirement assets we have and it will free up more monthly disposable income to pay for college tuition. Our income of $150K plus non retirement assets are such that we are most likely looking at merit aid. Does this seem like a reasonable approach?

    If so, my next question when would we take this step? Our son is a junior this year. Next fall, when we fill FAFSA or PROFILE info, are we submitting investment information from some date we determine in the 2016 calendar year? I realize our incomes from 2016 are what we work off of, but is that true for investments as well?

    Thanks Lynn.

    1. Hi Laura,

      I am not a financial advisor so I can’t advise you on what you should do financially. If you have a financial advisor, I would consult him or her. That said, I can suggest some things to consider.

      1. If your child is applying to any PROFILE schools, the vast majority of these institutions will assess your home equity. If you own your home outright that is more home equity to assess. On the other hand, you’d have less taxable investments assets to assess. This would likely be a wash.
      2. The FAFSA-only schools don’t ask about primary home equity so paying off the mortgage would allow you to lower your EFC at these institutions. Many FAFSA-only schools are state institutions and with your income you wouldn’t have a chance for need-based aid at your state schools and public universities outside your state wouldn’t give your child need-based aid either. What you would be aiming for at these schools are institutional merit scholarships.
      3. I’d recommend that you run net price calculators at schools your child is interested in to see if paying off your mortgage would help at any of them.
      4. The FAFSA and the PROFILE care about assets as of the day you file the application. So if you file for financial aid on Feb. 1 next year, you would share what your assets are on that date.

      I hope this helped.

      Lynn O.

  2. hello lynn,

    we own our primary home and two other properties (two 3 family homes) that we rent out in the city. this is our main source of steady income.
    providing this we will most likely have a very high EFC, our annual income is not that high around $60000 for a family of 4 but the value /asset in the home is high.

    what schools should we be looking at and focusing for our 11th grader.
    we do not have any significant savings and with a income of around $60000 a year in mass can’t not really afford your traditional tuition.
    where do we even begin? thanks

    1. Hi Jana,

      It is tough for financial aid purposes when the family assets are in investment property rather than in retirement accounts. You may be able to position the rental property as your business since it is the major source of your income. If the rental properties are considered your business you wouldn’t have to share them on the FAFSA. The FAFSA doesn’t require family businesses to share their assets if there are less than 100 full-time employees or the equivalent. The PROFILE schools, however, don’t provide this loophole.

      You can look at the course’s home equity list that includes some PROFILE schools in the Bonus Material section. There are some PROFILE schools that don’t include primary home equity and some other PROFILE schools link home equity to the parents’ income. This benefits families that are house rich, but cash poor.

      Your best bet would probably be to look at schools that only use the FAFSA and try to position your rental properties as your business. Your primary home would not be considered by the FAFSA and if you exclude the rental property, you would be looking for financial aid with a relatively low income to qualify for need-based aid.

      One place you should definitely look at when exploring FAFSA options are your own state schools.

      Lynn O.

      Lynn O.

      I would recommend talking to a financial aid expert in this. One person I could highly recommend is a friend of mine, Paula Bishop, who is a CPA in Bellevue, WA. Her website is paulabishop.com and her email is Paula@paulabishop.com.

      1. thank you lynn,
        very helpful information. question; how is it determined if the properties are a business or not by FAFSA? we have owned them for 24 years but only the last 10 years or more have focused no them solely, taking the work into our hands and handling everything ourselves such as: administrations and fiances and my husband all the remodeling and upkeep.
        we do not have a LLC or anything like that. we have an accountant who files our taxes as self -employed 1040? should we be changing some of that? this has been clearly our way of making money and will be in the future.
        i have contacted paula and will most likely work with her after this seminar, than you for the recommendation.

        1. Hi Jana,

          This is a gray area which is why it’s important that you consult an expert in this area. She will let you know what you might be able to do to position the investment property as a business.

          Good luck!

          Lynn O.

  3. When you use the term “home equity,” do you really mean to say the home’s fair market value? The discussion above, including about Zillow, would suggest fair market value, not home equity – literally, the equity in one’s home defined as the home’s fair market value minus one’s mortgage. Do colleges look at a home’s fair market value minus the mortgage (which Zillow or colleges could get from public record databases), or do colleges just look at the home’s fair market value? If the former, that would be a disincentive for a parent to pay off their mortgage while their child is applying to college. If the latter, then there’d no “home equity” problem with the mortgage being paid off. Thanks.

    1. Hi Donald,
      Hi Donald,

      No home equity can’t be used interchangeably with fair market value. To get your home equity, you have to subtract what you owe on the house from its fair market value.

      Fair market value – mortgage = home equity

      Keep in mind that schools that use the FAFSA exclusively do not even ask if you own a primary home. PROFILE schools do ask.

      Lynn O’Shaughnessy

      1. Which do colleges look at: the home’s fair market value, or the home’s fair market value minus the mortgage? Thanks.

        1. Hi Donald,

          I’m sorry if I didn’t make myself clear with my previous answer to your question. Colleges look at home equity, which is the fair market value minus the mortgage.

          Lynn O.

  4. Truly, what is the best way to calculate home equity? I suspect the Zillow estimate for our house may be low, but is there any way to calculate that short of hiring an appraiser to appraise the house? Or, to bring out a real estate agent or three? Would we be putting ourselves at risk by simply going with the Zillow estimate?

    1. Hi Rebecca,

      I don’t think there is any right way to calculate home equity. Zillow, however, is a very acceptable resource and you would not be putting yourself at risk using it. I’ve heard that some schools use Zillow themselves.

      Lynn O.

  5. In 2016, we will be moving from MN to NC and will have an overlap of approximately 4 months of owning 2 homes until we move from MN and sell the house. How would this impact the financial picture (and aid) for college?

    1. Hi Shyla,

      The FAFSA does not consider home equity in the primary home, but it will treat the equity in the home you are not living in as an asset. The equity will be assessed at up to 5.64%.
      The PROFILE will assess the equity in the secondary home as a parent asset at 5%. It will vary how PROFILE schools will assess the home equity of the primary home. To learn more, I’d suggest that you take a look at the lesson entitled, Home Equity and Financial Aid in the module entitled, A Closer Look at Financial Aid Formulas.

      Lynn O.