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:
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:
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
- 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)
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.