Is It Okay to Hide Home Equity?

If you missed it, on Monday I wrote a post for my college blog on the dramatic impact that home equity can have on a family’s financial aid package. Here is the link:

 Will Your Home Equity Hurt Financial Aid Chances: A Case Study

If you read the post, you’ll see that even a huge amount of home equity (in this case $800,000) won’t always hurt aid packages when a family is house rich and cash poor. On the other hand, some schools will severely penalize a family. As I mentioned in the post, one way to avoid a home equity penalty is to use a net price calculator to assess how a school will handle this asset.

After writing the post, I got a question from a parent who wanted to know if there were ways to reduce home equity before filing for financial aid. In response to that question, I decided to rerun a post that I wrote last year after receiving an email from a dad, who was interested in using the services of a CPA who claimed that 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.

In your book 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.

Lynn O’Shaughnessy is the author of The College Solution, 2nd edition, which was released in May.

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  1. Can you give more detail about the situation with the IRA rollover and how the IRS Data Retrieval Tool impacted how that was perceived?

    1. Hi Belinda,

      I don’t really know any more details about this. My understanding is that the data retrieval tool interpreted the cash leaving the 401(k) account as a distribution rather than the retirement rollover that it was. There was no distribution – the money went directly into a retirement account. I suspect the retrieval tool was programmed wrong and maybe the federal government has fixed it. I just wanted to warn people about this potential problem. The parent who rolled over the account could have done so years ago, but never got around to it. It was just an unfortunate time to do so under the circumstances.

      Lynn O.

  2. Does the 5.64% of assets for financial aid formulas calculate the amount parents can contribute YEARLY or OVER a 4 -YEAR SPAN for their kid’s college tuition?

    1. Hi Domenic,

      The 5.64% is used to assess parental assets every year. The aid formula automatically does this when you file the FAFSA and PROFILE (if applicable.)

      Lynn O’Shaughnessy