Should I Hide My Home Equity?

It’s the time of year when families of high school seniors start worrying about their home equity and financial aid.
That’s why I decided to share an email that I received from a father who was interested in using the services of a CPA who says 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?

Not a Good Idea

Here is my response 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?
  • Did he use the institutions’ net price calculators to determine what price you would pay at each school?

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.

Read more at The College Solution:

Should You Apply to a Reach School?
How Hard Is It To Get Into College?
Lynn O’Shaughnessy is the author of The College Solution, an Amazon bestseller and a workbook, Shrinking the Cost of College: Great Ways to Cut the Cost of a Bachelor’s Degree. Follow her on Twitter and Facebook.

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  1. Do NOT purchase the annuity. Using home equity means taking a loan against your home, which involves interest payments. Even if the annuity would cover the interest, annuities contain substantial penalties for early withdrawal not to mention hefty built in fees when purchased or internal fees charged annually or both. If you have an emergency and have to sell your house or need cash for anything, your home equity money (which is your largest asset) will not be available to you without paying a significant price.

    1. There are a lot of problems surrounding annuities and you pointed out some great ones. Thanks Susan.
      Lynn O’Shaughnessy

  2. You are EXACTLY correct, Lynn! Many folks with the “CCPS” designation sell product. In fact, commissions derived from annuity and life insurance sales for many College Funding “experts” is often their primary source of income!
    Another important point is the fact that a Financial Aid Officer is entirely at liberty to count the asset that was “repositioned”, EVEN if it’s in an annuity or a life insurance product. PROFILE schools have some of the most astute FAO’s in the biz, and this tactic is hardly a new one. The PROFILE form even ASKS about annuities, and when the FAO learns that the annuity was established in the base year, they can assess the asset at will.
    And just one more point – many PROFILE schools are now “capping” the equity as a function of parent income. 1.2x is a common multiplier. So for families that have a large amount of home equity, the cap is often significantly smaller than the actual equity, so this works to the advantage of the family.
    We often advise parents to ask FAO’s at the colleges of interest what their policy is in assessing home equity. We find FAO’s respecting such an intelligible question that is rarely asked by parents.

    1. Thanks Tom for your great thoughts on this important issue! I’m sure people will benefit from them.
      Lynn O’Shaughnessy

  3. Good advice, Lynn. Here is a little bit more for Steve’s question.
    1) The federally determined (FAFSA) Expected Family Contribution does not consider home equity or retirement accounts.
    2) However, it may well be true that the schools your son is interested do consider home equity. These schools will typically require that you complete a CSS/Profile or other financial disclosure document.
    3) Those same schools may also consider the value of your retirement accounts and tax-deferred investments (401k’s, life insurance, and annuities, to name three).
    4) Your advisor should know specifically (for each individual school) how those two asset types figure into the aid calculations. BTW, it is VERY unlikely the advisor knows this since schools that use extra-FAFSA methods are very reluctant to disclose them.
    5) Since your advisor (who after all is supposed to be acting as a FIDUCIARY) doesn’t know exactly how the recommendations will affect your actual cost of college, you should …
    … run!