How U.S. schools calculate financial aid is so confusing that there is an entire industry devoted to unlocking its secrets with books, consultants and websites.
Most parents are probably not aware that Stanford University in Palo Alto, California, or any school for that matter, consider the value of a home as part of the financial aid process.
Stanford announced last month it was removing home equity from financial aid calculations.
But should parents still consider strategies to look less “house rich” when applying for financial aid?
“Even now, ten years after the housing bust, we still have families with homes worth significantly less than they paid, whereas the inflation calculator says they are worth more,” said Sean Moore, a certified financial planner in Boca Raton, Florida.
One of Moore’s clients got an independent appraisal on their house when appealing an aid package, to show that they were less well off than it appeared on paper.
Financial aid expert Mark Kantrowitz, whose new book is “How to Appeal for More College Financial Aid,” does not think this strategy would work for most people, because colleges use a federal formula that usually works out to less than a paid appraisal.
“Unless there is a specific reason why your home is worth much less, an appraisal is unlikely to yield much of an adjustment,” Kantrowitz said. “But, who knows? Perhaps your home is haunted, or has toxic mold, or is infested with thousands of snakes.”
What might work
If you are concerned that your home value will hurt your chances for financial aid, the best strategy might be avoidance.
This will be relatively easy since the majority of schools use the Free Application for Federal Student Aid (FAFSA), which only asks for basic income and asset information. It will count a second home as an asset, however.
A selection of about 200 schools uses the CSS Profile to determine aid, asking specific questions about homes, such as the year of purchase, the price, and the monthly mortgage payment.
The list of schools that use the CSS Profile is available on many college information sites. Some sites such as www.thecollegesolution.com and www.edmit.me dig further and will tell you specifically which dozen or so of those schools do not count home equity, and the handful which count it fully, like Sarah Lawrence in New York.
Other schools fall somewhere in between. For instance, Stanford used to have a cap of 1.2 times income - meaning if you make $100,000 and your house has $300,000 in equity, they would only count $120,000 of it. Since parent assets typically are assessed at around 5 percent, that would lower an aid package by around $6,000.
The website Edmit.me features an interactive tool to help you determine how a particular school would view your situation. This information is also available directly from each school.
“It’s frustrating that two schools that look very similar on paper, but offer very different financial aid. Families don’t know what to expect,” said Sabrina Manville, a co-founder of Edmit.me.
Making your case
The CSS Profile is used primarily by elite, high-priced schools that give out a lot of need- based aid. That means your best chance for a good package is to present your situation in full.
“It’s a lot more case-by-case,” said Allan Katz, a certified financial planner in Staten Island, New York who specializes in college planning.
Home equity is just a part of the picture. If you own an expensive shoe box home in San Francisco, but have a relatively low income and a few kids in college at the same time, you will get more aid than if you had $300,000 sitting in the bank.
Stanford said it changed its formula to expand the number of families who would qualify for aid.
“It may also lessen the psychological barrier for families worrying about college affordability because they live in areas with high home values,” Stanford said in a statement.
But the subjective scrutiny also means it is harder to shelter assets, Katz said. Taking out a home equity loan to lower your equity or buying a cash value life insurance policy will not help.
“Harvard will see right through it,” Moore said.
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