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Will home equity affect financial aid for your college student?

With home values rising and college application time upon us, you may want to look at how home equity could impact financial aid decisions at your son or daughter’s school of choice.

Nearly every school requires families to complete the Free Application for Federal Student Aid (FAFSA), which asks for basic income and asset information. However, more than 200 institutions nationwide also require the College Scholarship Service (CSS) profile to determine aid. The CSS questionnaire includes specific questions about home value and equity.

The website Edmit.me features a free “home equity financial aid calculator” to help you determine how a particular school would view your situation.

According to Edmit, home equity is generally assessed at around 5 percent, meaning you can expect 5 percent of the total value to be added to the expected family contribution. That means a $150,000 asset could reduce your financial aid package by $7,500.

However, schools that use the CSS profile do look at equity differently. Stanford requires the CSS but announced it will no longer consider home equity. Meanwhile, Cornell limits home equity to 1.5 times the household’s adjusted gross income. That means a family with $400,000 in home equity and $150,000 in income will have their home equity calculation capped at $225,000 ($150,000 x 1.5).

Consultants say you can appeal financial aid calculations. Check with your school to determine the appropriate channel and then outline any circumstances, such as rapidly inflating home values, that may be skewing your perceived need for financial aid.

Colleges that factor home equity into financial aid packages seem to assume that parents will borrow against that equity to help fund their child’s education. But the Tax Cuts and Jobs Act eliminated interest deductions for home equity loans, potentially reducing a family’s incentive to do so.

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