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WSJ Your Money Briefing
How Home Equity Affects College Financial Aid
00:08:58
Wall Street Journal real estate columnist Beth DeCarbo explains how some colleges and universities figure home equity in determining the amount of financial aid a student will receive.
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- [00:01]
A
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B
Here's your Money briefing. I'm J.R. whalen at the Wall Street Journal in New York. How much college financial aid a student receives can often be determined by how much equity their family has in their home. We'll go through the numbers with a Wall Street Journal real estate columnist in a moment. First, some money and market news you should know The Friday jobs report shows the unemployment rate at a 50 year low after falling to 3.5% in September. Traditionally, that would mean the nation is nearing full employment, the point at which almost every American who wants a job can find one. Historically, that in turn pushed up wages and inflation. But economists say average hourly wages rose just short of 3% for the 12 month period ended September after rising at a rate above 3% for the prior three months. Even though the number of people still on the sidelines are looking to go from part time to full time continues to fall, maybe it's time to grab your cowboy hat and move to Wyoming. The Kiplinger personal finance advice website says Wyoming is the most tax friendly state in the country for a four person family earning $150,000 a year with $10,000 in dividend income. Kiplinger highlighted Wyoming's lack of income tax and the abundant revenues it collects from oil and mineral rights. Next on the tax friendly list are Nevada and in Tennessee and the unfriendliest. That title goes to Illinois, which has the second highest property taxes in the country and, unlike many states, levies state tax on food and drugs. Financial aid can make or break a student's opportunity to attend the college of their choice. But the forms to fill out involve more than just reporting income. A growing number of schools require parents to include their home equity to help determine the amount of financial assistance they'll receive. But there's a maze of numbers and formulas to pour through to understand the impact home equity will have on a school's financial aid decision. Let's bring in Wall Street Journal real estate columnist Beth DeCarbo to help us clear things up. So Beth, home equity is, in broad terms, the value of one's home minus debt. And colleges don't expect parents to tap into their home equity. But many schools include it when calculating a family's ass.
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C
That's right. Let me make a distinction, however. When you're applying for federal student aid, they don't ask about home equity. And most schools, hundreds of schools, use the free application for federal student aid. Home equity comes into play when filling out the college scholarship Service profile. It's also called the CSS profile, and that involves about 200 private, mostly private institutions, the very elite institutions. They'll require the CSS profile for aid, and that asks you about home equity.
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B
Is this something new, asking for home equity? Or have schools, elite or otherwise, been asking for that information for a long time?
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C
It's not new on the CSS profile, however, because home values have gone up so much in recent years, People's home values exceed far what they paid for them. So it skews what parents are able to afford to pay for school.
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B
Now, the way the financial aid is calculated varies from school to school. But what are some of the common ways that home equity is added to the aid formula?
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C
Let's say we're looking at a school like Harvard. Actually, Harvard won't look at home equity at all, which is a growing trend. Stanford also just last year announced they're not looking at it. However, a school like Boston College looks at 100% of your home equity. So if you have $800,000 in home equity, even if you have a middle class income, Boston College will factor that in its initial decision making. And then other schools cap the home equity based on your adjusted gross income.
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B
Now, a school giving home equity 100% weight or 50% or 0%, is it an indication of how competitive the application process is?
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C
Not necessarily. It could involve how much an endowment fund the school has. So maybe they have limited funds or they need to distribute it evenly. So it's more about how much funding is available for the pool of students that will be accepted.
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B
And parents should be careful about taking out home equity loans. Why is that?
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C
A home equity loan is actually sent to you kind of as a lump sum, and the unspent proceeds of the loan will be counted as an asset. So it's better to take a home equity line of credit, which is just that, a line of credit. You only draw the money when you need it, so it's not sitting in your bank account, which looks like an asset to the school.
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B
Are more schools expected to add home equity to their financial aid formula?
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C
You know, that's really unclear what will happen. Some schools have actually been dropping home equity from the formula. But. But the schools are very. They vary widely, and they don't really divulge a lot of information about exactly how aid is calculated.
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B
And you can just pick up the phone and ask a school, hey, how does home equity fit into your financial aid formula?
- [05:58]
C
That's exactly right. Those numbers change, and they're not really announced. So even in my reporting, one school that previously looked at 100% of home equity reduced that number to and capped it to 1.5 times the family's adjusted gross income. So it was a pretty significant change, but it wasn't announced as far as I could see in my reporting.
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B
Tell me about the experience of a financial aid advisor you spoke with whose son applied to American University in Washington, D.C. in 2010.
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C
Paula Bishop, who is a financial aid advisor. Her son applied to American University. It's a school that uses the CSS profile. At the time they applied, her home equity was $700,000, even though she had purchased the home for $400,000. She lives in Washington state, and it's where real estate values have really skyrocketed in the past few years. So American, as a starting point, looks at 100% of home equity. So when they submitted the aid package, she found that she got a number that was far below what she was expecting in financial aid. That's because they were looking at the full value of her home, the $700,000. However, she appealed, which is a great tip for parents, and it's a number that you feel like it doesn't accurately reflect your finances. You contact the financial aid office, appeal the decision, and as a result, they capped her home's value. It resulted in her receiving an extra $6,000 in financial aid.
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B
Well, that's good for her. Is that appeal process available for people reporting their home equity or not?
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C
That's right. They look at all assets. I should be very clear. It doesn't come down just to your home equity. So they're looking at bank accounts and all of your assets, not just home equity. If you feel like it's not a great representation of what your financial situation is, such as maybe there's been a medical emergency or a job loss that affects your outlook, you can appeal. And to do that, you contact the financial aid office and ask, what's your process to appeal the decision? And usually it's a written letter in which you explain what the circumstances are and they'll take it under consideration. You should know that the schools really are willing to take an initial look and reconsider. They evaluate each application individually.
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B
And they might also consider a family having more than one child in college at the same time.
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C
That's exactly right. There are so many things. There are other assets and other factors like other siblings in college that will affect the financial aid package that's offered.
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B
And there's some research to be done by students and by parents to make sure they don't overvalue their house. They should actually do some research against local real estate listings.
- [08:55]
C
That's right. And the current listings are probably your best guide. Sometimes parents will over inflate their home value, thinking that if they they show they have a lot of collateral, that will improve their chances of getting accepted. But in fact, over inflating your home value actually makes it look like you might have more home equity and it might hurt your chances of getting financial aid.
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B
All right. That's Wall Street Journal real estate columnist Beth DeCarbo joining us. Beth, thanks for coming on the show.
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C
Thanks so much.
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B
And that's your money briefing. I'm JR Whalen in New York for the Wall Street Journal.
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A
This episode is brought to you by Charles Schwab. Decisions made in Washington can affect your portfolio every day. Washington Wise from Charles Schwab is an original podcast that unpacks the stories making news in Washington. Listen@schwab.com WashingtonWise.