Does Home Equity Affect Eligibility for Financial Aid? What If You Sell the Family Home?

Mark Kantrowitz

August 22, 2011

Ask Kantro: Does Home Equity Affect Eligibility for Financial Aid? What If You Sell the Family Home?

Is home equity considered an asset when determining eligibility for aid? — Steve

The net home equity of the family’s principal place of residence (the family home) is not reported as an asset on the Free Application for Federal Student Aid (FAFSA).

However, the net home equity on a second home or investment real estate (e.g., a rental property) is reported as an asset on the FAFSA. Generally, rental property is reported as an investment asset, not a business asset. To qualify as a business asset the rental property would have to be part of a formal business that provides additional services, such as a hotel with maid service. If the rental property is part of a small business with 100 or fewer full-time equivalent employees that is owned and controlled by the family, it may be omitted from the FAFSA entirely under the small business exclusion.

The CSS/Financial Aid PROFILE form, which is used by about 250 colleges for awarding their own financial aid funds, does count net home equity on the family’s principal place of residence as an asset, but caps it at 2-3 times income.

Sometimes a family has sold their home but has not yet purchased a new home. The proceeds from the sale must be reported as an asset on the FAFSA, as discussed in the answer to the next question. The family could try appealing for an adjustment to exclude the proceeds, but such an appeal is unlikely to be successful, especially if the family is not under contract to buy a new home.

During the credit crisis and recession some families have had to relocate because of their jobs and have bought a new home, but have been unable or unwilling to sell the old home due to a difficult real estate market. Again, the family could try appealing for a professional judgment adjustment, but such an appeal is unlikely to be successful.

We sold our house and have the money in savings. When applying for federal grants is this counted against us? How much of it is? We are a family of three, my husband, myself and our daughter. My husband was laid off in May. I am currently not working. Our daughter is a senior in high school this year. — Shari M.

While the net worth of the family’s home does not affect federal student aid eligibility, money in a savings account does count as an asset regardless of its source or purpose.

A portion of parent assets are sheltered based on the age of the older parent (about $50,000 for the typical family) and the rest is assessed on a bracketed scale with a maximum effective rate of 5.64%.

However, some families may qualify for the simplified needs test, which causes the FAFSA to disregard assets entirely. To qualify for the simplified needs test, the family’s income must be less than $50,000. The family must also satisfy one of several secondary criteria, such as:

  • The family is eligible to file an IRS Form 1040A or 1040EZ (or not required to file a federal income tax return).
  • The family received certain federal means-tested benefits in the last two years. The federal means-tested benefit programs include SSI, Food Stamps or SNAP, Free and Reduced Price School Lunch, TANF and WIC.
  • A member of the household is a dislocated worker.

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