Does the Cash from a Cash-Out Refinance Count as an Asset on the FAFSA?

Mark Kantrowitz

December 17, 2012

My daughter is a high school junior. I have just refinanced with cash out for a home remodel to accommodate my aging parents. However the remodel is delayed and the money is still in our account. The remodel should be completed and the money spent by the time my daughter starts her senior year. Will this money be counted as asset for financial aid? We have heard that a snapshot of assets at year end of the junior year is taken into consideration. We may be able to move money around but we don’t want to make the matter worse. What do you recommend? — Lynn H.

Money in a bank or brokerage account counts as an asset on the Free Application for Federal Student Aid (FAFSA), regardless of the source or intended purpose of the funds.

The only exception is when the money is pledged as collateral for a loan. For example, a margin loan in a brokerage account reduces the net worth of the account. Technically, the loan is treated as reducing the value of the stocks and bonds in the account, not the cash proceeds of the loan, since the investments are pledged as security on the margin loan. So the cash still counts as an asset.

The FAFSA requires the applicant to report the net worth of the applicant’s assets. This is the market value of the assets minus any outstanding debt secured by the assets. The margin loan reduces the net worth of the stocks and bonds in the brokerage account.

With a cash-out refinance, the mortgage is secured by the real estate, not the cash proceeds of the loan. Thus the debt will be treated as reducing the net worth of the real estate on the FAFSA. The cash is a separate asset and is reported on the FAFSA.

(Note that the net worth of the family’s principal place of residence — the family home — is not reported as an asset on the FAFSA. The net worth of investment real estate, such as a second home or a rental property, however, is reported as an asset on the FAFSA.)

The logic of this treatment is that cash in the bank is fungible and can be used for any purpose, including paying for a child’s college education. The intention to use the money for another purpose, such as remodeling a home or paying for retirement, does not guarantee that it will be used for that purpose. Only when the money is restricted for particular purposes, such as a qualified retirement plan, does the FAFSA ignore it as an asset. (There are exceptions for the family home and family business because Congress did not want to force families to sell their homes and businesses to pay for college.)

The net worth is reported based on a snapshot of the market value of the asset and the outstanding debt as of the date the FAFSA is filed, not the end of the junior year. The FAFSA is first filed soon after January 1 of the senior year in high school. If the money in the bank is spent on the remodel before the FAFSA is filed, the money will have no impact on eligibility for need-based financial aid.

If the money will still be unspent on the date the FAFSA is filed, it must be reported as an asset on the FAFSA. Moving the money around will generally not yield a more favorable financial treatment and still allow the family to use the money for remodeling the home.

Instead, the family should consider appealing to the college financial aid administrator for a professional judgment review. The family should provide the financial aid administrator with copies of documentation that demonstrate the purpose for the funds, such as a signed contract for remodeling the home and restrictions in the promissory note requiring the family to use the proceeds to improve the home. It also helps if the money is in a dedicated account, such as an escrow account, and not commingled with the rest of the family funds.

If the college financial aid administrator does not make an adjustment to exclude the funds, the money will be treated as a parent asset on the FAFSA. This has a relatively small impact on eligibility for need-based aid. In a worst-case scenario, every additional $100,000 in parent assets will reduce need-based aid eligibility by $5,640.

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