Due to some intense family emergencies in the past two years we have about 45k in credit card debt. It’s at a very reasonable interest rate, we still have good credit (never missed or had a late payment on anything in my life) and we are on track to have it paid off in about two and a half years.
We have a HS senior looking at colleges, and NPCs are coming up with an EFC of about 22k. We’ll probably only be able to pay about 6k of that in cash (especially with the CC payments) and then will need to borrow the rest between our kid and us.
A financial advisor suggested we borrow against the equity in our house, probably by refinancing our mortgage, and pay off the credit card bills. He said that because colleges don’t look at credit card debt but do look at home equity this would make us eligible for more financial aid.
I understand the theory, but the idea of putting unsecured debt into a mortgage gives me a squicky feeling. Thoughts, anyone?
Are you taking a serious look at Merit aid schools? Your senior needs to cast a wide net and take a look at living at home and commuting, going far away for a much better deal financially, in addition to the colleges already on the list.
I think the issue of the home equity is one you need to consider apart from the college issue. If refinancing makes sense for you now- you bought at a low point in the market, the house is worth substantially more, you can get a much better interest rate now, you plan to stay in the house for a while so re-fi costs won’t eat up all your potential savings, then it should be on the table as a smart financial move to make. But don’t make a dumb financial move for the sake of elusive “maybe more financial aid” down the road. The number of colleges which meet full need without parent loans (i.e. will ONLY require you to pay your EFC) is a small list. The rest will expect you to take on loans as part of the package ANYWAY in addition to you having to borrow to meet the EFC.
SOME colleges look at home equity in your primary residence…but the vast majority do not. If your student is applying to,a college that uses ONLY the FAFSA to determine eligibility for need based aid, your primary residence isn’t even mentioned…at all…on the FAFSA.
Now, if your kiddo applies to,a private university that uses the Profile or its own form, the school might use primary home equity…but then again…might not. You need to check the policies for each college of interest.
What would the increase in your mortgage payment be?
Daughter is only looking at small private LACs which meet 100% of need, with our local state school as a safety. All of the schools (except the safety) use the CSS/PROFILE, not the FAFSA. I’ve checked into her top 4 schools and they do all look at equity.
Financing 45k adds about $225 per month to a 30 year mortgage. We are paying a lot more than that right now to pay the credit cards off, which we obviously don’t want to pay off over 30 years so we’d pay more than $225.
Taking $45k out would mean we’d only have about 20-25% equity in the house. We already have a decent mortgage rate so refinancing wouldn’t really change that.
Others may be better able to answer your question, however, I don’t think it would make any difference when filing the FAFSA. The FAFSA doesn’t ask about home equity, value etc. It is primarily concerned with your income and your savings. The CSS profile is more complicated and home equity might be an issue. Be aware that with the FAFSA at least the EFC they give is not what the school will expect you to pay, it only determines whether or not you are eligible for federal grants, work study and subsidized loans. Everyone is entitled to unsubsidized loans. Some schools may meet your need others may not.
I would approach this differently than trying to find colleges based on what they say it will cost. I would determine what I am willing to contribute to my child’s education. This could be from savings, earnings or what I am willing to borrow. Then your son can choose the colleges he wishes to apply to. Once accepted you can determine which schools are in contention for when the financial aid packages come in. Your son can borrow $5500 his first year, 6500 the second and 7500 the third and the fourth. Others sources of paying for college are scholarships (especially university scholarships), grants, and having your son work while at school and during the summer. I would recommend he apply to schools that his stats are in the upper 25% and higher. If he is so inclined he could apply to be an RA his sophomore year, many schools give room and board for being an RA. If he wants to study engineering he could consider cooping.
The most important thing for him to do is to choose at least one school that is affordable, he is sure to get accepted to and he is willing to attend. These are usually an instate public school.
I’d pay of the credit cards with home equity, and pay THAT off as soon as possible, [after she is out of college]. You WILL have to reapply for FA each year she is in college.
the less equity you have in your home the better the chances for higher FA for your DD. But she should cast a wider net for $$ and not just limit herself to LACs- she should also research and apply to U’s that offer merit scholarships
If your daughter takes a Gap Year, and you focus on paying down the credit card debt during that year, would that make a difference in the overall family situation?
I really hate seeing people take out home-equity loans to pay off credit card debt because it is so very, very easy to build up a whole bunch of new credit card debt if there is another family emergency. This can leave the family’s finances in an even bigger mess.
You say you can pay $6k, and the rest each year will have to come from loans you and your child take out. Are you aware your child can only borrow $5500 the first year? Can you qualify for the other $15k+ for 4 years? (This will be your debt, not your child’s). Are there younger siblings to consider?
When our EFC came in at nearly four times what we could pay out of pocket each year, the decision was made to send Happykid to our own local community college for the first two years. By the time she transferred to the decent in-state public U, with what we could pay each year, what she could borrow in student loans, what she could earn, a bit of money that was saved up during the first two years as a result of the CC being less expensive than anticipated, and some small scholarships from that state U, it all came together. We didn’t borrow one cent.
The good news for your family is that you do know that your EFC is unaffordable, and that you do have some time to sort through all of your options.
Thanks – we’ve got the state school as a safety. She loathes the thought of going to a big U and fortunately the LACs are primarily targets for her as opposed to reaches. With the colleges meeting 100% of need they’re actually pretty reasonable. Some of them do merit, but most don’t. She’s going to skip early applications so we can compare FA packages.
She had not considered a gap year, not sure it would make too much difference.
@happymomof1 We actually have savings too, but they’re not liquid, and it’s not a good time to sell them even to pay the debt. Ours was a perfect storm that I really doubt could ever happen again (famous last words?) In the incredibly unlikely event that we had an emergency our cash flow couldn’t cover, we could sell securities. In our case most of the cc charges were for heavy equipment to fix our house after a hurricane, not for discretionary things like restaurants and new clothing. We never carried a balance in the past.
@menloparkmom That’s what the advisor said, and do you mean getting a home equity loan instead of refinancing? I wonder if that makes more sense, as that’s not over 30 years.
Have you run the net price calculators on the college websites? Do them both ways…with and without the refinance. See if there even is a huge difference. You may find that there isn’t.
Now, if you want to refinance to improve your cash flow,math at is another story.
Here is my unsolicited advice…you have gotten yourselves in a credit card debt situation (even if it is due to some extenuating circumstance). Why would you consider adding time and so forth to your debt burden,
I know you want to make the dream of going to one of these LACs a reality, but I would urge you to consider whether this is a good financial plan. It sounds like your daughter is an excellent student…and could very well garner merit aid where it is offered. merit aid would not consider your home equity.
This may be obvious to lots of folks, but it wasn’t obvious to me four years ago when DS first started college. That EFC of $22K (similar to our son’s EFC for four years now) may include things like “transportation” and “entertainment” or other things that are not tuition, board, or books. In our case, DS’ EFC had several thousand dollars in that category … and yes he did live on campus, but he was only 30 minutes from home. So we did not need to budget for a $500 plane ticket home twice a semester, etc. So, look into the details of the EFC too; there may be things included in that amount that your student won’t even need.
Here is my unsolicited advice...you have gotten yourselves in a credit card debt situation (even if it is due to some extenuating circumstance). Why would you consider adding time and so forth to your debt burden,
<<<<
know you want to make the dream of going to one of these LACs a reality, but I would urge you to consider whether this is a good financial plan. It sounds like your daughter is an excellent student…and could very well garner merit aid where it is offered. merit aid would not consider your home equity.
<<<<
I agree. Parents are sometimes temped to go deep into debt giving their kids what they want. If you have other children to also put thru college, you could end up with a huge amount of debt.
I don’t think you all should view this as a choice between “big state univ” and “small expensive LAC”. There are small schools that may give your DD a very large merit award.
If your DD “loathes” the idea of your big state school, then GUESS WHAT??? THAT SCHOOL is not a safety because your DD wouldn’t like it. A safety has to be a school that is affordable where the student would HAPPILY ATTEND.
What are her stats? What is her major and career goal?
Home equity or new mortgage…won’t make any difference in terms of financial aid. You equity in your home would be the same. But it’s possible your monthly mortgage outlay would be less.
Still…is there any way to pay off the credit card debt without securing an additional loan?
The flip side of cgpm’s observation is that sometimes the COA doesn’t cover what you think it should. Ds2’s travel costs seemed low. When I asked about it, they only count two trips home in travel expenses, when we planned on flying him home three times.
Thumper is ahead of me - run the NPC with it as it is now (they won’t consider the CC debt) and with it as part of your mortgage. I bet it will have little change to the EFC.
You could take out a HELOC and then the term can be anything you pick - 5 years, 10 years - and of course you can pay it off earlier. The difference will be that the HELOC payment is on top of your mortgage, and if you refinance you’d just have one, lower, payment. If you are comfortable paying it as you are, you can do that but the schools probably won’t consider the credit card payments unless you can show that the entire debt was from the medical emergency, then they might give you an override.
Most of the EFC comes from income, so if you have a high income, they aren’t going to care all that much about your debt. The non-liquid savings is not going to help either unless it is a retirement account.
It MAY be harder to qualify for a whole new mortgage than a home equity loan.
Because of all the trouble banks and lenders got themselves into during the last 10 years, they are much more cautious and careful with new loans.And, Fannie May, who buys most of the home loans that banks originate, also also imposed strict requirements on the banks.