Excluding Real Estate Equity for EFC Calculation

I’m 63 y/o with a S starting college next year & been self employed since day one. About 25 years ago I sold one of my previous business and used the money to build a really nice house in a great neighborhood. My current home equity is about $750K. In addition a few years ago I bought a rental property for cash using inheritance money for the purpose of using the rental income to pay for my son’s education and then provide retirement income. Thanks to my efforts, the colleges now want me to pull $60K/year+ out of my real estate equity to pay for tuition. The problem is that our income is now much less than it once was. If we take out a home equity loan, we just don’t make enough to afford the monthly payments. If we mortgage the rental property the rental income would disappear thus taking away $30K/year that would otherwise be used for tuition. While we do have a moderate amount in a IRA, the real estate equity is our de facto retirement savings. I would think that the ultra-smart financial aid folks would see this. Of course they don’t & instead expect us to choose between loosing our home or sending our son to college. How do I convince them that our equity is retirement savings and should be excluded from their EFC calcs? Does anyone have any ideas on how to deal with this?

I have known a few people who were in a similar situation. At least in the cases that I have seen, the students either went to in-state public universities, or went to university in Canada (we live in the northeast of the US, so some parts of Canada are not all that far away). There is one case that I know of, one of the academically stronger students who were friends of a daughter, where the student went to community college for two years, did very well, and got a full merit scholarship to a local public in-state university. She lived with her father the entire time, so the main expenses were books and miscellaneous supplies, plus a car to drive to the college and then to the university.

I had one daughter start university after I had retired. Taking on debt is a really bad idea in a situation like that. You are not really all that far away from retirement and thus again debt would be a bad idea. Unfortunately if you borrow against the value of your rental property it could take a very long time, possibly longer than your remaining lifetime, to pay it off.

At least based on what I have seen the way that universities compute “need” does not fit your situation (nor my situation) at all.

Has your son applied to in-state public universities?

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They don’t expect you to do anything. When the Mercedes dealer tells you the car costs 80K, they don’t expect you to become homeless and live in the car in order to afford it- they are telling you how much the car costs.

If your son’s college list is filled with colleges you cannot afford, he needs a different list!

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It doesn’t work that way. Your S will need to target FAFSA only schools and/or schools where he can get merit $.

This spreadsheet has the most recent home equity percentages used by colleges which is a good starting point, but you do need to double check this info, and the only way to do that is by asking a financial aid staffer.

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One thing that I might add to my previous response: Due to circumstances somewhat similar to yours, both of my daughters attended public universities that were affordable, with merit aid. They had the option to attend higher ranked expensive private universities, but I would not let them take on any debt.

After graduating, the value of graduating with strong grades, a good education, and no debt at all, was vastly greater than any value that might have come from attending a more expensive private university. One daughter for example got a dream job after graduation that paid really badly. She could only take the job because she had no debt. She loved the job, it led to a different but related job, and this led her to now being enrolled in a very good graduate program at a university that has a very good program in her major. The other daughter was able to get a very good research job that again appears to be setting her up very well to do what she wants to do in life. Having a bachelor’s degree with no debt was very valuable in both cases. Having attended affordable public universities in both cases worked out just fine.

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You can ask for a special circumstances consideration to have the rental property removed if it is your source of income. Some schools might do that. Others won’t.

In terms of the equity in your primary residence, you won’t be able to get that excluded for schools that use primary home equity.

What you are asking is that schools give you need based aid and ignore that you own these two pieces of property. Basically you want aid to preserve your properties. Most families don’t have this type of equity or own two homes. Many colleges will not adjust your aid. But ask.

In your case, it would be best to look for colleges for your student where that student would get merit aid. Merit aid does not have anything to do with your family finances.

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Even the FAFSA only schools WILL consider the rental property equity AND the rents that property generators.

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I disagree with the Mercedes analogy. In the unusual case that Mercedes offers a discount, they do so for everyone or at least will negotiate with you to get a sale. The colleges opaquely dole out their discounts only to those they deem worthy using formulas that are obviously flawed.

So if I sell all of the real estate, buy a $1M yacht & move into an apartment only my income will be used in the calculations. Those parents that have wasted their money buying toys get off scot-free while those that manage their money well are heavily penalized. This is going to get fun, time to get into rabble rousing mode.

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No, I don’t think so, you’d have capital gains to report.

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The financial aid system looks at the totality of what you have. What you plan to do with your assets (with the exception of qualified retirement accounts) is not factored into the equation except in special circumstances (excessive medical bills, home disaster). Maybe another family wants FA so they can keep their income-producing $550k that they intend to use for retirement – but it’s in a non-retirement-qualified mutual fund. You have a non-qualified retirement asset. The other family has a non-qualified retirement asset.

Instead of demanding that certain colleges change their ways for you, you’d have better success finding the colleges that already fit your financial situation. I’m sure there are hundreds.

Besides, how much FA do you think you can get? What colleges is your son considering? Have you done the net price calculators? There may not be as much aid available as you think there is, even if you did not own an income-producing second home

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Other parents could argue that while they were putting their savings into restrictive retirement accounts or saving for their kids’ college costs in 529 accounts, you were putting yours into real estate, making much larger returns than they were in their savings vehicles. You also got some tax breaks for the rental property they didn’t receive.

The college financial aid formulas are unfair to some and greatly favor others. Farmers get hit hard because the land has great value but it isn’t liquid. I think you’ll find a lot of farmers’ kids going to their state schools (Wisconsin, Ohio, Minnesota, Iowa) because that what they can afford with liquid assets. I felt the system was unfair to me as a single parent of two kids in school at the same time. The savings allotment for my family of 3 (one adult) was $10k and a two parent/one child family of 3 got about $50-60k (depending on the age of the parent). That made no sense to me but those were the rules.

Parents can claim that they make more money in the markets and would rather invest than save in a 401k. They are welcomed to do that but then it is not an excluded retirement account and they have to report it as an asset.

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If one of the goals is to fund a child’s higher education, selling reportable assets and using the proceeds to buy a $1M yacht as a way to game need-based financial aid formulas seems a bit extreme.

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I’m not sure I agree that the formula is “opaque”. You may not agree with the formula, but it doesn’t make it opaque. The fact that a year out, you already know that certain schools are unaffordable, based on the way your assets are allocated, clearly means it’s not opaque- it’s quite transparent. Holding retirement assets in a vehicle which is NOT a retirement account doesn’t work for some colleges. A merit aid college won’t care where your retirement assets are- or if you even have any. The aid will be based on your son’s stats, plain and simple.

Nobody is expecting you to lose your home. If you cannot afford what the NPC’s are telling you, your son needs a different list of colleges where your assets won’t be a factor.

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Just trying to make a point.

Is someone actually saying to use home equity? Where are you getting these numbers from? If the rental house is meant to pay for college and it’s paying out 30k then look for schools that are in that range (or 35k if you add in a federal loan for your son). My average by college confidential standards kid had schools under that cost.

I’m also confused about your primary residence. No fafsa only school will consider your home as an asset.

You sound like you have good income and as others have said, that just means using a different strategy to find colleges that are affordable for you.

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I am quite sympathetic with @edl1016’s point. Top universities in the US claim to meet “full need”. However, for a retired parent (who probably had their children when they were in their 40’s), or for a parent with a small business or rental properties, they really do not. You can’t sell your main large asset to put the kids through university when your main asset is also your main source of a moderate income. Also, if you are already retired, the money that you have sitting in a savings account looks a lot like “retirement funds”.

However, this really does not matter all that much. It must makes the famous “meets full need” schools irrelevant for some of us. Students can get a great education at other universities. We just need to find the schools where we can get a great education at an affordable price. Then our recent graduates can get a good career or get accepted to great graduate programs with degrees from universities that are not all that famous.

The only answer I have found to this problem is to look at in state public universities, less selective private colleges in rural areas, low cost out of state colleges, or southern/midwestern colleges with great merit scholarships if one’s child has excellent grades and test scores.

We are lower middle income but have the majority of our retirement savings in regular accounts vs legally designated retirement accounts due to having lived overseas in our younger years. I explained this to college financial aid officers over the years and didn’t get much sympathy. The most it ever got us was a $2,000 grant.

More states are offering special financial aid programs for families with adjusted gross income under $65K. Those are the best opportunities for people with assets in unprotected accounts.

One option would be to sell the rental, put the money into an annuity, and only apply to fafsa-only schools. But that might not be something that’s good for your family in the long run.

It’s a tough situation but I remember @Mom2aphysicsgeek ‘s very wise answer to this type of situation. It better to have money and have this problem than not to have money at all.

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Good idea. Reduce assets or reduce income and can still go to (some) ‘meets full need’ schools.

Those schools also include the caveat of “typical assets for that level of income.” That’s to avoid cases where one parent quits their job or parents downgrade their jobs to have low income, but they have $3M liquid.

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