own a 2 family house, FinAid consequences living there or not? Advice please.

Paying for College
1

<p>Hello,
My daughter is a 10th grader.
She is currently at a private school getting approximately 80% in financial aid, and I hope that this will continue into college as she is a very motivated student.</p>

<p>I am doing some financial planning in order to be as ready as possible.
I own a 2 family house, both units rented out, and I rent an apartment elsewhere.
There is not much equity accumulated as prices have fallen off steeply since I bought 9 yrs ago. I am about even (not underwater) and current rents in are approximately equal to payments out. </p>

<p>When my daughter finishes high-school, I will have three options:
1. move back to my 2 family & rent out 1 unit
2. continue to rent elsewhere & rent out both units
3. (maybe) buy another place & rent out both units </p>

<p>At this point, I don't have a strong preference (lifestyle-wise) either way. </p>

<p>I have looked at FAFSA calculators, etc, but i can't find anything to guide me on the financial consequences of these 3 choices from the Financial Aid point of view (I know how each plays in terms of taxes). </p>

<p>I know one thing about living in the 2family is that as a resident (if equity built up/prices rose) I could get a Home Equity Line of Credit, whereas if I don't live there, I can't ... would a financial aid package require this? </p>

<p>I'm not even sure what kind of person/professional would know the ins & outs of this kind of thing. </p>

<p>Can anyone advise me on this?
or suggest resources that would help explain it to me? I'd like to be able to model it out & know the landscape & consequences of various decisions. </p>

<p>Thanks in advance,
I'm in Massachusetts if that matters.</p>

<p>mom</p>

2

<p>She is currently at a private school getting approximately 80% in financial aid, and I hope that this will continue into college as she is a very motivated student.</p>

<p>High school aid procedures is VERY different than college aid.</p>

<p>There are a gazillion motivated students out there, and most families have to pay for most/all of college. What are your D’s test scores?<br>
Most colleges do NOT have a lot of aid to give. </p>

<p>FAFSA-only schools generally do NOT give great aid.</p>

<p>Your rentals will likely hurt you a LOT. Those are assets and the rental income will count.</p>

<p>You should live in one of the units because then that PART of the unit will not get counted on FAFSA (the other half will). </p>

<p>The schools that give the best aid use CSS Profile. And those are the hardest to get into. And the ones that give the best aid will also consider the income/assets of any non-custodial parents. Is there a NCP?</p>

3

<p>If I were you I would start playing with the financial aid calculators both the FAFSA (federal) and the institutional to get a reliable feeling for what you will be expected to pay. You can run the calculations with the entire 2-family as a rental and with 50% of the 2-family as a rental. Also almost every college will have a net price calculator on their web site that you can plug in numbers and get some idea of what costs will be.</p>

<p>Expected Family Contribution is the the minimum you would be expected to pay and as a rule of thumb runs about 1/4 to 1/3 of annual income. Additional assets in addition to 401Ks or IRAs increase your EFC.</p>

<p>FAFSA only schools do not include your home’s equity. Profile schools do.</p>

4

<p>Use the Net Price Calculators on a few different schools’ websites (try a few different types of schools…like the state flagship, an OOS public, a moderate private, a good private, etc. </p>

<p>Yes, you can expect that your EFC will be about 25-33% of gross income. the rentals will also count as assets for both income and value. </p>

<p>Keep in mind that FAFSA is to determine FEDERAL aid and that is NOT much free money AT ALL.</p>

5

<p>Most likely the best option is to move back into one of the units. That way you are not paying down someone else’s equity, and your half of the equity won’t count against you for FAFSA schools. Also you will have less income from rents.</p>

6

<p>First of all, run your numbers through an EFC estimator and maybe a NPC of a college that you might have in mind, and see what numbers will come out of there. Though it’s true that the home equity in your primary residence is not counted as an asset for FAFSA reasons, if you don’t have that much equity in your rental unit, it may not make that much difference, especially if you have few other assets. You get a certain amount of asset protection and then it’s 5.6% of asset value beyond that.</p>

<p>The income is where you can get hit since FAFSA and most other financial aid calculators are heavily focused on the income figures. I don’t know how rental income is counted for fin aid purposes. Maybe someone here can tell you. If rental expenses offset that income, then and it is that net amount you report, again, it may not make that much difference if the net amount is not much. By moving into one of the units, you will reduce that amount even more, but not have the rent expense you currently have to pay for your apartment giving you more net income at your disposal.</p>

<p>However, it’s what your income and asset figures actually are that can make the most difference and where your DD is applying, the type of schools she has in mind. In terms of federal govenment aid, your EFC has to be below $5550 or thereabouts to even get any PELL money, which means your income has to be very low to qualify for that money. Beyond that, unless you live in a state that has some funding for college, it’s the Stafford Direct loans that you DD will be able to get subsidized rather than pay interest while at school and get lower interest rates if your EFC is low enough and her college costs high enough. The maximum is usually $5500 for freshmen. The rest is all up to the individual college.</p>

<p>There most selective school, as a very general rule, tend to be more generous with financial aid, but they use their own application, PROFILE, and they scrutinize things more carefully in terms of giving aid. If there is a non custodial parent, s/he will often also be on the hook for payment. Home equity, though often capped, is also taken into consideration, even that for a primary home. </p>

<p>FOr most schools in this country, full need is simply not met. It doesn’t matter if your EFC is zero, meaning you can’t afford to pay anything for college according to FAFSA. You’ll get full PELL and the full Stafford to borrow, but that comes to about $11K sufficient to go to a local state school, but short of most “sleep away” colleges, and not much towards the more pricey privates. The closer to the top of the student pool your DD is, in terms of academics and test scores, mostly test scores, the better the chance that she will get a good need package up to what the school or FAFSA defines as need, is the way it works. </p>

<p>For kids who are good students with good scores, and whose families do not come up as needing a lot on the financial aid calculators—and this happens alot, what YOU consider affordable may not mesh with what the colleges define as affordable, merit aid becomes important. A lot of schools have their own scholarships where they try to get the students to come there by lowering the cost that way. Again, the more desirable your student is to a school, the better chances that she will get a high level scholarship. Schools like the Ivies, selective LACs, MIT, and other such school do not give any merit money; it’s all on a need basis. Also some schools do not have much in the way of scholarships and getting a hefty one is nigh impossible. So you need to do research on each school that is on your DD’s list as to what they even have available. Hoping to get a scholarship when you don’t have defined need from Dartmouth, for example is futile–they don’t give merit money, and trying to get a scholarship from Duke is a true lottery ticket as they have very few and only the most stellar applicants and few of them, will get their awards. </p>

<p>So even while you look at possibilities, the most important schools on the list will be those you know you will be able to afford without conditions, and that you know will accept your daughter. Some schools do have guaranteed awards if an applicant has a certain gpa and test score. Some local schools might be affordable without any aid. You need a few of those on the list, and then you can go to town with the lottery tickets, some of them with better chances of a hit than others.</p>

7

<p>In california you can have Cal grant and 2 houses.</p>

<p>My friends family live in one house and rent the other.
They have negative income from that investment.</p>

<p>My friend is second year student at public university and have Cal grant B.</p>

8

<p>The OP is in Massachusetts, so the Calgrant guidelines don’t apply.</p>

<p>I agree that moving into 1/2 of that duplex sounds like the most economically sound plan.</p>

9

<p>Since the D is only a 10th grader, she also has time to try to make NMF on the PSAT. That would open up some more possibilities.</p>

10

<p>You can have negative cash flow on your taxes from a rental, but the rental still has value as a reportable asset unless you are underwater on your mortgage.</p>

11

<p>A lot of this depends a lot on what the OP’s income is, what other assets s/he has, are there other parents in the mix, what school they are hoping for. </p>

<p>If the parent has an income in the 6 figure range with a non custodial parent making the same in the picture with substantial assets, it isn’t going to make a bit of difference. That the properties have little equity and little income may make very little difference in many scenarios for fin aid, but if the OP is on the border of being PELL eligible every dollar could count. So we need to know a lot more info.</p>

12

<p>Cpt’s advice is correct, and I will add this: If you live in the rental, you will only have to claim the value of half as an asset for FAFSA. The half you live in is considered your primary residence & is not reported for FAFSA purposes (the other half is, since that is not your primary residence).</p>

13

<p>thank you for all the thoughts. This clarifies things a great deal. </p>

<p>I’ve just run the numbers several times/several ways using the “profile” (not FAFSA) calculator, and the answer is a bit counter-intuitive. </p>

<p>Looks like even if I live in the smaller apartment (not the larger) (the building is a 1:2 not 1:1 split by sqft) (and therefore itemize deductions to capture the mtg interest but then can’t count all of the expenses of the property against the income) my EFC is $2K MORE if I live there than if I continue to rent & use the full 2family as an investment property. (EFC $20K if I live there vs EFC $18K if I don’t).</p>

<p>Thanks to all who posted.</p>

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<p>If current rents equal payments out, this property most likely generates a big tax loss every year.</p>

<p>One thing to remember with the Profile is that schools, at their own discretion, can remove expenses off of your Schedule E. Depreciation is the big one as this is considered a “phantom” expense in that it doesn’t represent money you actually spent. Or they may decide to not consider any loss at all, since you could always sell the property and not have the loss every year.</p>

<p>This will not be captured in the calculators, and can lead to an unpleasant surprise as it leads to large increases in income. And you won’t know until your FA package comes.</p>

<p>FAFSA just takes whatever is on your schedule E; however, even if living in one unit raises your EFC by a small amount (you said $2000), you will not be paying rent to live somewhere else, which is almost certainly much more than $2000/year. So the net result is that you will have more money to pay your EFC if you live in it.</p>

15

<p>yes, in the high-school financial aid scenario, they remove the passive loss.<br>
Thank you for mentioning that these calculators do not take care of that. I had gotten lulled into thinking this was close to the final, but right, they can still remove that depreciation loss.</p>

<p>The 2 rents together just cover expenses, so the reasoning in the last paragraph doesn’t work in my situation–I have to pay about the same for my housing whether I’m renting elsewhere and letting 2 rental apartments cover the mortgage, or living there and paying half the mortgage myself. </p>

<p>I think it’s going to end up being a toss-up, and then a wait and see while I wait to see how the various systems & schools handle it.</p>

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<p>If the OP is going to move into the 2-family home, does he need to do so before January 1 of his student’s junior year of high school? What should the timeline be?</p>

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<p>The house is an asset. The rents are income. Do you have other income? In addition as pointed out upstream, there are a couple of things to remember. First the huge vast majority of colleges do NOT meet the full need of all accepted students. Your parent contribution is highly likely to be higher than what your EFC or a calculator using the institutional methodology (Profile-ish) might indicate. Second, schools using the Profile EACH have their own formula for awarding their institutional money. You should be using the net price calculators for EACH college you might be considering as the money will most definitely vary from school to school. Even with that…your NPC numbers should be viewed as an estimate BECAUSE of your rental properties.</p>

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<p>Mom22. The move would need to take place BEFORE the FAFSA and Profile are completed. If the student is applying EA or ED and has an early Profile filing date…the move will have to take place before the Profile is file (could be as early as November 1).</p>

<p>So OP take that into consideration as well. If the college is fafsa only and you don’t have an early Profile deadline, the rental/living arrangement will need to be reconciled probably BY January of your child’s senior year in high school. You will not be able to wait until she graduated.</p>

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<p>This will not be captured in the calculators, and can lead to an unpleasant surprise as it leads to large increases in income. And you won’t know until your FA package comes.</p>

<p>Very true. People who have income that is not typical income from a job will likely have unpleasant surprises. Also, those who have “business deductions” often have these surprises.</p>

<p>Income that is not from a job is often calculated differently because that income doesn’t have FICA and other earned income deductions. It is calculated more harshly.</p>

<p>However, even if all/most of your income was from a job, you still CANNOT think that NPC results are “close to final”. NPC results often give “best case scenarios,” which often do not happen because schools run out of certain aid early (SEOG grants, Perkins loans, etc).</p>

<p>Also, unlike much of high school aid, college aid usually includes LOANS and work study. So, while your child may get an FA package with $10k in aid, that aid may be nearly all loans and work-study…little or no free money.</p>

<p>Your FAFSA EFC may be somewhere in the $18-20k area (or more). So, that means that your EFC is way too high for any federal grants. (EFC must be about $5k or below for federal grants). </p>

<p>You may be misunderstanding FAFSA. Schools don’t have to do ANYTHING with your EFC except see if you qualify for federal aid (which isn’t much and you don’t qualify for grants anyway). </p>

<p>That means that unless your child attends a school that has a lot of its OWN dollars to give away, you will likely be gapped big time. </p>

<p>If your child is a strong student and has high stats (high test scores and high GPA), then include a few schools that will give LARGE merit scholarship for stats.</p>

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<p>

Well some of it does, but that’s another matter.</p>