<p>After tax income is also counted twice for FAFSA purposes in the case of a taxable state income tax refund. It was income when earned in the previous year, no FAFSA benefit received when deducted on Schedule A, and then included in income (again!, as a component of AGI) when received (some exceptions, for example if no tax benefit in year deducted due to AMT).</p>
<p>It is highly possible that all of these financial gymnastics won’t make a speck of difference in terms of need based financial aid awards.</p>
<ol>
<li><p>Need based aid is heavily weighted towards income.</p></li>
<li><p>FAFSA only schools do not consider primary home equity at all, but some Profile schools do consider it. If this student is applying to a mix of schools, paying off the home will have mixed results.</p></li>
<li><p>How much home equity does the family have right now? As noted upstream, if they have $250,000 in home equity now, and paying it off would mean $300,000 worth…might not make much difference.</p></li>
<li><p>Home equity is t a particularly liquid asset. Money in the bank is. What if the family needs the money for some other unanticipated necessary purpose?</p></li>
<li><p>And lastly…what would be wrong with using a portion of this money to pay for college costs???</p></li>
</ol>
<p>The ROTH distribution as non-taxed income for FAFSA purposes has been discussed many times on CC. Here is one thread:</p>
<p><a href=“Roth IRA distribution treatment - Financial Aid and Scholarships - College Confidential Forums”>http://talk.collegeconfidential.com/financial-aid-scholarships/1273598-roth-ira-distribution-treatment.html</a></p>
<p>Here is more information on the ROTH distribution as nontaxed income for FAFSA:</p>
<p><a href=“Retirement Plans and Saving for College - Finaid”>Your Guide for College Financial Aid - Finaid;
<p>Some parents use a Roth IRA as a combined college and retirement savings vehicle. When they need to pay for college expenses, they limit their withdrawals to the contributions in order to avoid paying any income taxes on the distribution. The earnings remain in the Roth IRA to pay for retirement. (Conceptually, both the contributions for college savings and retirement are independently earning a return that builds the value of the Roth IRA account. But since money is fungible, you can withdraw the contributions while leaving the earnings in the account.) The main problem with this approach is the distributions count as untaxed income on next year’s FAFSA, reducing eligibility for need-based financial aid.</p>
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<p>Nothing. Nothing wrong with saving for retirement first either.
It’s like the difference between paying MSRP for a car versus haggling - you get the same car.</p>
<p>You need to do the math for your mortgage and for any specific investment, but for me, the interest rate on my mortgage is so low, that it’s like a “short” position on a bond (borrowing money is like selling a bond). Instead of paying off my mortgage, I was able to buy an intermediate term Vanguard muni bond fund that had an after tax yield that substantially exceeds my effective after-tax mortgage rate and had a shorter duration. So it made no sense for me to prepay my mortgage since I have it hedged out anyway with an acceptable risk. The rates have come down since then, so you need to do the math yourself. </p>
<p>If later you find that paying off the mortgage makes sense you can do it later, but at least you can lock in your low mortgage rate if you do find that you need to use the cash for college. </p>
<p>@ #14 & #21</p>
<p>Haven’t been able to read through all of the replies, but yes we can definitely use the money for tuition. House is worth 225k, mortgage balance is 80k, rate is 3%. I am worried if I use the money to pay off the mortgage, then I won’t have any liquid assets to pay any college costs. We are self employed and I also have a part-time job. Our industry is tied heavily to the economy and we have endured several recessions and haven’t been able to save as much as we would have liked for college. </p>
<p>I will be back to read more this evening. I have a short lunch hour. 
</p>
<p>Paying off the mortgage to me is a no brainer. If are ever in a bind, you can get a home equity loan on your house.</p>
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<p>This is what I think too. I also suspect having the cash could hurt your financial aid - but by all means check the schools’ net price calculators. You’d be crazy not to figure out the best way to maximize your financial position, including maximizing financial aid.</p>
<p>You can get a HELOC on your house if you have the income, credit, and equity to support it. </p>
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<p>Let me clarify what I said. </p>
<p>You still have a few years to go. Nobody knows what interest rates are going to be.
You have enough cash to pay off your mortgage.
Getting a new loan later will have to be at prevailing interest rates. </p>
<p>If you’ve been refinancing and have a low interest rate mortgage, lower than you could get now, you have two options. </p>
<p>1) Buy the bond fund with the highest after-tax yield for an appropriate level of risk and duration. This is a pretty liquid investment, subject to some market fluctuation.
2) Pay off the mortgage and forever lose your low interest rate. This is much less liquid. To reverse it requires a new loan, a new appraisal, yada yada. </p>
<p>Each of these two options has an after-tax yield. </p>
<p>I don’t know your exact situation, but paying off a low-interest mortgage is probably leaving money on the table. </p>
<p>For me option 1 was better in every way possible. Liquid, shorter duration, and higher yielding. </p>
<p>Here are some schools that ignore home equity (for FA calculations):</p>
<p>Bard College
Bucknell University
California Institute of Technology
DePauw University
Hamilton College
Harvard University
Princeton University
Santa Clara University
University of Virginia
Washington University, St. Louis
Whitman College</p>
<p><a href=“Will Your Home Equity Hurt Financial Aid Chances?”>http://www.thecollegesolution.com/will-your-home-equity-hurt-financial-aid-chances/</a></p>
<p>After reading the OP’s second post, that she owes $80k and her mortgage is at 3%, I don’t feel she should accelerate paying off the mortgage. I’d put the extra funds into something that is earning a higher rate if the 401k or IRAs are maxed out each year. Just keep paying the mortgage as agreed and make that other money work for you. I don’t think it is going to make a lot of difference in the end. The schools that consider everything will consider everything - that you have a house with 150k in equity with other assets in the bank or that you have $225k in equity but fewer other assets (cash, bonds, etc). It’s a wash, but I think you are more liquid with the assets in other funds like 401k, IRA, bond, 529 plan, etc.</p>
<p>If the FAFSA truly does not look at the amount of equity you have in your primary home, then that’s a strong argument for using the money to pay off the mortgage. However, 3% is a really low interest rate. You certainly can’t get that kind of return on your money in a money market account these days (ah, for the heady days of 5% return on money market funds before the 2008 crash!). What kind of interest would you have to pay on a student loan? You should calculate what the difference would be if you had to take out an equivalent amount in loans. The fact that your income is a little uncertain presumably means that you can’t count on being able to pay off a student loan in X years, so you don’t know what your total interest payment is likely to be. There’s a lot of uncertainty there.</p>
<p>Of course, the big question is whether paying off your mortgage and thus reducing your cash balance will persuade colleges to award you more need-based aid. People say that sometimes colleges say they’re awarding you “aid” when what they’re really doing is telling you to go take out loans, but I haven’t been through this process so I can’t say. But if there’s a chance for a school to actually charge you less up front, that would make a difference. However, I would want to know how much money we’re talking about here. If it’s only $5000 or $10,000, I’m not sure I would let it influence me. You’d still have to get loans for the rest of the money, and if the interest rate on those loans was much higher than 3%, that would eat up that $10,000 pretty quickly.</p>
<p>Mortgage rate has been low for sometime so I will not worry. I would pay off the house, get a home equity loan for emergency. If you don’t have income due to whatever reason then you can’t deduct the mortgage. Some colleges cap home equity like Stanford caps at 2.8 times salary. But I also would run Npc to see first before doing anything.</p>