Question about assets

Paying for College
21

<p>Sblake7,
So a family with 100K income and 1 million house (760K equity and 240K mortgage) will contribute zero from home equity, while a family with 50K income and 250K house (170K equity and 80K mortgage) has to contribute 5% of 40K (50K*2.4-80K) from equity?</p>

<p>Based on the link
<a href="http://www.usnews.com/usnews/edu/articles/020930/archive_022785_3.htm%5B/url%5D"&gt;http://www.usnews.com/usnews/edu/articles/020930/archive_022785_3.htm&lt;/a&gt;&lt;/p>

<p>568 Group caps the equity at 2.4 times income. Therefore, the equity to be considered in FA formula is 240K for the first family and 120K for the second family. I think SBDad is right.</p>

22

<p>It's not surprising that there's confusion over this point, even among the media. I've seen it described in media as "capping equity as 2.4 times income" several times-- but it's not that simple.</p>

<p>Here's the original recommendation of the 586 Group back in '01:</p>

<p>"Recommendation: Count home equity capped at 2.4 times income minus mortgage debt with professional judgment adjustments in individual cases."</p>

<p><a href="http://www.news.cornell.edu/releases/July01/568.presidents.report.html%5B/url%5D"&gt;http://www.news.cornell.edu/releases/July01/568.presidents.report.html&lt;/a&gt;&lt;/p>

<p>BankRate got it right in their press piece:</p>

<p>"Under the new guidelines, the schools will count home equity, but cap it at 2.4 percent times income minus mortgage debt."</p>

<p><a href="http://www.bankrate.com/brm/news/pf/20020128a.asp?keyword=%5B/url%5D"&gt;http://www.bankrate.com/brm/news/pf/20020128a.asp?keyword=&lt;/a&gt;&lt;/p>

<p>as did Smart Money:</p>

<p>"Last year a group of 28 elite schools, including Cornell, Amherst and Duke, agreed on common guidelines for determining need, which included capping home equity at 2.4 times income minus mortgage debt. This means that if you still owe $100,000 on your $400,000 home, and earn $80,000 a year, these schools will consider you to have only $92,000 in equity. "</p>

<p><a href="http://www.smartmoney.com/mag/index.cfm?story=nov02-college3%5B/url%5D"&gt;http://www.smartmoney.com/mag/index.cfm?story=nov02-college3&lt;/a&gt;&lt;/p>

<p>The most recent official word I've seen on this is the GAO's report on the consensus methodology adopted by the 586 Group colleges- the report is dated September 2006 (see table 3, page 19):</p>

<p>"Home value is capped at 2.4 times income minus mortgage debt."</p>

<p><a href="http://www.568group.org/docs/gao.pdf%5B/url%5D"&gt;http://www.568group.org/docs/gao.pdf&lt;/a&gt;&lt;/p>

<p>And as I've said, individual colleges may have adopted formulas that deviate from the consensus approach adopted by the 586 Group-- best to check with the college you're applying to and find a FAO that knows his/her stuff.</p>

23

<p>And from "Paying for College Without Going Broke" (Princeton Review, 2007):</p>

<p>"Let's take a family with income of $60K and a home valued at $200K, with a $100K mortgage. At schools that choose to cap the home value at 2.4 times income, the maximum value of this family's home would be 2.4 times $60K or $144K. The colleges will subtract the $100K debt from the $144K asset and decree that the family has equity of $44K...."</p>

<p>"However, let's take a family with a combined income of $60K, a home valued at $300K, and a mortgage of $200K. If the schools choose to cap home value at 2.4 times income, the maximum value of the house for assessment purposes is $144K. The colleges then subtract the mortgage of $200K. In this case, there is, in fact, no equity at all in the home as far as those colleges are concerned."</p>

24

<p>That's great information! I wish I knew Chicago was not using the cap before DS applied. I thought 568 Group = Home Equity Cap. Wrong!</p>

<p>Do you know of any specific college(s) that use this methodolgy? We can't go by the 568 Group list because Chicago is a member of the group and does not adhere to the methodology.</p>

<p>According to the GAO report, a total of 25 schools chose to use some part of the 568 methodology. 7 of thos 25 chose not to use the home equity cap.</p>

25

<p>Sblake7,
In other words, as long as a family has a mortgage greater than 2.4 times income, their home equity will not be counted no matter how much their house worth. Therefore, a 100K income family with 500K savings can buy a 740K house and contribute zero from home equity and savings. On the other hand, a 50K income family who paid off 150K house and saved 50K for children’s education will be required to contribute 10K (5% of 150K+50K) per year. Why 568 group schools think the later family has the ability to contribute $10K more a year (from equity and savings) compared with the former family? Why they think it is fair? Don’t they know that the former family can use the 500K equity to live in a better life than the later one? Thanks!</p>

26

<p>fftd:</p>

<p>The Federal Methodology doesn't consider home equity at all. And either methodology allows a family to convert a reportable asset (checking or savings account, for example), into a non-reportable asset (art, or furniture, or a pricey car).</p>

<p>The policy wonks have hashed out all the variables, and tried to make the formulas as "fair" as possible. The Institutional Methodology, other than the 568 Group Colleges, counts full home equity as an available asset, and that doesn't seem fair either, given that many don't have the current income to qualify in order to effectively tap the full equity in their homes.</p>

<p>So, one could have a wide ranging discussion of the "fairness" of the various formulas that the colleges use. But that, in my view, is a different issue for a different time. It is what it is. The formulas are the formulas we have to work with, and my view was (and is) as a parent that my time is best spent educating myself about how the formulas work, and putting my finances in the best position to maximize my potential financial aid as my kids prepare to apply to colleges.</p>

<p>In your examples the 100K income family with the 740K house and 500K savings: The 500K savings counts as an asset only if it's in a reportable form on the day the Profile is filed. If you're saying they spent the 500K to buy the house, yes, they've effectively sheltered those assets by converting them into unreportable assets (for schools that cap home value as discussed above). There 100K income, however, will be rather harshly assessed, so they won't be getting any free ride.</p>

<p>The 50K income family who saved 50K and owns their house outright (nice going!) would have nearly all their savings sheltered in the asset allowances that the IM provides, if they do a little research and planning. Between the Emergency Reserve Allowance (about 24K for a family of 4), and the Cumulative Education Savings Allowance (about 20K minimum), nearly all their savings is sheltered. The remaining 6K is assessed at only 3% (first $30K gets assessed at only 3%); so their contribution from assets would be only $180. AND, they might qualify for the third asset protection available under the IM- the low income asset allowance, so all of their assets might be effectively sheltered. And with an income of only 50K, after the income protection allowance, the parent's income contribution to the EFC would be minimal. They would end up with a very low EFC-- certainly much lower than the 100K family described.</p>

<p>So the lower income family that saved would get the better need-based financial aid offers. You could come up with other scenarios, however, that wouldn't turn out so well, and the frugal family would get screwed. That's why it's important for parents to research the aid formulas, and find out which schools use which formulas, so they can position themselves to maximize their aid when the day comes to fill out the forms.</p>

27

<p>The whole idea of exempting ANY home equity is inherently unfair. If you have two family in identical financial circumstances, and one invests in the stock market or saves the money, living in an apartment, whereas the other buys a house that goes up in value, the one with the house can shelter the home equity from college aid methodologies whereas the one in the apartment cannot. In addition, the homeowner gets to deduct the interest portion of the mortgage from his taxes (usually a substantial portion in the earlier years), so if the rent is equal to the mortgage payment, the homeowner is enjoying another perk. It all has to do with how we view home ownership. And the person with the larger interest payment (up to a point) gets to deduct larger amount from taxes. None of this really fair if you look at it. </p>

<p>A lot of the schools, including the 568 schools have caps for the home equity even if they are less than 2.4 times the income. This is where the discretion comes into play. Believe me, I have seen a lot of aid packages (and heard a lot of wailing) from friends who thought they were sitting pretty until the PROFILE, and indiv college fin aid app results came in. FAFSA ignores a number of things that those secondary apps include. BC includes pension money, there are schools that include those tuition savings plans that are usually exempt, and there are schools that not only go after noncustodial parents financial but want all the step moms and step dads financials as well. If they audit your financial and see a large check from granddad or great aunt Eunis, they will take that into account. THe discretion part for the fin aid officer is enormous. They can also ignore a heck of a lot too, and it is sometimes inconsisitent from student to student at the same school. Galling when you know someone who sold the college the story that Dad abandoned the kids, when you know he showers money and gifts on them, just doesn't want to pay for college, when you truly have a deadbeat dad with no contact for years. It is not a fair process.</p>

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<p>cptofthehouse, agreed. What I get tired of (here's my rant) is people who saved for college and then want to try to hide those assets when filling out the FAFSA. I have seen posts about moving business assets, and the OP here was about not having to declare equity in a second property. In my mind, if you are well enough off to own more than one piece of real estate that has equity, you should figure out a way to pay for college. And I don't say that because I have sour grapes...we own more than one property and saved for college and are getting nothing from Financial Aid. I feel blessed that I am able to provide this opportunity for my children and absolutely fine about the fact that others are able to receive assistance.</p>

29

<p>I agree wholeheartedly with you, Ebeeee. The rule are right out there, and if can find a loophole that pertains to you, great, go for it. But cheating on any of these things whether it is taxes,financial aid, is stealing, as far as I am concerned, if you get money on that basis, and terribly dishonest, in any case. </p>

<p>Nothing wrong with complaining about the situation. We all complain about things. And the college financial aid rules have enough inequities to generate a lot of complaints. I have a friend who retired early due to some very serious medical problems. He put his savings, pensions, and any other money he could get into some apartments which are what provide his family's income. Well, he was really hit with hard for that ownership. His earnings are what they need to live, and low enough to qualify for some nice financial aid. But when the real estate is hit as assets, that is a problem. Since their income is low, to borrow against those buildings would mean additional loan payments which cannot be afforded at this point. To sell the buildings would not net what they are being assessed as a asset aand would be killing the goose that is laying the income eggs. Those who own their businesses can find themselves in a similar dilemma, though I hear that some relief is here on that front. </p>

<p>As for hiding assets, parents are assessed a bit more than 5% on assets. To withdraw and hide those assets will be a red flag if audited, particularly large amounts. That's an awfully big chance to take, considering the 5% assessment seems fair to me. Unfortunately when it comes to money, too often there are cheaters, and sometimes they do get away with it. The penalties can be severe if you do get caught since FAFSA is a federal form. It can affect aid for you and your family for a long tiem if you get caught cheating.</p>