Still confused about home equity for primary residence - FAFSA and CSS/Profile

Paying for College
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<p>Yes, this is not our first home, and we short-saled our first home back in the recession. So yes, we know that it is due. We’ve never owned a home outright - in fact, we only put down 5% on our first home so we had to pay PMI until we paid off 20%. Note that our first mortgage cost was 75% of our rental, and that was becoming equity not just wasted away.</p>

<p>My dad used to own his home 100%, when I was in middle school my parents paid it off. Then my brothers got into financial trouble, like a few hundred thousand worth, and my dad has almost full HELOC now. I need to keep HELOC space open so I can help my dad when he needs it. And if it came down to my son dropping out of college because I couldn’t pay the bills because of my dad’s situation or my mother-in-law’s situation, I’d see if my son could take a year off and return, with the new FA situation. </p>

<p>It’s a shame, especially in my MIL’s case, because there is no one else in that family with any money remotely near ours (yet my spouse started with zilch except a college education and the student loans with it). The others do their best to stay out of jail, and sometimes that doesn’t work out. </p>

<p>I hope everything is stable at least until my oldest graduates college.</p>

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<p>There were other tax-advantaged college savings programs before 529 plans came into existence.</p>

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<p>Those are not the only choices, and depending on how much (or little) earnings there are, penalties may not be much of a factor. Also, there are certain circumstances in which the 10% penalty does not apply, even if the funds are not used for qualified education expenses.</p>

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<p>You’re not limited to investing in only your home state’s 529 plan; anyone can pick any plan from any state. There are some very good plans out there with low expenses and good investment choices, even for those who are risk averse.</p>

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<p>What is your 401(k) invested in?</p>

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<p>I was not aware of any other college savings plans until I heard about the 529 plan, and something at the cash register regarding saving money for college at some stores (U something?).</p>

<p>I was not aware that I could pick any state’s 529 plan - why are they state-based if you don’t need residency (rhetorical I guess)?</p>

<p>My 401k is 1/3rd blue chip, 1/3rd low-risk, and 1/3rd bonds. I’m too paranoid for anything else. The state’s matching is pretty good, and my contribution is mandated. One of our “dilemmas” is whether to pay more into my 401k (by the way, it’s actually a 403b, but it is the same as a 401k for all intents and purposes, except that it is for government workers) or just pay the minimum.</p>

<p>I’m old enough to know people who keep their money under the mattress :)</p>

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<p>I’m surprised that you, as a college teacher, have not done more research. All this information is out there and very easy to find. Here’s a good place to start:</p>

<p><a href=“http://www.savingforcollege.com/”>http://www.savingforcollege.com/&lt;/a&gt;&lt;/p&gt;

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<p>So, you do own stocks and other investments, you just don’t do the individual stock picking yourself. This is the same way that most 529 plans work.</p>

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<p>I still am missing something.</p>

<p>What is the danger of keeping my HELOC “free” and not putting money from it into a 529, other than “losing” some percentage of potential gains? It’s not like we are drilling the HELOC down going off to Atlantic City or something.</p>

<p>The danger of whittling down my HELOC is that if my relatives need help, both psychologically and in terms of penalties, it will hurt more to take out of the 529.</p>

<p>As for me being a college instructor, it’s not like we have any insight into FA (all I’ve learned is from CC). All I know is that we get asked if students stopped attending our classes, because their FA will be taken away and they will owe 100% of their charges retroactively.</p>

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<p>My point was that as a college instructor, you’re likely smarter than the average bear. Borrowing money, whether it’s through a HELOC, student loans, or some other way, is a much more expensive way to pay for college than a sustained savings program, especially one that’s started when the future college student is very young.</p>

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<p>Remember to conservative assess your home value, there was a website for that but I don’t remember it on top of my head. I remember my house was worth a lot more than that website for estimate.</p>

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<p>I hate to say it, but it sounds like you are robbing Peter to pay for Paul in your family. Your dad paid for his home, but now is in debt because of your siblings? You want to take a HELOC to pay for college but if you need that same HELOC money, your son will need to leave school so you can help your dad with finances?</p>

<p>Your son likely has college options that are affordable for him for all four years. Why not research those, instead of creating a third generation dependent on HELOC debt to get themselves out of emergency situations?</p>

<p>Help your son look for affordable options. My opinion, if you are taking ANY kind of loan for $35,000 for each of four years, the college is NOT affordable for your family. You are creating debt. </p>

<p>You are a college teacher, correct? Do you get a tuition benefit whereby your son can attend your college? Does your college participate in tuition exchange, and are you eligible?</p>

<p>Re: 529s. We have been getting mailings and other info about them for years in this state (CT). And all you need to do is listen to the radio once in a while, and you hear ads. There are frequently things in the newspaper about funding higher education.</p>

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<p>I’ve got to go back to this, because maybe it’s the source of some confusion.</p>

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<p>No. If you take out a mortgage at 5% and pay it back, that’s costing you money, not making you money. If you save a steady amount of money for a future expense, that is making you money, assuming a historical rate of return over an extended period of time (say, five or more years).</p>

<p>If you borrow $140k at 5% over 30 years, the total of your monthly payments over 30 years would be $270,558. So your cost to borrow that $140k is $130,558.</p>

<p>The annualized return of the S&P 500 for the 18 year period from 1996 through 2013 was 8.27%. If you invested $300/month in a low-cost S&P 500 index fund through a tax free investment (like a 529 account) for that period, you would have $148,367 after 18 years. (Fees and expenses will reduce that somewhat.) You would have invested a total of $64,800, and you would have “made” approximately $83k.</p>

<p>Here’s the kicker: if you use your home like a piggy bank to pay for your kid’s college and for some reason you have trouble making the loan payments, guess what? Now you’re in danger of losing your home.</p>

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<p>I agree with some of the earlier posts, but sympathize also. I have 3 children very close in age and will have overlap of 2 in college at the same time over a 4 year period. Our income has been very modest during our entire married life and it was not possible to save for college - we literally purchase most of our clothes from the goodwill and our vacations have largely been visits with family in our home state. there was no way we could have saved $200 - $300 per month per child. We live in a modest 1700 square foot home in a decent neighborhood, which thankfully has decent public schools. We drive 2 cars that are 2001 model year.</p>

<p>My husband got laid off 3 years ago and thankfully he got a new job quickly and is now earning about 30K more than he used to , but benefits are not as good - no pension(didn’t have that before either), higher health insurance costs, no 403B retirement contribution(used to receive 11% contribution from employer). Thankfully we did have an emergency fund and did not lose our home - but it can happen any time to anyone.</p>

<p>$140 K is a lot of home equity to use up, and it does present a real risk to losing your home, or perhaps you might need that equity to help with your parents or in-laws as you say.</p>

<p>Our fafsa efc went from about 20K to 30K with the new job, neither of which we could ever hope to pay. We were lucky to have smart kids who excelled in school (and knowing our college financial situation, we focused on helping them be successful). We looked only at colleges where they could get a lot of merit aid and they got it. D1 is a junior on a full-ride and D2 is a freshman who got full tuition and several smaller scholarships, so affordable for us.</p>

<p>$140K seems like a lot of debt for undergrad. Does your child have more affordable options? I would strongly suggest having your student apply to colleges where big merit aid is more likely. Reaches will not offer any merit.</p>

<p>As a cautionary tale, I also watched my Mother in law use a huge amount of home equity to pay for an expensive private school for my husband’s much younger sister(20 years between them). Her husband left her, she got screwed in their divorce and was barely able to hold on to the house at all(only with the help of one of her sons). She is 73 and still needs to work full time just to make ends meet. The daughter she sent thru the expensive private school is grateful and kind to her mother, but her degree in social work does not earn her a big salary and could have been earned for a fraction of the cost at a state school, and there are good ones where they live.</p>

<p>Be wary of falling into the “only school XX is good enough for my child” or “school XX is my dream school and the only one which will make me happy” traps. </p>

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<p>In an earlier post in this thread, OP mentioned that he/she had “a big mortgage payment,” which leads one to believe that either 1) a lot of house was purchased, or 2) there was a short term on the loan (or a combination of the two). Either way, it sounds like a choice was made in the financing of the house that meant money wasn’t available for other things, such as saving for college. Of course, everyone is free to make their own financial decisions, but spending a lot of money on financing a house and then wondering how you’re supposed to afford $140k in college costs is a bit of a head scratcher.</p>

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<p>I believe OP said a previous home was a short sale - worth less than paid for- during the recession, and lives in NJ where homes are notoriously expensive and property taxes are among the highest in the nation. Housing in NJ generally eats up a much higher percentage of family income than many other states. </p>

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<p>^^^
Very good points, and I’m trying not to be judgmental. The idea that paying for college using home equity loans is preferable to at least some college specific savings, though, is hard to swallow.</p>

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<p>College savings do not require that you pay interest on the amount.</p>

<p>A HELOC or most any other kind of unsubsidized loan will have interest costs to the borrower over time. And a $140,000 loan will have a huge amount of interest over its payback period…likely about the same as the principal.</p>

<p>That just isn’t sound economics.</p>

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<p>I totally agree @MiddKid86 . Trying to fund the entire efc of 35K per year with home equity is very risky, and even that efc might turn out to be too low if colleges applied to don’t meet need. Also, the $5500 in federal loans will be part of the financial aid package you receive, on top of the efc. </p>

<p>OP, consider checking out schools which offer substantial merit/lower priced schools so that you can reduce the amount needed to finance. College expenses can still be a gift to your child without breaking the bank, if you work together on a college list, and you can preserve more of your home equity if you need it to support yourself/family in other ways, retirement, aging parents, etc. Teaching your child about the big financial picture is also a gift.</p>

<p>I personally encounter many families every year whose college bound kids did not get the enough aid(either need or merit based) to attend any school they were accepted to other than the state public, which was only used as a safety, and that they don’t really want to attend. These kids do usually get accepted at a lot of great schools that they spent lots of time and money visiting and applying to that they could not ever truly afford, because they were reaches or matches academically, but that is a formula for little to no merit aid, or meeting need with offers of loans instead of grants. Those kids are crushed and disappointed and their parents feel like they totally let their kids down.</p>

<p>We discussed finances with my kids early in the process to avoid disappointment and put together realistic college lists for visits. They both each ended up with affordable, but still academically challenging choices. We are also lucky to have excellent college counseling at our school who could suggest good schools to meet our financial needs.</p>

<p>Good luck to you OP:) </p>

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<p>OP, I also just noticed that you stated in our original post that you were looking at FAFSA only schools. FAFSA only schools are generally much less likely to meet full need and they will gap you, leaving with more to pay than your efc.Many of those CSS profile schools are much more generous with both need-based and merit aid and your final price tag might well end up less than a FAFSA only school. </p>

<p>D2 did receive some merit aid from our FAFSA only in-state public U, but they did not meed 100% of her need. She got much better offers from several CSS profile schools, including the top 25 private LAC she attends.</p>

<p>What are your child’s stats?</p>

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<p>Starting with your original post, most of what you are supposing is correct. Schools that use only the FAFSA EFC as as definition of need do not use primary home equity values in the asset amount. Bear in mind, however, that not a single school guarantees to meet full need as defined by the FAFSA EFC (I might have missed some special cases, but for the most part, that is the case). Schools that use ANY supplement, including a couple of extra questions on top of the FAFSA COULD be using primary home equity values. If they ask what the net market value of your primary residence is, that is a tip off that might be the case. Though PROFILE schools tend to use primary home equity values, they don’t necessarily have to do so. I don’t know if there are any PROFILE schools that do not include any home equity values off the bat, but it is possible. </p>

<p>It can vary as to how a school uses home equity values. A school can do pretty much what it pleases in terms of how it awards its own money for financial aid, so just about anything goes. Some schools will cap the primary home equity value. It’s usually by multiple of income. You make $50K a year and live in a $300K home that paid off, and that $300K is what you can expect to net on a reasonably quick sale of that home, some schools with an income cap for such a home could be 1.2X or 2.4X your income. Instead of $300K being included in your assets, only $60K (1.2 X $50K) is used for the value of your home at schools where that 1.2X cap is used. The 1.2 and 2.4 figures are what are commonly used, but a school can use anything it wants to use, and there may be situations where there are more complicated caps and formulas used. You can ask a school’s financial aid office what it does with primary home equity values. Whether you get a straightforward answer easily or not, is a whole other story. </p>

<p>The important thing to remember through all of this, even with some schools guaranteeing to meet full need, how the NPC comes out, is that it’s really up to the school. Some NPCs have slack in them, some are not so accurate and there are special situations that are not all that uncommon that render NPCs just about useless (NCPs,for example, owing a part of a business, unusual investments, etc, etc). But with the NPCs, more of us can come up with some idea as to what colleges expect us to pay. The calculators are most accurate, as a rule, at schools that meet full need and don’t have much or any merit money to offer. </p>

<p>How you configure your assets, your mortgage , primary home arrangements, are all part of your particular financial situation and going all out to try to “beat” the college costs, isn’t necessarily going to net you the best results. Colleges differ greatly, and there are a lot of things in the picture for a particular family, other than college payments. </p>

<p>Most schools are pretty good about keeping financial aid packages commensurate with what is first given if family finances are the same with some increase each year as the student is often expected to take on more of the cost. </p>

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<p>What is the average college related debt for a family making $150,000 per year? Do they honestly think a family like that has $140,000 cash in the bank?</p>

<p>Where does it come from if not a loan?</p>

<p>Answer: as in above,
1 - from savings, hopefully there is some built up for 18 years
2 - from kids working and saving it. Especially in the summer.
3 - out of your weekly paychecks - schools let you make monthly payments through Sallie Mae
4 - grandparents, HS graduation gift money
5 - from curtailing all the things you used to enjoy - vacations, home repairs, pricey haircuts, restaurants, Nordstrom
6 - federal student loans
7 - by reducing the contribution you were making to 401k or IRA</p>

<p>Remember, you don’t pay the whole 4 years at once. At $150,000, to me, you’d not want to take on more than about $30,000 in parent debt. And if you have more kids coming up, try not to take on any debt at all. You want to financially sound for all your kids.</p>

<p>Also, if your financial situation does get better, you probably WILL lose your need based aid. Go to the school that gives you MERIT money.</p>

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<p>I think if you have drawable HELOC then colleges may expect you use that money to fund your college costs.</p>

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<p>Cool weather…how would the colleges know that you have a draw able, but unused HELOC? Especially FAFSA only schools that don’t even ask a question about your primary residence.</p>