How the Value of Your Home Affects How Much You Pay for College

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It’s rare for colleges to offer a peek into the complex formula they use to determine how much they’re going to ask families to pay.

But earlier this month, Stanford University did just that, announcing that it would no longer consider the amount of equity a family has in their home when determining how much the school expects them to contribute to the cost of college.

The move illustrates the challenges that even middle- and upper-middle class families face paying for school as tuition costs have skyrocketed over the past several decades, and wages remained relatively stagnant. Students from families earning $125,000 a year or less can already attend Stanford tuition free. (A Stanford spokesman said those are the families the new policy will benefit the most.)

But Stanford’s announcement also highlights the opacity of the college financial-aid process with different schools taking varying approaches to evaluating the same family’s ability to pay. That can leave parents and students confused about where they stand as they approach one of the largest investments they’ll every make.

“Students and families don’t generally seem to be terribly aware of it,” said David Hawkins, the executive director of Educational Content and Policy at the National Association for College Admission Counseling. The idea behind considering home equity is so families could theoretically take a loan against it to pay for school.

“A lot of times I liken the college admissions process to the wedding industry—you’re not paying attention to it your whole life,” Hawkins said.

Considering home equity is rare

That Stanford ever considered home equity makes it a relative rarity among colleges, experts say. The Free Application for Federal Student Aid, the form provided by the government to determine a family’s ability to pay for college, doesn’t include equity in a primary residence in its calculation.

“That’s an acknowledgment of a public policy that you shouldn’t necessarily have to rob yourself of your home equity, which many people think of as a retirement asset,” said Andy Lockwood, a financial-aid and college admissions counselor in Long Island, N.Y.

Wealthy families can look poor on paper

But roughly 200 schools, many of the most elite in the country, also use the CSS Profile, a form provided by the College Board, to determine aid eligibility. The Profile, as it’s known, includes questions about home equity. Many of the schools that use the form, do take that equity into account, but in different ways.

For example, before its recent change, Stanford capped the amount of home equity it considered relevant to the financial-aid calculation at 1.2 times a family’s income. Other schools may use higher or lower multiples of income. The differences in formula can mean potentially thousands of dollars more parents and students would be expected to contribute to college costs.

Schools that use the Profile are often looking to get a more detailed picture of a family’s ability to pay for college, said Mark Kantrowitz, the publisher of SavingforCollege.com and a financial-aid expert. The FASFA has less than half the number of questions featured on the Profile.

Schools “use the profile because they want to prevent wealthy families from looking poor,” Kantrowitz said. “They’re looking at all the potential loopholes in the FASFA and saying we want to count this and this.” Those extra factors include regional cost of living differences and assessing the assets of any parent in a child’s life, whether they’re custodial or not.

Many of the colleges with the most generous financial-aid policies for low-income students use the Profile, Kantrowitz said. By getting a more detailed picture of a family’s finances, these schools are able to determine who qualifies based on “their definition of financial need rather than the federal definition of financial need,” he said.

Looking at home equity can give a skewed picture of a family’s resources

Though some schools may still expect that equity in a home puts parents in better position to pay for college, the reality is many can’t realistically tap into it. For families that live in high-cost areas an increase in equity may be the result of growth in the value of the home, not that the family paid down more of the mortgage, Kantrowitz said. In that case, it’s not realistic to expect parents to be able to afford payments on a loan that’s the size of the equity in their home, he said.

What’s more, families in these types of situations are often “tapped out” with mortgage and property tax payments, said Lynn O’Shaughnessy, the author of the College Solution: A Guide for Everyone Looking for the Right School at the Right Price.

“In a way it’s unfair that schools use home equity because, hey, you’ve got to live in your house,” she said. “One reason why elite schools can do this is that most of the students that come to their schools are very wealthy, they’re going to pay full price because their income is so high.”

Still, there are steps families can take if they want to be mindful of home equity’s effect in the college financial-aid process, experts say:

Find out if the schools you plan to apply to even count it: There’s no central database of schools’ home equity policies, but there are a few resources that can provide clues. Edmit, a website that helps families understand college costs, features a free calculator parents and students can use to get a sense of how their home equity may affect how much they’ll pay for college.

O’Shaughnessy also keeps a list on her site based on information from Paula Bishop, a Bellevue, Washington-based financial aid advisor.

Families can simply ask the schools they’re interested in about their policies, though it’s not always easy to get an answer, Bishop says. If a college won’t share its policy then families can play around with their net price calculator — a tool colleges are required to have on their website that shows how much families in different financial circumstances might pay — to see if they can get a sense of how home equity factors in, O’Shaughnessy said.

“If you’ve got a family that’s got a house that’s worth a lot of money and you’re going to get knocked out of the ball game with all of this home equity that’s something you should know ahead of time,” she said.

Make a college list with these considerations in mind: Sabrina Manville, the co-founder of Edmit, says they always advise students to create a list of colleges that will offer them a range of outcomes. The list should not just prompt students to ask themselves the question, “Will I get in or not?” They should also ask if they can afford it, she said.

But don’t knock schools off the list just because they consider home equity: The financial-aid process is largely income-driven, Hawkins said, so a family’s home equity may not wind up making that much of a difference in their aid package, even if a school considers it. “It certainly wouldn’t be advisable to rule out a college before you’ve even applied,” he said.

Prepare to appeal the award: Families who can’t realistically tap their home equity to pay for college, but believe it could be counted against them, can prepare ahead of time to appeal their financial-aid award, Lockwood said.

In some cases, he’ll advise clients with a lot of equity in their home and a low income or a recent business loss to make an argument to colleges after they receive their financial-aid award that they couldn’t possibly use the equity as a resource to pay for college because of strict underwriting standards.

“Sometimes we’ll tell clients to get a rejection [from their lender] ahead of time,” he said.

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