Home Equity Loans and College Financial Aid

If your child is going to apply for college over the next couple of years, you’ve probably considered several different ways to pay for that. For many families, financial aid will be an important part of that calculation. Across the country, families spent $26,373 on average to pay for college during the 2020 to 2021 school year, according to a 2021 survey by Sallie Mae and market research company Ipsos. Almost half of that amount (45%) came from financial aid.

Depending on your circumstances, there may be other options when it comes to raising the money for college. One of these is the equity you own in your home, which you can access through a home equity loan or a home equity line of credit. Either can allow you access to cash that you can put toward college expenses.

But how do these two funding sources interact? Does having a home equity loan affect your eligibility for financial aid? In this article, we’ll answer both questions.

Home Equity and College Financial Aid

When it comes to assessing you (or your child) for financial aid, there are two main tools that colleges use: the Free Application for Federal Student Aid (FAFSA) and the College Scholarship Service (CSS) Profile. Each treats your home equity differently.

The FAFSA requires information on the amount of cash you hold in savings and checking accounts but doesn’t directly consider your home equity when it comes to your eligibility for college financial aid. The FAFSA counts cash, bank accounts, all kinds of investments, 529 plans, prepaid tuition plans, and Coverdell accounts, among other things, as potential money sources that a family can tap to pay for college. Student assets increase the expected family contribution (EFC) to college costs by 20%. Parent assets increase the EFC by up to 5.64%. The value of the house you live in and the proportion of it you own don’t make any difference in the aid you will receive if the college you or your child is applying to uses the FAFSA.

The CSS Profile is a little more complicated. This tool does include the equity you own in your home, alongside the value of your cash accounts, when calculating the EFC to college costs. The complexity here is that every school that uses the CSS Profile uses it slightly differently and imposes a different cap on the maximum amount of home equity that will be considered. 

Some schools, for example, cap the amount of equity that counts toward the EFC as a multiple of your income. So if your family income is $75,000, the school might only consider equity up to double your income, making the maximum equity that will count toward the CSS Profile $150,000. Each college is different, however, and it’s important to understand how your chosen colleges work with the CSS Profile before you commit to one. Edmit, a college advising company, provides a calculator that can help you to make this comparison.

Using a Home Equity Loan to Pay For College

Though there are differences between the ways that the FAFSA and the CSS Profile deal with home equity, they are similar in one important regard—both include cash as part of your assets. If you take out a home equity loan, you are converting your home equity into a lump sum of cash. This means that if you take out a home equity loan before you apply for college financial aid, no matter which assessment tool your college uses, you’ll have to count this cash.

If you want to use your home equity to pay for college and get around this potential problem, there are several options open to you.

If the college you or your child has applied to uses the FAFSA, you can apply for a home equity loan after you’ve filled out the FAFSA form. This means that the cash you’ve received from your home equity loan won’t count toward your EFC. This is possible because the FAFSA is based on your “prior-prior year” assets—that is, it’s based on the tax year before last year’s academic year, and thus on income information from two years ago. Because of this, your home equity loan won’t count toward your financial aid eligibility until two years after you’ve taken it out when you or your child are already in the third year of college. 

The other option is to take out a home equity line of credit (HELOC) rather than a home equity loan. HELOCs allow you to draw as much (or as little) home equity as you need, albeit at variable interest rates. This allows you to draw as much as you need for college tuition without having a large amount of cash in your bank account that may affect your financial aid.

Of course, neither of these approaches will work if a college uses the CSS Profile because in that case, the equity in your home will count toward your EFC whether you have taken it out as a loan or not.

The Bottom Line

There are two main tools that decide on your (or your child’s) eligibility for college financial aid: the FAFSA and the CSS Profile. The FAFSA doesn’t take into account home equity. The CSS Profile does, but each college has its own rules about how much home equity counts when it comes to financial aid. Both systems take into account cash that you hold in checking and savings accounts. 

If you are looking to use your home equity to finance college, make sure you apply for financial aid before you take out the loan; otherwise, the cash will count toward your assets. Alternatively, you can take out a home equity line of credit (HELOC), which allows you to be more flexible when it comes to drawing on your home equity.