How would a paid off mortgage impact financial aid?

[disneysteve]

I've been running numbers and toying with the idea of paying off our mortgage before our daughter enters college in 4 years. We could accomplish that through our regular cash flow without touching existing savings but it would mean stopping some contributions to savings that we currently make. We would still be able to max our Roths and still have 50% of my wife's salary going to her 401k but that would pretty much be it. Everything else would be going toward the mortgage. The result would be about $1,200/month in free cash flow when college starts which could be used to pay college expenses (in addition to what is in her 529 account).

I can run all the numbers just fine on my own but what I'm wondering about is how all of that might impact our eligibility for financial aid. Would it be better to have more in savings and still have a mortgage or a paid off house and less in savings? I don't know how the aid calculations measure those things.

[swanson719]

Being a full time college student, my experience with student aide is that it is determined by your net worth compared to the annual cost of the college attended. Net worth on the FAFSA, etc. includes non liquid investments such as Roths, 401(K)s, rental property, etc. Annual income plays a factor as well, but I don't believe available income is viewed differently than if it were going to the mortgage. I don't know any of the standards concerning student loans.

That being the case, it would seem that it doesn't make a difference if you pay off the mortgage or have the money in savings because it will increase your net worth either way.

[jIM_Ohio]

Steve-

I read an article recently which suggested this strategy:

1) Get a HELOC
2) take cash from the HELOC and pay for school (that cash is hidden from the FAFSA because it does not change net worth)
3) then each year just recycle that payment (so pay back HELOC over 12 months, tap it again and repeat).

The only issue is this works for sophomore to senior year, you have to foot the bill for freshman year (if I understood the math right).

So following the logic above, you have to decide how much college would cost, could you pay it back in time ($1200/mo is about $14k per year)

You get a few kickbacks here.
Because the HELOC is cash, you are eligible for the hope credit and lifetime learning credit, so $2k comes back to you each year.

Plus you get 15% of the HELOC interest back on tax return (its not a lot on 14k, but its something, I have this around $170 if 14k loan was 8% and paid back within 1 year).

It has been years since I looked at FAFSA. If I find the article on another forum, I will link you to it here. I do not know if savings counts more than net worth or not.

[jIM_Ohio]

Gaming the Financial-Aid System - WSJ.com

Long-Term Strategies
For financial-aid purposes, the most crucial year is the one that begins on Jan. 1 while your child is a junior in high school—the "base income year." During that time, and throughout college, income earned or received is counted more heavily than assets in the financial-aid formulas. Try to avoid taking retirement distributions or realizing large capital gains during that period. Load up on contributions to retirement plans before the base and college years, because assets in those accounts aren't counted in the aid formulas.

Some families may want to defer converting an IRA to a Roth IRA, even though new laws now make it possible for wealthier taxpayers to take advantage of the conversion. Many financial-aid offices may use the income generated from the conversion to reduce the students' eligibility for need-based aid—unless parents appeal the offer through professional judgment.

Since financial-aid forms ask parents to list the funds in their accounts the day they fill out the forms, aim to draw down those accounts as much possible before filing out the paperwork. If you were already planning to make a big purchase—say, a new car or computer—just buy it sooner.

Spend down assets in the student's name first, since aid formulas count student assets more heavily than parental assets. Custodial accounts, such as UTMAs and UGMAs, can also be liquidated with the proceeds transferred into a custodial 529 plan, which are currently counted as a parent asset on the Fafsa form.

Some families may want to consider margin loans, passbook loans (which use savings accounts as collateral) or a home-equity loan to help pay for college since such loans reduce net assets in the aid formula, says Mr. Chany. If, for example, you have a $20,000 stock portfolio and a $5,000 margin loan and have no other investments to report, you'd report $15,000 as the figure for your assets on the Fasfa. A major drawback: If the stock market declines drastically, you may be asked to put up additional stock as collateral or pay back part of the margin loan.

[jIM_Ohio]

My conclusion would be this

use the aggressive payoff up thru junior year in college, then try to use 401k or other deferred savings plans if they are available. If not available, just pay off the mortgage.

Income means more than assets, but it does not say if its 51-49 or 80-20.

[MonkeyMama]

Does it really matter? I am just curious if you would even qualify for financial aid? Just wonder if it makes a hoot of a difference, either way.

I am surprised to see home values considered in net worth, but probably explains a lot. Living in an expensive region, if you own a home and make an average wage, you are far too "welathy" for any Federal aid. Which leaves my attitude as "it won't apply to me so who cares about it." (Since we NOW live in a lower cost region more, maybe I should consider implications of financial aid? It is interesting to see what is discussed, above. Just not something I have dealt with at all personally or professionaly, due to Federal standards being so out of whack with local wages and home costs. This is coupled with an abundance of low-cost public colleges - which may be a big part of the equation. I know few people, even wealthy, who went to colleges that cost any money).

[MonkeyMama]

"The Federal need analysis methodology does not consider the equity in the family's primary residence. So to maximize your eligibility for Federal aid, you could use your cash and other included assets to prepay part of your mortgage. Many private colleges and universities, however, do count your home as an asset when allocating institutional funds. If so, it may be worthwhile to get a home equity loan to provide funds for your children's education. Not only are the interest payments tax deductible, but the loan reduces your assets. "

Looks like the answer to your question is - it depends...

FinAid | Financial Aid Applications | Maximizing Your Aid Eligibility

[disneysteve]

1) Get a HELOC
2) take cash from the HELOC and pay for school (that cash is hidden from the FAFSA because it does not change net worth)
3) then each year just recycle that payment (so pay back HELOC over 12 months, tap it again and repeat).

The only issue is this works for sophomore to senior year, you have to foot the bill for freshman year (if I understood the math right).

That's interesting. I may just do that. Thanks.

[zakity]

Hmmm... This probably means that I should hold off on getting a job for a few years. Bummer! I have three of them coming upon college in the next 6 years.

[jpg7n16]

You could also run a simulation through the FinAid calculator:

FinAid | Calculators | Expected Family Contribution (EFC) and Financial Aid

In case one, keep your X amount in cash/liquid assets. In case two, run the simulation by adding X to the equity in the home, and taking it out of cash/liquid assets.

Compare results to see which is better.

[snshijuptr]

Does it really matter? I am just curious if you would even qualify for financial aid? Just wonder if it makes a hoot of a difference, either way.

Always apply for FAFSA. It is necessary for students to get Work Study money which will practically guarantee them a job on campus (federal government foots over half their salary!). Also it is necessary for many scholarships. In addition, the government is constantly changing the rules so more people receive aid. It does not take that long to fill out and affects so many things. Plus next year you can check a box and FAFSA will import you efiled tax return. Also it gets easier every year because they save you previous information.

[sm808]

Always apply for FAFSA. It is necessary for students to get Work Study money which will practically guarantee them a job on campus (federal government foots over half their salary!). Also it is necessary for many scholarships. In addition, the government is constantly changing the rules so more people receive aid. It does not take that long to fill out and affects so many things. Plus next year you can check a box and FAFSA will import you efiled tax return. Also it gets easier every year because they save you previous information.

Depending on the situation - you can have the child file their own FAFSA - without your information included to qualify for more aid. However, this will not work if you claimed them as a dependent on the previous years tax return (the year that FAFSA requires.) Obviously this varies by situation, but you DO need a FAFSA not only for finaid, but for scholarships, students loans, etc.

[snshijuptr]

One issue with the HELOC or other non-student loan payment strategies is that they are not eligible for loan forgiveness for teaching, military service, community service, or come what may. PLUS loans (parent loans) rarely count for these programs, but Stafford, Perkins, and other loans are eligible.

For instance, the California teacher forgiveness program pays up to $19,000, but will not reimburse Perkins, PLUS, home equity, or private loans.

So don't reduce your students debt with your own. Even if you are both sure of their future job. Things change drastically in college (I started out wanting to be a Nuclear Physicist, and I'm now an Education PhD).

[Shzasaver2]

There is a FAFSA forecaster that can be used to determine your financial contributions. I found the only way to qualify for anything other then loans was to have income under 40K a year and very little cash savings. This was through the gov site not the one listed through MIT posted in an earlier message.