Universities Are Changing Their Views on Home Equity

[Apr 7, 2009.]

 

As real estate values continued to climb earlier this decade, many parents would utilize the equity in their home as a way to help their children pay for college. Some universities would include a percentage of the parents' home equity into their financial aid applicants.

A lot has change in recent years as housing prices continue to decline and banks tighten lending guidelines. Universities are now forced to take a more realistic view of home equity and how that may impact the financial aid received by a particular student.

Of the roughly 2,000 four-year colleges nationwide, only about 250 require applicants for financial aid to disclose a home’s value and outstanding mortgage debt. That disclosure comes in the College Scholarship Service’s Financial Aid Profile, a supplement to the Free Application for Federal Student Aid.

Universities must also contend with the ability of homeowners to obtain access to their home equity, assuming they still have some. They understand that not all banks are willing to lend in the form of home equity loans or home equity lines of credit.

“If you have a bunch of equity in your house and the value of your home drops, then you can’t draw on that value to help pay for college,” Haley Chitty, director of communications for the National Association of Student Financial Aid Administrators, said in an article with the Badger Herald. “When real estate prices were increasing fast that was an extra source of money parents could tap into, but as the real estate has gone down that’s not an option for a lot of parents and students.”

Students seeking financial aid must now work to lower the expected family contribution based on the school's formula and/or seek alternatives.

Some older parents are now turning to reverse mortgages. Unlike conventional loans, reverse mortgages require no monthly payments, and the money doesn’t have to be repaid until a home is sold, or the borrowers move out. They are much easier to qualify for and give the parent the ability to leverage the equity in their home during a difficult time.

 

About Author:

Chris Rocks is the Regional Director of the National Credit Federation (NCF), a consumer advocacy group that assists small business owners and consumers overcome debt and credit challenges.