Parents of college-age children used to be able to count on home-equity loans to help pay tuition, but this is no longer the case with housing values sliding and the mortgage market imposing much tighter restrictions on loans.
As a result, educational institutions that once considered a house as a college fund of sorts are taking a more realistic look at home equity’s role in the financial aid equation.
“With so many people up against the wall with declining home values,” said Philip Day, president of the National Association of Student Financial Aid Administrators, “the issue of using home-equity loans for tuition is almost rendered moot.”
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.
Institutions that require the Financial Aid Profile are typically costlier, and wealthier, with endowments large enough to sustain a supplemental financial aid program. Traditionally, these schools would ask parents to contribute 5 or 6 percent of their home’s equity to the tuition.
As real estate values climbed in the early part of this decade, colleges started to back away from that formula, because it forced many families of otherwise modest means to cover too much of the cost of tuition. About two dozen of the nation’s more affluent colleges, like Columbia University and the Massachusetts Institute of Technology, capped the amount of home equity that they would consider available for tuition.
If an applicant had, say, $500,000 in available home equity and the household income was $100,000, some of these colleges would consider only $120,000 of home equity in their financial aid calculations, or 1.2 times the family’s income. Others would multiply the household income by 1.5 or 2, instead.
Some schools, like Sarah Lawrence College in Yonkers, N.Y., have not opted for a cap. But now that home values are lower, and families cannot easily qualify for home-equity loans, applicants are getting a break in other ways. “We’re seeing less equity available now,” said Heather McDonnell, the director of financial aid, “so our expectations for families are down.”
McDonnell said that a household with an adjusted gross income of about $100,000, and $150,000 in available home equity, had been expected to use roughly 5.65 percent of that home equity for a year of tuition. That amounts to about $9,000 of Sarah Lawrence’s tuition and fees, which exceed $50,000.
But McDonnell says she and industry colleagues understand that home equity is now harder to access (although such loans are attractive to some borrowers, because they are tax deductible). Banks will often deny second mortgages even to those with lots of equity if borrowers have poor credit scores or if their income consists heavily of commissions or bonuses.
In such situations, McDonnell said she would lower a family’s expected tuition contribution and either lobby for a larger grant from the college or recommend other loan options.
Rick Darvis, a founder of the National Institute of Certified College Planners in Syracuse, said that consumers were increasingly hesitant to use home equity for tuition, because “most of them may want to use it to survive themselves until this economic crisis is over.”
He noted that some older parents (at least 62) are instead considering reverse mortgages, which also convert the equity in homes into cash. 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.
“It’s probably not a smart idea to do it,” Darvis said, adding that in such cases the children might bear more of the financial burden of tuition.