With a Tax Deduction Gone, Is Home Equity a Smart Way to Pay for College?

"For parents facing the prospect of six-figure college bills, every bit of savings and every last tax break helps. So as Americans digested the details of the tax bill that passed last month, it was natural to lament the end of deductions for interest people pay on home equity loans. After all, if you don’t have enough savings but have been paying down your mortgage, it’s awfully tempting to borrow against your house to help pay for college," The New York Times reports. 

"Many colleges know this and seem to count on it. In fact, scores of the more expensive private ones ask about home equity during the financial aid process and factor it in to what they ask you to pay.

The change in the tax bill begs two questions then, one immediate and one that is timeless. Will the colleges ask less of some families now that the home equity deduction is no longer available? And was borrowing against the value of your home to pay college tuition a good idea in the first place?

As always with college aid and family financial behavior, there is a big difference between what the schools’ formulas say about a family’s ability to pay and what that family does in practice. The federal financial aid system, which governs things like Pell Grants and federal loans — and which families access by filling out the Free Application for Federal Student Aid, or FAFSA — does not take home equity into account.

A few hundred colleges, mostly the more expensive private ones, ask families applying for financial aid to fill out an additional form known as the CSS Profile. It does ask about home equity. The schools take different approaches to baking that number into their overall equations for making financial aid offers, though many will also use your income to place a cap on the amount of home equity they factor in.

...So will schools change their financial aid formulas so they ask a bit less of families with home equity? Justin Draeger, president of the National Association of Student Financial Aid Administrators, said he was not aware of any colleges that were preparing to change their approach. His organization has not issued an opinion on whether members should do so.

Not every family will be hurt by the lost deduction, and some borrowers could come out ahead overall because of other tax changes. Meanwhile, home equity lines of credit for people with good credit histories might cost 4.5 percent in annual interest right now. Even absent the tax deduction, that remains a good deal compared with one other alternative that colleges often recommend: Federal PLUS loans, which come with a 7 percent interest rate."

NASFAA's "Headlines" section highlights media coverage of financial aid to help members stay up to date with the latest news. Inclusion in Today's News does not imply endorsement of the material or guarantee the accuracy of information presented.


Publication Date: 1/16/2018

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