Before Applying To College - Prepare For How Equity In Your Primary Home and Rental Properties Could Affect Your Child’s EFCSubmitted by Miller Financial Group | Red Oak Iowa Financial Advisor on January 16th, 2020
Before Applying To College - Prepare For How Equity In Your Primary Home and Rental Properties Could Affect Your Child’s Expected Family Contribution.
By: David Eads, MBA
FAFSA-Primary Home and Rental Property There are two main formulas used to calculate the Expected Family Contribution (EFC), aka the amount families are expected to be able to pay each year for students attending college. The majority of schools use the FAFSA. Currently, the FAFSA does not factor any equity you have in your primary residence into the EFC calculation. However, the same principle does not apply towards rental properties. The FAFSA considers rental properties as investment assets. Consequently, the equity you have in rental properties will be assessed at 5.64%. For example, if you have $100,000 equity in a property it will raise the student’s EFC by $5,640.
CSS Profile - Primary Home and Rental Property
The second formula used for calculating EFC is known as the CSS Profile. The CSS Profile is used by roughly 400 schools throughout the country. Schools that use the CSS Profile may factor in the equity of your primary home into the EFC calculation. However, just because a school uses the CSS Profile, doesn’t necessarily mean that it will choose to factor in your home equity. Each school can choose whether they want to ignore the equity, assess it at 100%, or cap the assessment at a certain percentage of income. The CSS Profile assesses parental assets at 5%. Therefore, if a school chooses to asses the equity in a primary home at 100% and they have $100,000 in equity, that would raise the EFC by $5,000. Similar to the FAFSA, the CSS Profile will also consider rental property a parental asset and will assess the equity at 5%.
You may be wondering if your rental property will be left out of the EFC calculation if it is considered a business asset and not an individual asset. Unfortunately, the likely answer is that it will still be factored into the EFC. For the property to be left out of EFC calculations it must be titled under the business itself as well as have additional services provided outside of strictly renting.
Parents’ Educational Savings and Asset Protection Allowance Currently, the “Parents’ Educational Savings and Asset Protection Allowance” allows parents to shelter a certain amount of their nonretirement assets from being calculated in the FAFSA EFC. Now the reason I say currently is because it is possible that soon this allowance will be phased out because it has continually been lowered year after year. The allowance considers if there are one or two parents and the age of the oldest parent. For 2020-2021, a two-parent household with the oldest parent being 50 could shelter $6,300. This means that out of all the parent’s nonretirement assets they could subtract $6,300 from the total before calculating the EFC. Let’s look at our FAFSA example we used previously. We will assume that the parents only had the rental property equity of $100,000 and no outside nonretirement assets. They would be able to take $100,000(home equity)-$6,300(sheltered amount) =$93,700. Now the rental property portion of the EFC would be calculated using the $93,700x5.64%=$5,284.68.
It is important to note that there are many factors outside of your primary home and rental properties that are used to determine your EFC. I understand that there are many complexities to college aid process and would like to offer to help you determine your EFC. If you would like more information, you may schedule a meeting with David Eads face to face, online, or by phone by calling 402.991.9020 or by going to the following link: https://go.oncehub.com/davideads
David Eads, MBA and Financial Advisor at Miller Financial Group, Inc., focuses on late stage college planning. David lives in Bellevue, NE with his wife and daughter. “David Eads is not a lawyer, for legal advice or in depth information on laws and regulations please contact a qualified attorney.”
Dan Miller, David Eads, Kaleb Robuck, and Marcus Taylor are an investment adviser representative of and securities and advisory services are offered through, USA Financial Securities Corp. Member FINRA/SIPIC. A Registered Investment Advisor located at 6020 E Fulton St., Ada, MI 49301. Miller Financial Group is not affiliated with USA Financial Services.