Home value may have less effect on student aid

In this time of increasing tuition rates, it is getting harder for students and their families… In this time of increasing tuition rates, it is getting harder for students and their families to pay for a higher education.

To help with the cost, students can apply for financial aid at their respective colleges. To do this, students must complete a Free Application for Federal Student Aid form and, usually, a financial aid supplement for their school.

Schools have traditionally looked at the net worth of the student’s family, which includes income, real estate and the value of the primary home, Caroline Hoxby, a Harvard economics professor, said.

From this net worth, the family’s expected contribution to the cost of education is determined. The financial need of the student is then determined by subtracting the expected family contribution by the total cost of attendance. The more net worth a family has, the more they are expected to contribute, and the less financial aid students from that family receive.

“When colleges do look at [the value of the home], it’s a measure of … the savings a family has,” Hoxby said. “It is a form of wealth.”

But “some people feel that [their home] … is not the same as having cash in the bank,” and should not be treated as such, Hoxby said. In order to use their homes to pay for college costs, families would either have to sell them or take out a second mortgage.

“People don’t feel comfortable taking out a second mortgage,” though, because it is essentially another loan to pay off, Hoxby said.

To address this issue, a group of 28 colleges, known as the 568 Presidents’ Working Group, has decided to cap the amount of home equity they would use in determining a student’s financial need.

Named after Section 568 of the Improving America’s Schools Act, the 28 colleges, which include Yale and Columbia universities and the University of Pennsylvania, discussed and agreed upon common principles in determining the financial need of students.

Families will still be expected to contribute as much as 5 percent of their home equity toward education costs, but now the colleges will cap home equity at 2.4 times the amount of the parents’ annual incomes.

Home equity is determined by subtracting what is still owed on the house from its current market value.

For example, if a student’s parents make $60,000 a year and own a home worth $350,000, but owe $50,000 on it, their home equity is $300,000. This home equity would then be capped at 2.4 times their income of $60,000, or $144,000.

So, with this new policy, the family’s expected contribution would be less.

While the policy would not affect families with homes less than 2.4 times their income or families whose annual income, in itself, is too high, it can affect those who own a valuable house, perhaps because of inflation or an inheritance, but don’t make much money.

But Carnegie Mellon University doesn’t take the value of the primary home into account at all, Trevor Rusert, Associate Director for Admissions and Financial Aid at CMU, said.

When a school looks at the value of a home to determine the expected family contribution, they have to ask about the home value in a Financial Aid Supplemental Form designed by the school. The FAFSA only asks about the value of real estate other than the primary home.

“We do not stray from the FAFSA,” said Rusert. “We’ve made a conscious decision to use the government formula, which does not include home equity.”

At CMU, 62 percent of incoming freshmen for this year received an average of $23,000 in financial aid. The average total cost of attendance at CMU is $39,900 a year.

According to Rusert, CMU’s student population includes people from all over the country. By taking home equity into account, it “could negatively impact any students … where there’s a high cost of living,” he said.

Large populations of CMU’s students come from the New York or Washington, D.C., metro area, where the cost of living is extremely high, he added.

“I’m glad that we don’t consider [home equity] at Carnegie Mellon … because I think it makes us more attractive to students,” Rusert said. By not taking home equity into account, and by still offering merit awards, CMU can “compete with Ivy League schools that don’t offer scholarships,” he said.

Suzanne Mccolloch, Pitt’s senior associate director for Admissions and Financial Aid, could not be reached for comment concerning Pitt’s policies. Mccolloch said she would be available for an interview last Friday, but did not answer or return calls that afternoon and has not since.

Pitt’s 2003-2004 Financial Aid Application Supplement asks about the purchase price, current market value, and mortgage amount of the primary home.

Rusert said CMU is the exception, since many colleges do take home equity into account when determining financial need.

“Universities are looking to save money,” he said, and they can do this by looking at a family’s home equity, because it decreases the amount of financial aid awarded.