Author Topic: Payoff Mortgage for FAFSA?  (Read 516 times)

Snowman99

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Payoff Mortgage for FAFSA?
« on: September 19, 2017, 01:58:53 AM »
We've been reading about preparing finances for college expenses, and we learned that FAFSA does not count certain assets in calculating the "expected family contribution." One of these assets is the primary residence.

Our kids are young and far off from college.  Just curious if there are people paying down their mortgage debt to reduce their overall countable assets on the FAFSA application.  With mortgage interest rates so low, is this a strategy worth considering?  Just curious as to what the benefit is if anyone knows. Thanks.

Dicey

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Re: Payoff Mortgage for FAFSA?
« Reply #1 on: September 19, 2017, 05:43:25 AM »
Wait, you mean they don't count a paid-off mortgage? I'd guess it would be just the opposite. Can you provide more details, please?
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Snowman99

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Re: Payoff Mortgage for FAFSA?
« Reply #2 on: September 19, 2017, 06:18:24 AM »
FAFSA doesn't take into consideration your primary residence, but they do take into account your taxable investment accounts, bank accounts, etc.- anything save for retirement accounts and some other assets.

Accordingly, if you are trying to maximize financial aid for your kids, and if you have a $100k balance on your mortgage and $100k in your taxable, does it make sense to just pay off the mortgage?  Does this make sense if your mortgage interest rate is low at like 3-4%?

ManlyFather

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Re: Payoff Mortgage for FAFSA?
« Reply #3 on: September 19, 2017, 08:34:47 AM »
Your kiddos can benefit from the FAFSA in only two ways:

1. Grants ("free" money)
2. Loans (subsidized interest and unsubsidized interest)

If you own a home, or can liquidate your taxable investments to payoff your home essentially means you make too much money for your kiddo to get grants.  Sorry, but these are extremely rare and students who actually NEED these grants don't get them.

I would ignore what your investments/debts would do to your kids' FAFSA, and just do what's best for you.  Chances of getting grants are extremely slim (essentially a 0% chance if the parents have any assets).  I speak from experience.

You may want to consider how/if you will contribute to your kids' higher education, and whether you want to let them know ahead of time that you will contribute.  Personally, I will be contributing, but I won't disclose so ahead of time (sometimes students study harder and value their education more if they feel they have to work for it instead of just getting it handed to them).  This is a separate discussion, though.

reeshau

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Re: Payoff Mortgage for FAFSA?
« Reply #4 on: September 19, 2017, 08:37:33 AM »
I am a ways off from this, too (2 year old) but it's an interesting idea.

The expected contribution for parental assets is up to 5.64%.  So, in your example, $5,640 per year is at risk from the $100k.  So, there is a potential benefit of 5.64% + 3% mortgage = 8.64% per year, for four years of college, and 3% thereafter.  As a guaranteed payback (that is, if you would are not otherwise disqualified from assistance due to income, etc.) that seems pretty good.  If all you had was $100k taxable, though, I would not think that is worth the reduction in liquidity.  It also does not beat the return you could get from that $100k if it was invested in a stock mutual fund, particularly over the long term.

lhamo

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Re: Payoff Mortgage for FAFSA?
« Reply #5 on: September 19, 2017, 09:44:45 AM »
This article in Forbes provides a pretty good overview of how the different formulas work -- there are indeed ways to gain the FAFSA, which is used by most public universities, by sheltering assets in the primary residence,  but if your child wants to go to a private university that uses the CSS Profile that strategy won't work, as the CSS looks at both home equity and business assets more closely than the FAFSA does:

https://www.forbes.com/sites/troyonink/2017/01/08/2017-guide-to-college-financial-aid-the-fafsa-and-css-profile/#55c85a5a4cd4
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