Will we mortgage a chance at college financial aid?
Like many financial decisions, paying off the mortgage early comes with trade-offs.
On the plus side, it would give me considerable pleasure to retire the debt.
Our mortgage payment is our biggest single monthly expense, and it would be a load off our minds to be done with it. We would have the freedom to do other things with the money. In general, I like having more options.
On the other hand, our mortgage is a 15-year note at 4.5%. Historically speaking, that's cheap money, even if we aren't paying the record-low rates offered last year. It's not likely that we'll be able to borrow money this cheaply again.
Our kid is 11, clearly college bound, and I know that financial aid depends greatly on our family's income and assets. There's no point in paying off a mortgage now, only to have some college tell me that it expects us to take out a home equity loan — at more than 4.5% — against that asset, in order to help pay the kid's college expenses.
I had no idea if this is something I need to worry about. So I called Mark Kantrowitz, a financial aid expert who is senior vice president and publisher at Edvisors, a Las Vegas-based firm that runs websites about planning for college.
There are two financial aid applications, Kantrowitz says: the Free Application for Federal Student Aid, better known as the FAFSA, and the CSS/Financial Aid PROFILE. Anyone who wants financial aid, including state and federal grants, fills out the FAFSA, which determines a student's eligibility for loans and other need-based aid.
The PROFILE is an additional application that about 250 mostly private colleges use in addition to the FAFSA, Kantrowitz says. The PROFILE is more detailed, more invasive and designed to prevent wealthy students from making themselves look poor on paper.
A family's "principal place of residence" — in our case, this house — doesn't count as an asset where FAFSA is concerned. That makes paying down the mortgage a potentially great strategy.
"Paying down mortgage debt on the family home may improve eligibility for need-based aid on the FAFSA, by making the cash effectively disappear into a nonreportable asset," Kantrowitz says.
The PROFILE treatment isn't as favorable. It does consider the amount of equity a family has in its home and caps the value of that equity at two to three times the family's annual income. Our house is probably worth less than three times our annual income.
Still, the PROFILE is a secondary financial aid document, and the small number of colleges that use it makes it less important than the FAFSA.
Other real estate does count on both the FAFSA and the PROFILE, Katnrowitz says, with its net value calculated by the amount of equity the family has in it. If you've got a vacation home that's worth $200,000, but you owe $100,000 on the mortgage, then the property value is $100,000, or the difference between the two numbers. The same math applies to investment properties.
A paid-off vacation home or investment property is definitely something that will count against college financial aid, Kantrowitz says. But a small family business may not count against you.
"The simplest thing for a family to do is to set up a corporation and have the corporation hold title to the property as a separate legal entity," he suggests.
We don't have a vacation home and probably never will, but we do have two investment properties and may add more in the next seven years. One of those investment properties will be paid off in four years, so we would report its entire value on financial aid statements.
I plan to investigate Kantrowitz's suggestion that we create a private, wholly owned corporation that will hold title to all our investment property.
Still, I'm not going to start paying down the mortgage right away. I need to consider other potential uses for the money. But it's good to know that paying down the mortgage probably won't hurt our kid's eligibility for financial aid.