How to Move Home Equity Into a Non-Includable Asset

When your child approaches the end of his high school career and begins to investigate college, one of the most important aspects is the cost of higher education. Many universities offer in-house scholarship programs and need-based financial aid, and a number of these schools consider the amount of equity in the parent's home as a source of funding for college. There are legal and legitimate methods of transferring your home equity into an asset that is outside the boundaries of financial aid calculations.

Things You'll Need

• Home equity loan or line of credit

Instructions

1. Determine if your child's university uses the CSS Profile application in addition to the FAFSA. These two forms are used by many colleges to determine your financial capabilities, and ultimately affect the amount of aid your child receives. Your home equity may be viewed as an asset when calculating need-based financial aid.

2. Obtain a home equity loan or line of credit. To prevent your home's equity from negatively impacting your ability to obtain need-based aid for your child, you must reduce or eliminate the amount of equity in your property.

3. Transfer your home's equity into a non-includable asset such as a fixed or indexed annuity. Some university financial aid applications request information about retirement accounts, but rarely penalize you for high balances or reduce the amount of aid based on the size of these accounts. According to the Financial Aid Supersite, "one way to shelter your home equity from both the CSS Profile and the FAFSA is to move it inside a non-includable asset."

Tips & Warnings

• When searching for an appropriate annuity into which you will transfer your home's equity during your child's college years, focus your efforts on finding one without a surrender charge, or at least a surrender charge that has expired by the time college is finished. This will allow you to replace your home's equity when your child's education is complete.

• When withdrawing your home's equity at the conclusion of your child's college education, you may be responsible for income taxes owed on the growth of the money in your annuity account. Your entire initial deposit can be withdrawn without taxes due, but any additional money will be treated as ordinary income for that year.

• Prior to transferring your home equity, seek the guidance and advice of a college funding professional. Tax laws and financial aid calculations differ from state to state and school to school, and it is best to enlist the services of an experienced industry professional to avoid mistakes.

References

• Financial Aid Supersite: How to use parent positioning to maximize financial aid

Resources

• College Funding Solutions: Financial Aid Strategies for High School Seniors and Their Parents