Slick mortgage moves won't bring  more financial aid when Junior goes to college
By Michael D. Larson • Bankrate.com

When it comes to qualifying for a meaningful  college financial aid package, homeowners may feel they're starting out behind the eight ball. Home equity, after all, can amount to thousands of dollars just a few years into the mortgage.

But experts say trying to shift money around, or dumping the two-bedroom manse before the aid forms are due, probably won't help much when it's time to qualify. Income plays a much greater role in determining need than assets and home equity, so trying to skirt the rules will probably cost more than playing by them.

"When you look at the total amount that gets calculated for the family contribution, 90 percent of that is based on your income, not your assets," explains Shelly Diers, president of The Access Group Inc., a college finance advice firm in Eden Prairie, Minn. "It's a myth that, if we can reposition assets and hide money, we can get more financial aid."

Changes in the landscape
The student's family house was part of the college tuition equation for years. Colleges saw home equity as a brick-and-mortar checking account. A family owning a $200,000 piece of property, after all, has access to more money than one renting an apartment for $900 a month.

But the college financing landscape changed in 1992 when Congress decided to amend the Higher Education Act of 1965. Legislators successfully argued that removing home equity and home value questions from the form for federal aid would mean more money for middle-class families.

Yet financial aid professionals balked, countering that the new rules made their business that much more difficult.

"It was the simplification, supposedly, and also a response to concerns that middle-income families weren't getting access to federal aid programs" that prompted legislators to act, says Jack Joyce, a spokesman for the College Board, which oversees the Scholastic Assessment Test, or SAT, and the Advanced Placement exams, or AP.

"But with federal methodology looking at fewer and fewer data elements, colleges find themselves in an era where increasing numbers of students look more like one another in terms of federal aid eligibility."

Profile expands application
As a result, a College Board subsidiary developed Profile, an application system that allows universities to ask more pointed questions about assets and income than people face on the government's Free Application for Federal Student Aid. Thirty percent of the 1,500 four-year institutions in the U.S. used Profile to determine aid for the 1998-99 school year, Joyce said.

Profile consists of two main sections: One has standard questions asked of everyone, and the other has a list of questions compiled by the school that will be considering the applications. Unfortunately for homeowners, everyone faces questions about home equity because the congressional reforms didn't prevent individual schools from asking about it when qualifying people for college-sponsored aid.

Still, experts say people don't understand that trying to manipulate the home and its equity usually isn't worth the effort. Profile lumps assets together, and most people will not succeed in saving a lot of money by reworking their books.

"I'm not going to tell them to take the home equity out and stick it in a mutual fund," says Gary Goldberg, president of College, Financial & Tax Strategies Inc. in St. Louis. "If a parent goes out, refinances the home and takes $50,000, $60,000 out, if it's going to go somewhere else, then it's going to be a negative, because it will show up as an asset again."

No disadvantage
Homeowners with 20 years worth of mortgage payments under their belts also shouldn't worry too much that their no-equity neighbors will snag all the aid.

Consider a two-parent family from Florida, with one 18-year old student going off to a school that uses Profile. According to estimates from the College Board's aid calculator, they would be expected to contribute $13,470 toward college, assuming the parents earned $40,000 each and the child made nothing. Adding $50,000 worth of home equity would only raise their expected contribution by about 4.5 percent, or $604, to $14,074.

Even parents whose children plan to attend schools that use only the federal form won't really benefit by locking their money away where the financial aid officers won't look. Taking the same hypothetical family and giving them $50,000 in savings, for example, would result in an expected contribution of $13,752. Hiding the cash by using it to pay down their mortgage, however, would reduce the contribution by a mere 4 percent to $13,205.

"You have to think about, 'Well, is it better to hide my assets in home equity, liquidating other assets and paying off the home mortgage?' or 'Is it better to keep my money in other interest-bearing or higher-yielding accounts?' " Diers says. "The advantage you're going to get in that is very possibly minimal."

Assets and income count
Regardless of equity, homeowners with hefty mortgage payments have one other thing to keep in mind: Neither Uncle Sam nor Profile care, because they compute a family's ability to pay tuition based on the family's assets and income after taxes, rather than its monthly obligations, according to financial planners.

As for the handling of mortgages and home equity in college aid, things should remain pretty much where they are now for the foreseeable future, says Marty Guthrie, director of governmental affairs for the National Association of Student Financial Aid Administrators. Lawmakers re-evaluate and amend the Higher Education Act approximately every five years, but they're expected to leave home equity out of the federal calculation next time around, as well.

Members of the House committees on Education and the Workforce, and Ways and Means, are working with legislators from the Senate Committee on Labor and Human Resources to draft the reauthorization bill.