How FAFSA Considers Home Equity in Financial Aid Calculations
Understand how FAFSA treats home equity in financial aid calculations, including differences in federal and institutional methods and the impact on eligibility.
Paying for college is a major financial commitment, and many families rely on the Free Application for Federal Student Aid (FAFSA) to determine eligibility for grants, loans, and work-study programs. Since FAFSA assesses a family’s financial situation, homeowners often wonder whether their home equity will impact aid calculations.
Understanding how FAFSA treats home equity can help families plan effectively and avoid unexpected financial burdens.
How Federal Aid Considers a Primary Home
FAFSA does not count the equity in a family’s primary residence when determining federal financial aid eligibility. Regardless of how much a home has appreciated or how much of the mortgage has been paid off, that wealth is not factored into the Student Aid Index (SAI), which replaced the Expected Family Contribution (EFC) starting with the 2024-25 FAFSA cycle.
A primary home is considered a necessity rather than a liquid asset. Unlike savings or investments, home equity cannot be easily accessed without selling the property or taking on additional debt. The federal government avoids forcing families to tap into their home’s value, particularly in high-cost housing markets where home values may be high but do not necessarily reflect available income.
Equity in Second Homes or Investment Real Estate
While FAFSA ignores the value of a primary residence, second homes and investment properties are treated as reportable assets. Their equity—calculated as market value minus any outstanding mortgage—is included in a family’s net worth and can increase the SAI, potentially reducing need-based aid eligibility.
Second homes and rental properties are considered financial resources that could be used to pay for college. Even if a property isn’t generating significant income, its value still impacts financial aid calculations. Rental income must also be reported on FAFSA as taxable income, which can further affect aid eligibility. FAFSA does not allow deductions for mortgage payments, maintenance, or other expenses related to rental properties, meaning families cannot offset reported income with these costs.
Institutional Variations in Evaluating Equity
While FAFSA follows a standardized approach, colleges that require the CSS Profile take a different stance. Many private institutions and some public universities use this additional financial aid form to assess a family’s financial situation more comprehensively. Unlike FAFSA, the CSS Profile often includes home equity in its calculations, though how much it affects aid varies by school.
Some colleges cap the amount of home equity considered, often limiting it to 1.2 to 2.4 times the family’s adjusted gross income. Others assess home equity without a fixed cap, which can result in higher expected contributions for families with significant property appreciation. Schools may also apply a lower asset conversion rate to home equity than to liquid savings, recognizing that while home value represents wealth, it is not as accessible as cash. Some institutions exclude home equity altogether for families below a certain income threshold to avoid penalizing middle-income homeowners.
Home Equity Loans in FAFSA Calculations
Families who have taken out home equity loans or lines of credit (HELOCs) may wonder how this debt affects their FAFSA submission. Since a primary residence is excluded from FAFSA’s asset calculations, loans secured against it do not reduce a family’s reported net worth. Even if a household carries significant home equity debt, FAFSA does not consider it when determining aid eligibility.
However, if home equity loans were used to purchase reportable assets, such as a second home or investments, the situation changes. The outstanding balance on a home equity loan used for a down payment on a second home does not reduce the reported value of that property. FAFSA still counts the second home’s full market value as part of the family’s net worth, which can make families appear wealthier on paper than they feel in reality.
Special Ownership Arrangements
Some families hold real estate under unique ownership structures, which can complicate how home equity is assessed. If a home is placed in a trust, its impact on financial aid depends on the type of trust and the beneficiary’s level of control. If the student or their parents are beneficiaries of a revocable trust, the home’s value is typically considered part of their assets. Irrevocable trusts, however, are often excluded from FAFSA calculations if the family cannot access the funds. Some colleges using the CSS Profile may still factor in trust assets, particularly if distributions are made to cover living expenses or tuition.
For families who co-own property with relatives, only the portion attributable to the student’s immediate household is considered. If a parent owns 50% of a second home with a sibling, only half of the equity is reportable on FAFSA. However, the CSS Profile may take a broader view, assessing the full value if the property is deemed a financial resource available to the family. Homes owned through a business entity may also be treated differently depending on whether the business is a small, family-run operation or a larger commercial enterprise.