Owning more than one home affects the Free Application For Federal Student Aid (FAFSA) by increasing net asset value for a family. Since assets are a significant factor in the FAFSA ‘application’, and the FAFSA review process, reducing the value of these assets can potentially increase the amount of Federal financial aid qualified for. Reducing asset value can be done, but may take financial resourcefulness, and a willingness to convert and/or transfer ownership of those assets to different financial instruments and/or persons.
I: HOME FACTORS WEIGHED IN THE FAFSA ‘METHODOLOGY’
There is more than one variable of home ownership that can affect the influence of a second home on FAFSA. Each one of these elements may influence the designation of the home as an asset, and the weight of affect the home has on the student aid application. The greater the asset value and/or income from the second home and the closer the connection of ownership is to the FAFSA applicant, the greater the potential reduction in FAFSA qualification(s). The following list comprises aspects of second home ownership that can influence FAFSA.
* Home value(s)
* Income from the home
* Documented owners
* Property appreciation
* Location of home
Obviously the more expensive the property is the greater the value of the asset and henceforth, its influence on FAFSA. Additionally, if the real estate is used for rental or lease, an income derived from such may also have bearing on student loan qualification. Similarly, if the home’s value has or is expected to appreciate in value, this may be a factor in the FAFSA ‘Federal Methodology’ depending on how elaborate it actually is.
If the home is not owned by either the FAFSA applicant(s) or the FAFSA applicant(s) parents, then the important of the home on the application is likely reduced. Lastly, if the home is owned abroad in another jurisdiction via international business held trust, it may not qualify as ownership in so far as FAFSA is concerned. Moreover, depending on where the second home is located i.e. either domestically or internationally, its assessed value may vary thereby further factoring in to FAFSA.
II: AFFECTS OF HOME OWNERSHIP ON FAFSA:
If a particular home is considered relevant by the FAFSA process it can cause the ‘Expected Family Contribution’ (EFC) to rise. In such case, there can be a number of potential repercussions on the student aid application. Generally, the greater the EFC, the less likely FAFSA will be approved and if it is approved, the amount qualified for may decline. Below are some elements of FAFSA that may be affected by ownership of a second home.
* Qualification for financial assistance
* Increase in student financial aid
* Consideration for Federal and State grants
* Access to more educational programs
* Entrance into Federal Work Study
A highly priced home owned either by the student or the student’s immediate family could disqualify the applicant from FAFSA approval in so far as the FAFSA process allows. Moreover, if the home becomes less of a consideration either by lowered value or less relevant ownership, this may help the applicant qualify, and be eligible for a larger amount of assistance. This assistance can include both Federal and State grants and/or entrance into Federal Work Study programs in addition to qualification for subsidized and non-subsidized loans. Also, with qualification and increased eligibility, comes the potential to be admitted and enroll in more educational programs.
III: TECHNIQUES TO REDUCE HOME INFLUENCE ON FAFSA
A family that owns a second home doesn’t necessarily have to give up on FAFSA. This is because there are certain financial techniques and strategies that may limit or eliminate the second home as a financial consideration in the ‘Federal Methodology’ used during the FAFSA review process. If the correct steps are taken, the second home need not be a problem to student loan applicants. It may be helpful to keep in mind some of the financial techniques listed below are quite involved and could take some time to prepare for.
* Transfer ownership to a business
* Sell the home
* Reinvest home proceeds in non-eligible assets
* Temporarily forfeit ownership
* Convert home into a trust owned entity
If a second home is registered as owned by a business, it may not qualify as a personal asset depending on the business structure and/or how the FAFSA process considers business structure in relation to ownership. Also, if the second home becomes too much of a financial obstacle, it could be sold, hence nullifying its influence on FAFSA. However, if the home is sold within the same or previous tax years as the Federal assistance application, it may increase the capital gains of the owner and the Expected Family Contribution in another way. Thus it is more advantageous to sell the home in a tax year that is not considered by FAFSA and then transfer the proceeds to a non-eligible asset such as a retirement account and/or personal assets.
Placing the property into the custody of a flow through trust or business owned trust may reduce the eligible income generated from the property considered in the FAFSA process. Moreover, if the primary trustee of the trust is both the business owner, parent of, or the FAFSA applicant, ownership of the home can be transferred back to the original owner if and when it is no longer an influence on the FAFSA procedure.
If ownership of the second home is temporarily transferred to another party, the home is less likely to be considered an asset in regard to the Federal assistance application. This can be achieved by filing a property transfer affidavit, memorandum of understanding and/or repurchase agreement/contract, in addition to a quit claim deed and forward contract to secure reacquisition at a later point and under no uncertain terms. This last attempt at bypassing the asset ownership can be quite involved and may also require a mortgage assumption.
Disclaimer: The above content is for informational purposes only, and does not constitute financial planning advice. The information is to be used at the discretion of the reader and the author assumes no liability for the use of this information.