Home eq­uity may im­pact child’s col­lege fi­nan­cial aid

The Palm Beach Post - Residences - - Front Page -

Ques­tion: Our daugh­ter will be go­ing off to col­lege next fall, so we are be­gin­ning the process of ap­ply­ing for fi­nan­cial aid. My wife and I don’t have much in the way of sav­ings, but our house is worth about $125,000 more than we paid for it about eight years ago. Will the eq­uity that we have in our home af­fect her abil­ity to get fi­nan­cial aid?

An­swer: It largely de­pends on which col­lege or uni­ver­sity that your daugh­ter plans (or hopes) to at­tend. Some schools don’t ex­pect par­ents to tap their home eq­uity to pay for ed­u­ca­tional ex­penses, but oth­ers will in­deed cut the amount of money that they will loan or grant if the fam­ily home is worth much more than was paid for it years ear­lier.

The ma­jor­ity of pub­lic schools, in­clud­ing most state uni­ver­si­ties, do not con­sider a par­ent’s home eq­uity when de­cid­ing how much fi­nan­cial aid that a stu­dent can ob­tain. But it’s a dif­fer­ent story at many pri­vate schools, where the in­sti- tu­tions not only ask about the par­ents’ as­sets, but of­ten ex­pect the folks to tap some of it to help pay col­lege bills.

The ad­mis­sions or fi­nan­cial-aid of­fice at the col­lege your daugh­ter wants to at­tend can tell you whether the eq­uity you have in your house will be in­cluded as part of its fi­nan­cial-aid cal­cu­la­tions.

If the school will in­deed con­sider your home eq­uity when dol­ing out aid, make sure to ask about any ex­cep­tions or ex­emp­tions that can help to ob­tain the best aid pack­age that’s pos­si­ble. For ex­am­ple, some schools will over­look a large amount of built-up eq­uity if, say, a par­ent is dis­abled, re­tired or is un­em­ployed.

It might even make sense to tap your home eq­uity now and use the pro­ceeds to make a large con­tri­bu­tion to a tax-ad­van­taged re­tire­ment ac­count be­fore you fill out your daugh­ter’s fi­nan­cial-aid ap­pli­ca­tion. Though some schools now ex­pect par­ents to use their eq­uity to pay for col­lege ex­penses, few ex­pect a stu­dent’s mom or dad to raid their re­tire­ment nest egg to cover the cost. IS SE­CU­RITY DE­POSIT ‘IN­COME’ FOR LAND­LORD?

Ques­tion: We rented out our home ear­lier this year in­stead of sell­ing it. We know that we have to de­clare the $1,100 that the ten­ants pay each month as ren­tal in­come on our next tax re­turn, but do we also have to de­clare the $1,100 they gave us for their se­cu­rity de­posit?

An­swer: No, you don’t have to de­clare the $1,100 se­cu­rity de­posit as “in­come” — at least, not yet. But rules pub­lished by the In­ter­nal Rev­enue Ser­vice say that you will have to pay taxes on the de­posit you re­ceived if the ten­ant later de­faults on the lease and you use the money to cover the lost ren­tal in­come.

Con­sult a tax ac­coun­tant or sim­i­lar pro­fes­sional for de­tails and to make sure that you claim all of the spe­cial write-offs that land­lords can take when tax sea­son rolls around. PROP­ERTY IN­SUR­ANCE AND FORE­CLO­SURE

Ques­tion: I have had some fi­nan­cial set­backs lately. Though I have man­aged to keep my mort­gage pay­ments up to date, I haven’t paid my prop­erty in­sur­ance for sev­eral months, and the in­surer has al­ready threat­ened to can­cel the pol­icy. Now the bank has sent me a sep­a­rate let­ter stat­ing that it may fore­close if I don’t get the in­sur­ance re-in­stated. Can the bank legally fore­close?

An­swer: Yes, your lender has the le­gal right to ini­ti­ate fore­clo­sure pro­ceed­ings.

A typ­i­cal mort­gage con­tract con­tains a clause that re­quires the bor­rower to buy and main­tain an up-to-date home­own­ers in­sur­ance pol­icy. If the bor­rower doesn’t do so, the bank can ei­ther pur­chase the cov­er­age on the owner’s be­half and then bill the bor­rower for it — an ex­pen­sive process that’s called “force-plac­ing” a pol­icy — or in­stead be­gin fore­clo­sure pro­ceed­ings.

Call your in­surer and ex­plain why you haven’t been able to make the pay­ments. There’s a good chance that the com­pany might be will­ing to re­struc­ture the pol­icy, such as rais­ing de­ductibles or elim­i­nat­ing un­nec­es­sary bells-and-whis­tles cov­er­age, in or­der to lower the pe­ri­odic bills to a level that you can af­ford. The bank might have some ideas, too.

Also call your state’s de­part­ment of in­sur­ance. Reg­u­la­tors there may have more sug­ges­tions and can also ex­plain your le­gal rights.

Many states also op­er­ate pro­grams that of­fer ba­sic prop­erty cov­er­age, of­ten at be­low-mar­ket rates, though some limit such pro­grams only to those who can’t get cov­er­age else­where.

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