College Costs and Refinancing a Home
Do families that accumulate more monthly debt enjoy a financial aid advantage?
I'm bringing this up today because of an email that I received from a dad who is reconsidering refinancing the family's home. I'm sharing the email because I think that variations on this question is something that a lot of families, faced with the high price of college, are wondering about.
Questions About Refinancing
Here is the email from a father of two girls:
My wife and I are considering refinancing to a 15-year mortgage. This would increase our mortgage payment significantly. At the same time we are starting to plan for the college years. We have two daughters who will be in college in 2 and 4 years.
We are wondering if financial aid and the expected family contribution are based on income alone or if expenses such as the amount of a mortgage payment are taken into account. If bills are not taken into account I'm wondering if keeping our payment low is a better idea so we could help pay for college with that extra money. Any advice on this would be wonderful.
Here's My Answer:
Many families are disappointed when they discover that the financial aid formulas don't take into account the monthly debt a family faces. The financial aid methodology doesn't care if you have racked up piles of credit card debt or you face a huge monthly mortgage payment.The Free Application for Federal Financial Aid (FAFSA), which is the financial aid form all schools use, doesn't even ask if parents own a house so mortgage payments aren't relevant.
The other main financial aid application, the CSS/Financial Aid PROFILE, does ask about home equity, but it also doesn't care about what your monthly mortgage payment is.
Bottom Line:
You should not refinance your mortgage for the purpose of obtaining a better financial aid package. It ain't going to happen.I think it makes more sense to head into college with lower mortgage payments so you have a better chance of handling your college expenses. This could help you reduce the amount of college loans - if any - that you or your child will have to take out. The interest rate on college loans are likely to be far higher than your current mortgage interest rate.
Finally, there is no reason why you can't make extra principal payments on your mortgage anytime you want to help you pay off your home loan sooner.
Lynn O'Shaughnessy is author of The College Solution, an Amazon bestseller, and she also writes her own college blog at The College Solution.
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Financial aid image by Studio Amore. CC 2.0.
