Home equity can reduce college student’s financial aid

Some colleges and universities consider a parent’s home equity when doling out loans or grants for incoming students, but others don’t even ask.

Q. Our son is a senior in high school and plans to go to college in the fall. We don’t earn a lot of money, but our home is worth about $90,000 more than we paid for it 10 years ago. Will the equity we have in our home affect his ability to get financial aid?

A. It largely depends on which college or university your son plans 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 several years ago.

The majority of public schools, including most state universities, do not consider a parent’s home equity when deciding how much financial aid a student can obtain. But it’s a different story at many private schools, where the institutions not only ask about the parents’ home equity 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 son hopes 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 indeed will 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 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 son’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 his or her retirement nest egg to cover the cost.

Q. We made an offer to purchase our first home and followed your advice by making the offer contingent on the property first passing an inspection. The inspector is coming out next week, but he does not want my wife or me following him while he reviews the property. Is this common? Can we insist that we be present when the inspection takes place?

A. Homebuyers should always insist that they accompany their inspector, in part because it’s a great opportunity to learn more about the property they intend to purchase.

“Tagging along” with the inspector could alert you to problems that should be remedied before the sale closes. A good inspector may also be able to provide some maintenance tips that will help you after you move in.

Perhaps most importantly, joining the inspector will allow you to view the property through the eyes of a trained, objective third party. Too many buyers “fall in love” with the home they intend to buy and consequently ignore its shortcomings. The best inspectors don’t share such emotions, so they can provide an honest opinion about the property — warts and all.

Q. We recently visited an estate planner to discuss the idea of creating the type of basic living trust you often recommend. In addition to creating the trust, the planner also suggested we sign a “durable power of attorney” form. Is this really necessary, or is the planner just trying to pad his fees?

A. You aren’t required to sign a durable power document to create a living trust, but I usually suggest it.

Forming an inexpensive trust is a good way to ensure your home and any other assets you choose will pass quickly to your heirs rather than be subjected to the long and costly probate process. When you die, the successor trustee you selected when you originally formed the trust could immediately distribute your possessions according to your final wishes.

If you also sign a durable power of attorney document, you could give the trustee, or anyone else you wish, the additional ability to take care of death-related expenses and to distribute any assets you purposely (or accidentally) left outside of the trust.

The forms typically cost between $10 and $20 and can be purchased online, at sites like nolo.com and legalzoom.com. They also are available at many business-supply stores.

Real estate trivia: Nine out of 10 buyers now use the Internet when searching for a new home, the National Association of Realtors says.

Ÿ For the booklet “Straight Talk About Living Trusts,” send $4 and a self-addressed, stamped envelope to David Myers, P.O. Box 4405, Culver City, CA 90231-4405.

© 2012, Cowles Syndicate Inc.