How selling a home impacts financial aid

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Q. How will selling my home impact my daughter’s financial aid for college? We filed for bankruptcy and we can’t afford to keep our home because of debt. We still need to pay off $30,000 of tax debt and we have $400,000 of equity. We plan to rent because we can’t qualify for a new mortgage for a place around here, but I considered buying property out-of-state so the home sale proceeds won’t sit in the bank.
— Concerned

A. You need to be careful.

The act of selling your home itself will not affect your daughter’s financial aid.

It’s what you do with the proceeds that can have an impact, said Brian Power, a certified financial planner with Gateway Advisory, LLC in Westfield.

He said at most state and private colleges and universities, the equity in your primary home is a non-issue. That’s because most schools only require families to complete the FAFSA (Free Application for Federal Student Aid) when applying for financial aid, and the FAFSA doesn’t even ask about home equity.

But if you sell and use the proceeds to buy a rental property or vacation home, this type of home equity is asked about on the FAFSA and can negatively affect your daughter’s financial aid, Power said.

At the same time, Power said, putting the sales proceeds into savings account can also negatively affect your daughter’s financial aid. It may cut her aid in half, Power said.

“If your daughter’s current university is working off of FAFSA, downsizing, paying off your tax liability and using what remains of the home equity proceeds to pay cash for a new home could be your best case scenario,” Power said.

Power said by downsizing, you could cut down the cost of carrying the home, which would hopefully be enough to ease your day-to-day cash flow crunch. With the tax liability paid and lower carrying costs on your home, you should feel a lot less stress financially, he said.

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NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.