Q Several years ago, my husband inherited a small home, worth about $110,000. It was a part of his grandfather's homestead, so has family meaning for him. We barely can keep up with our basic bills, and it is a stretch to pay the additional insurance, utilities and taxes on the second home. We have had discussions about what owning that home will mean when our two college-bound children apply for financial aid. In my estimation, having that home is detrimental to their ability to get as much financial aid as possible. My husband believes that the income from selling the second house will count against us. Can you help?
A I'm going to put the college financial aid question aside for a moment. (I'll come back to it.) My reaction is why stretch your finances to keep a second home you rarely use? Of course, I'm not emotionally invested in the memories contained within its walls. Yet unless it's an investment property that has the potential to pay off big enough to justify its current expense, my suggestion is to sell it, relieve the financial stress on your monthly cash flow and shore up your household finances.
Now, let's turn to financial aid. The formula runs along these lines: You start with the yearly cost of college, including tuition, room, board and books. You subtract the parents' and student's contribution. The parents' contribution takes into account their income and assets. The federal calculation does not include the value of your home or retirement plan. But you are both right when it comes to the second home. It isn't considered an excluded asset and, if you sell, the capital gains will be treated like income. So basically, whether you own it or sell it, the second home you own will count against you in the financial aid calculation. A complicating factor is that private colleges have leeway in what they count as an asset. For instance, some private colleges can add in a fraction of what your home and retirement assets are worth and they can treat your second home as a luxury good -- or not.
The aid formula then subtracts your living expenses and taxes. Similarly, it looks at your child's income and assets. The remainder is defined as need. Need is met through a combination of scholarship, grant, loan and work-study. It's a safe bet you'll be shocked at how much money colleges expect from you. Check out www.finaid.org.
Still, I don't think financial aid is the driving issue here. I would improve your monthly cash flow even if it turns out to reduce the amount of financial aid your older son gets. He could borrow more than you had hoped but you could help him pay off those extra loan payments after he graduates. Your younger son will also benefit from any actions you take now.
Chris Farrell is economics editor for "Marketplace Money." Send questions to email@example.com.