B.15 Education funding

Question 1

Which of the following is not a qualified education expense under a 529 plan?

A. Tuition and fees
B. Room and board
C. Textbooks
D. Computer equipment and software

Answer 1

B. Room and board

Room and board is only a qualified education expense if the student is enrolled at least half-time.

B.15 Education funding

Question 2

Which of the following types of financial aid does not need to be repaid?

A. Grants
B. Scholarships
C. Work-study programs
D. Grants and Scholarships

Answer 2

D. Grants and scholarships do not need to be repaid

B.15 Education funding

Question 3

If a student receives a full-tuition scholarship, what is the maximum amount of education tax credits the student’s parents can claim in the same year?

A. $0
B. $1,000
C. $2,500
D. $4,000

Answer 3

A. $0

If a student receives a full-tuition scholarship, the parents cannot claim education tax credits for that student’s expenses.

B.15 Education funding

Question 4

Which of the following is not a type of federal student loan?

A. Direct Subsidized Loans
B. Direct Unsubsidized Loans
C. Perkins Loans
D. PLUS Loans

Answer 4

D. Plus Loans

PLUS Loans are federal loans for parents and graduate students, not for undergraduate students.

B.15 Education funding

Question 5

John and Jane want to save for their daughter’s college education, but they are not sure whether they should use a 529 plan or a Coverdell ESA. Which of the following is an advantage of a Coverdell ESA?

A. There is no contribution limit
B. Contributions are tax-deductible
C. The funds can be used for K-12 education expenses
D. There are no income limitations for contributors

Answer 5

C. The funds can be used for K-12 education expenses

Coverdell ESAs can be used for K-12 education expenses in addition to higher education expenses.

B.15 Education funding

Question 6

Which of the following is not a requirement for a student to receive federal student aid?

A. Be a U.S. citizen or eligible non-citizen
B. Have a high school diploma or equivalent
C. Maintain a minimum GPA
D. Demonstrate financial need

Answer 6

C. Maintain a minimum GPA

While some scholarships and grants may have GPA requirements, there is no minimum GPA requirement for federal student aid.

B.15 Education funding

Question 7

Which of the following is not an eligible expense under the American Opportunity Tax Credit?

A. Tuition and fees
B. Room and board
C. Textbooks
D. Course-related expenses

Answer 7

B. Room and board

Room and board is only eligible if the student is enrolled at least half-time

B.15 Education funding

Question 8

Which of the following is not a type of federal student loan repayment plan?

A. Standard Repayment Plan
B. Income-Based Repayment Plan
C. Extended Repayment Plan
D. Refund Anticipation Loan

Answer 8

D. Refund Anticipation Loan

Refund Anticipation Loans are not student loan repayment plans; they are high-interest loans that people take out against their expected tax refunds.

B.15 Education funding

Question 9

Which of the following is not a qualified education expense under a Coverdell ESA?

A. Tuition and Fees
B. Room and Board
C. Textbooks
D. Computer Equipment

Answer 9

B. Room and Board

B.15 Education funding

Question 10

Mary is a single mother who is planning to go back to school to get her bachelor’s degree. Which of the following federal student aid programs might she be eligible for?

A. Pell Grants
B. Perkins Loan
C. Direct PLUS Loan
D. Federal Work-Study Program

Answer 10

A. Pell Grants

Pell Grants are need-based grants that do not have to be repaid and can be used to pay for tuition, fees, and other educational expenses.

B.15 Education funding

Question 11

Which of the following is not a factor in determining the expected family contribution (EFC) for federal student aid?

A. Income
B. Assets
C. Age
D. Number of children in college

Answer 11

C. Age

Age is not a factor in determining the EFC; instead, the number of family members, number of family members in college, income, and assets are considered.

B.15 Education funding

Question 12

Which of the following is not a requirement for a student to be eligible for a federal work-study program?

A. Be enrolled at least half-time
B. Demonstrate financial need
C. Have a minimum GPA
D. Be a U.S. citizen or eligible non-citizen

Answer 12

C. Have a minimum GPA

While some work-study programs may have GPA requirements, there is no minimum GPA requirement for federal work-study.

B.15 Education funding

Question 13

Jane has been diligently contributing to a 529 plan for her daughter, Emily, to support her future college expenses. As Emily nears college age, Jane reviews the terms and conditions of the 529 plan to better understand the implications of potential non-qualified withdrawals. She is aware that there are penalties associated with non-qualified withdrawals, but she’s uncertain about one of the potential penalties listed below.

Which of the following is NOT a penalty for withdrawing funds from a 529 plan for non-qualified expenses?

A. A 10% federal tax penalty on earnings.
B. State income tax on the earnings, if applicable.
C. Loss of the initial principal invested.
D. Federal and, if applicable, state income tax on the earnings.

Answer 13

C. Loss of the initial principal invested.

Withdrawing funds from a 529 plan for non-qualified expenses typically results in a 10% federal tax penalty on the earnings (Option A) and the earnings being subject to federal (and possibly state) income tax (Options B and D). However, the original contributions (principal) are returned penalty-free and tax-free since they were made with after-tax dollars. The principal is not lost or penalized for non-qualified withdrawals, so Option C is incorrect.

B.15 Education funding

Question 14

Jack and Jill are married and want to save for their child’s college education. Which of the following is an advantage of a 529 plan over a Coverdell ESA?

A. There is no contribution limit.
B. Contributions are tax-deductible.
C. The funds can be used for K-12 education expenses.
D. There are no income limitations for contributors.

Answer 14

A. There is no contribution limit

There is no contribution limit for a 529 plan (although investors need top be aware of the gift tax limit), while the maximum annual contribution for a Coverdell ESA is $2,000. Although there are no annual contribution limits to 529 plans, they are considered gifts for federal tax purposes which could impact exemptions for yearly gifts.

B.15 Education funding

Question 15

Katie is preparing to attend an out-of-state college and is applying for need-based financial aid. She resides with her parents, Tom and Shirley. Given the family’s asset information provided below, determine the total value of assets that will be taken into consideration for determining Katie’s eligibility for need-based financial aid.

Assets:

Stock portfolio in Tom’s name: $60,000
Bond portfolio in Shirley’s name: $42,000
Joint savings account in Tom’s and Shirley’s names: $10,000
Tom’s traditional IRA: $25,000
Shirley’s Roth IRA: $30,000
Family car: $27,000
Katie’s Roth IRA: $5,500
Katie’s checking account: $1,500

A. $112,000
B. $113,500
C. $130,500
D. $166,000

Answer 15

B. $113,500

When determining eligibility for need-based financial aid, certain assets are generally excluded from consideration, such as retirement accounts and the value of a family’s primary residence and cars. In this scenario, Tom’s traditional IRA, Shirley’s Roth IRA, Katie’s Roth IRA, and the family car are not counted as assets in the financial aid calculation. Therefore, the assets considered would be:

Stock portfolio in Tom’s name: $60,000
Bond portfolio in Shirley’s name: $42,000
Joint savings account in Tom’s and Shirley’s names: $10,000
Katie’s checking account: $1,500
Summing these values gives: $60,000 + $42,000 + $10,000 + $1,500 = $113,500.

B.15 Education funding

Question 16

Maggie and John are planning for their daughter’s college education. They are considering different savings options and are particularly interested in a 529 plan. They want to understand the tax implications of their contributions and withdrawals for qualified education expenses. Which of the following statements is correct about 529 plans?

A. Contributions to 529 plans are deductible on the federal income tax return.
B. Earnings in a 529 plan are taxed annually as they accrue.
C. Withdrawals for qualified education expenses are federal income tax-free.
D. 529 plans only cover tuition expenses at public colleges.

Answer 16

C. Withdrawals for qualified education expenses are federal income tax-free.

Contributions to a 529 plan are not deductible on federal tax returns, though some states offer tax deductions or credits for contributions to their own state’s plan. The earnings in a 529 plan grow tax-deferred, and withdrawals used for qualified education expenses, including tuition, room and board, and other related expenses, are exempt from federal income taxes.

B.15 Education funding

Question 17

Thomas is exploring financial aid options for his son who will be attending college next year. He learns about the Expected Family Contribution (EFC) and its role in calculating financial aid eligibility. Which factor is least likely to influence the EFC calculation?

A. Thomas’s non-retirement savings.
B. The family’s primary residence equity.
C. Thomas’s annual income.
D. Thomas’s retirement account balances.

Answer 17

D. Thomas’s retirement account balances.

The Expected Family Contribution (EFC) is calculated primarily based on income, non-retirement savings, and other assets, but does not typically include retirement accounts (like 401(k) plans and IRAs). The value of the family’s primary home is also generally not considered in the federal formula for calculating EFC.

B.15 Education funding

Question 18

Sarah is a single mother planning to save for her two children’s higher education. She is considering opening a Coverdell Education Savings Account (ESA) for each child. Which of the following is a true statement about Coverdell ESAs?

A. There is no limit on the annual contribution amount to a Coverdell ESA.
B. Contributions to Coverdell ESAs are tax-deductible.
C. Funds in a Coverdell ESA can be used for qualified K-12 expenses as well as college costs.
D. Only post-secondary education expenses can be covered with Coverdell ESA funds.

Answer 18

C. Funds in a Coverdell ESA can be used for qualified K-12 expenses as well as college costs.

The Coverdell ESA is versatile in that it allows for the funds to be used for both K-12 and higher education expenses, including tuition, books, and other qualified expenses. The annual contribution limit per beneficiary is $2,000 and contributions are not tax-deductible.

B.15 Education funding

Question 19

Emily is planning to save for her daughter’s college expenses and is considering different investment vehicles. She is aware of both 529 plans and UGMA/UTMA accounts. Emily would like to maintain control over the investments and their use even when her daughter becomes an adult. Which of the following choices best supports her requirements?

A. Invest in a 529 plan which Emily controls until the funds are used.
B. Open a UGMA (Uniform Gifts to Minors Act) account which transfers control to her daughter at the age of majority.
C. Open a UTMA (Uniform Transfers to Minors Act) account which can be extended until her daughter is 25.
D. Use a regular savings account in her own name to save for college expenses.

Answer 19

A. Invest in a 529 plan which Emily controls until the funds are used.

529 plans allow the account owner, in this case Emily, to maintain control of the account regardless of the beneficiary’s age. This control extends to decisions on withdrawals and changing the plan’s beneficiary, which is not possible with UGMA/UTMA accounts, as these transfer control to the beneficiary when they reach the age of majority (usually 18 or 21 depending on the state).

B.15 Education funding

Question 20

Liam and Sophie are evaluating their ability to fund their son’s higher education through federal student loans. They want to understand the implications of different loan types. Which of the following statements is true regarding federal student loans?

A. Interest on subsidized loans accrues while the student is in school.
B. Unsubsidized loans have their interest paid by the government while the student is enrolled at least half-time.
C. Parents cannot borrow from federal student loan programs on behalf of their dependent undergraduate students.
D. Subsidized loans do not accrue interest while the student is in school at least half-time.

Answer 20

D. Subsidized loans do not accrue interest while the student is in school at least half-time.

Federal subsidized loans are beneficial for students because the government pays the interest on these loans while the student is enrolled at least half-time, during the grace period after graduation, and during any deferment periods. Unsubsidized loans, on the other hand, accrue interest from the time the money is first disbursed, and parents can indeed borrow on behalf of their children using the Direct PLUS Loan program, designed for the parents of dependent undergraduate students.

B.15 Education funding