Ch.7 - Education Planning Applications & Ch.8 - Debt Management Applications Flashcards
Previously Module 8
College cost have historically risen by a rate higher than the…
customer price index.
What are the 5 inputs needed to calculate College Funding Requirements
– Rate of return on investments – Education inflation rate (hard to determine) – Current cost of one year of school – Duration of college education – Number of years until matriculation
This type of investment vehicle it’s considered free from default risk.
US Savings bond (Series EE and Series I)
Bonds are tax-free if you redeem them for…
Education purposes and you have income below certain threshold.
What type of bond has a fixed interest rate which makes them not as useful when considering inflation?
Series EE
What is a Section 529 plan?
Education savings funding vehicle that is handled by the state.
Section 529 plans are tax-free if used for…
education expenses.
This investment vehicle is the most attractive too conservative investors since the investment guarantees to pay for tuition.
Section 529
A Section 529 plan, contributions are allowed regardless of…
income.
Are the contributions to a Section 529 plan deducted for federal income tax purposes?
No
The rate of return for a Section 529 plan is based on the investments selected by…
the account owner.
This investment vehicle for education allows a limit of $2000 per year and for contributions.
Coverdell Education Savings Account
Is there any restrictions as to who can contribute to the Coverdell account?
No
Who controls the investments and withdrawls with a Coverdell Education Savings Account?
The owner of the account
This educational credit, up to $2,500 is allowed for expenses that you incur for the first four years of post-secondary education.
American Opportunity Tax Credit
What educational contributions phase-out after your AGI exceeds a certain level?
– Coverdell
– American Opportunity Tax Credit
– Lifetime Learning Credit
The American Opportunity tax credit is only available for students that are enrolled…
at least half-time for one academic period.
This text credit is for expenses incurred for education, for an unlimited number of years, available to any student, with a maximum credit of $2,000.
Lifetime Learning Credit
Government provides funds for education through the…
Department of Education.
Your ability to receive federal aid depends on 3 things what are they?
– Expected Family Contribution (how much your family makes)
– Student aid report
– Cost of attendance (tuition)
Do your grades affect the amount of money you’ll get for financial aid?
No
What are the four needs-based bonds offered by the government?
- Federal Pell Grants
- Supplemental Educational Opportunity Grants
- Federal Perkins Loan
- Subsidize Stanford Student Loans
This is the primary grant program for undergraduate full-time and part-time students, amount dependent on need.
Federal Pell Grants
This grant program is administered by the aid office at each school for undergraduate students only with an extreme financial need.
(FSEOG)
Federal Supplemental Education Opportunity Grants
This type of federal loan program is when the school lends money to a student and the interest accrues after the student leaves the school.
Federal Perkins Loans
This type of government loan program must be paid within 10 years and is the major source of education borrowing.
Subsidize Stafford Student Loans
What are the 2 types of loans given to students based on a non-needs-basis?
- Unsubsidized Stafford Student Loans (must be paid within 10 years)
- Parent Loans for Undergraduate Students (interest starts the day you get the loan)
This loan allows you to borrow the entire cost of your education.
PLUS Loan
FKA: Parent Loans for Undergraduate Students
This type of loan program allows graduate students to borrow money.
PLUS Loan
FKA: Parent Loans for Undergraduate Students
What are some emergencies that can result in a significant reduction any clients net worth?
– Loss of a job
– Expensive repairs to their car, house, etc.
What is the best approach for handling emergencies posing a serious loss?
Insurance.
How much of a persons take-home pay or total expenses should the emergency fund be worth?
3 to 6 months of your salary
What are some things that can influence the size of your emergency fund?
Age
Health
Financial situation
Being self-employed
It may be more appropriate to have a smaller emergency fund if…
- Home equity line of credit or other sources of low-cost funding is available
- You have multiple sources of income
- Stable employment or a skill is in constant demand
What are some factors that might make a client increase their emergency fund?
– Lack of job security – Downsizing at work – Self-employment – Commission-based job – Economic uncertainty
An emergency fund should consist of investments that are…
liquid (cash, cash equivalents, treasury bills, short-term CDs, money market mutual funds) assets.
If you’re considering using an investment as an emergency fund, what are some inappropriate investment ideas?
Real estate
Equity mutual funds
Collectibles
What are the sources for an emergency fund?
Savings accounts
Home equity line of credit
Laddered CDs that are set to mature more periodically
The creation of an emergency fund should take precedence over…
Investing
Retirement
Including home equity loans, this is the largest component of your debt.
Mortgage debt
Two types of consumer debt.
- non-revolving credit (car, & education loans, vacation cost)
- revolving credit (credit cards and store credit line)
The most common credit score used in over 75% of credit decisions.
FICO score
What are the five factors that are included in your credit score?
- Payment history
- The amount owed
- Years of credit history
- New credit inquiries
- Type of credit
Auto leases are appropriate for people who…
– Don’t like negotiating purchase price
– Want to reduce monthly payment and down payments
– Plan to retain the car for three years or less
What is the money factor formula used to determine the lessor’s required monthly return?
Interest Rate / 24
Leases can either be _____________ or ______________.
closed-end (the dealer absorbs the loss in value)
open-end (consumer absorb the loss in value)
A home equity loan is similar to a…
second mortgage.
The interest rate on a home equity loan is typically _____________ than the rate charged on other types of loans.
Lower
Can the interest on a home equity loan and a home equity line of credit be deducted when you do your taxes?
Yes
This type of loan offers more flexibility than a home equity loan.
Home Equity Line of Credit
Does a home equity line of credit (HELOC) have a fixed interest rate or a variable interest rate?
Variable
The downside of having a home equity line of credit?
The borrower may owe more on their house than its value.
A HELOC usually is issued with a card which makes it easier to spend on non-essential items.
Chapter 7 bankruptcy
Chapter 7 – liquidation (straight bankruptcy)
What type of course is required for someone applying for bankruptcy?
A credit management course
How long does a Chapter 7 remain on your credit report?
10 years
Who can initiate Chapter 7 bankruptcy?
The person that owes the money or the creditor.
Is a bankruptcy estate formed with a Chapter 7 or Chapter 13?
Chapter 7
If you file Chapter 7 what type of assets are liquidated?
Non-exempt assets
When you file a Chapter 7 bankruptcy, what are some debts that you cannot eliminate?
Taxes
Student loans
Alimony
Debts from fraud/illegal activity
Does someone have to have income in order to qualify for Chapter 13 bankruptcy?
Yes
Zero Coupon Bond
Poor inflation hedge. Sold at a discount that pays face.
A plan that typically allows parents to purchase tuition credits at current price. These do not guarantee admission, but can usually be transferrable.
Prepaid tuition plan
What 2 parts make up the Expected Family Contribution for the FAFSA
Expected Parent Contribution
Expected Student Contribution
((12% Uninvested Assets + Net Income) *
47% (max) and 12% (min)) / Number of Kid
Expected Parent Contribution
(20% Uninvested Assets + 50% Net Income)
Expected Student Contribution
PAYE (Pay As You Earn)
10% Discretionary income, family size considered, balance forgiven after 20 years, spousal income not included if filing separately, limited availability
REPAYE (Revised Pay As You Earn)
10% Discretionary income, family size considered, balance forgiven after 20 or 25 years, spousal debt/income included, broad availability
What are types of household debt
Mortgage, auto loan, credit cards, student loans
5 C’s of Credit
Capacity, Capital, Collateral, Conditions, Character
What is the formula for a HELOC loan amount
(Appraisal * 80%) - Balance
When is Home Equity Loan interest not deductible?
When the sum of interest and mortgage balance exceeds home value or $100K
Chapter 13 bankruptcy
Chapter 13 – repayment plan (3 to 5 years), debt limit
Chapter 11 bankruptcy
Chapter 11 - reorganization of debts, no debt limit