Education Funding Flashcards
Needs Analysis
1) calculate the cost of the first year of college in todays dollars
2) Determine the lump sum capital amount required at the beginning of the child’s college years using an inflation adjusted interest rate.
3) determine the monthly contribution required to create this fund.
American Opportunity Credit
- available for all years of undergraduate work
- can be used for tuition (books and supplies included only if paid directly to the institution)
- Room and board do NOT qualify
- $2,500 per student
- A phase out for higher income exists
- Benefit is that the credit can reduce the amount of tax that you pay
Calculating the American Opportunity Credit
1) 100% of the first $2,000 of qualified tuition you paid for each eligible student
2) 25% of the next $2,000
Lifetime Learning Credit
- available for all years of undergraduate and graduate work
- can be used for tuition (books and supplies included only if paid directly to the institution)
- room and board do NOT qualify
- $2,000 per FAMILY
- A phase out for higher income exists
- Benefit is that the credit can reduce the amount of tax that you pay
Calculating the Lifetime Learning Credit
1) 20% of the first $10,000 of paid qualified tuition for all eligible students
Claiming credits in conjunction with 529 plans and ESA’s
You can now claim the one of the credits in the same year that you take a tax-free withdrawal, provided that the distribution from either plan is not used in payment of the same expenses for which the credit was claimed.
Section 2503 (c) Trust
- Designed to use the annual gift tax exclusion
- permits accumulation of income on behalf of the child under the trust terms
- gift to a child under the age of 21 is not considered a gift of future interest if property and income is payable to the child at age 21
- Escapes “kiddie tax” and is taxed at the trust’s income tax bracket
Section 2503 (b) Trust
- Income must be paid out at least annually to the beneficiary, including the child
- Trustee has no discretion to accumulate income
- more difficult to avoid “kiddie tax” since trust income is distributed
- Trust property doesn’t have to be distributed at any age
- ensures the segregated funds are used only for the purpose intended
Crummey Invasion Trust or Demand Trust
- Beneficiary is permitted to withdrawal an amount equal to the lesser of:
- the annual addition to the trust
- the annual gift tax exclusion during intervals specified in the trust agreement
- the greater of 5% of the corpus or $5,000 annually
- Trust property is distributed to the beneficiary at any age chosen by the grantor
EFC
- The estimated family contribution
- the amount that can be borrowed by the student or that family
- Parents are expected to contribute 5.6% of their includible assets toward a child’s education
- the child is expected to contribute 35% of his or her includible assets towards the cost of education
Kiddie Tax
- Money invested in a childs name is typically taxed at the child’s rate
- if a child is under the age of 19 has unearned income in excess of $1,900, the excess is taxed at the parents marginal tax rate
- reduced the benefit of transferring assets into the child’s name.
Pell Grants
- distributed on the basis of financial need and availability of federal funds
- available to undergraduates only
- all students are eligible including part-time students
- receipt of other grants and loans is sometimes contingent upon applying for or receiving pell funds
Supplemental Education Opportunity Grants (SEOGs)
- funded by the federal government, but are administered by the individual school; $4,000 max currently
- available to undergraduate students only, both full and part-time
- distributed on the basis of financial need
- Pell grant recipients are given the highest priority
Perkins Loans
- funded by the federal government, but administered by the individual schools
- available to graduate and undergraduates, both full and part-time
- based upon financial need with stated total maximum
- stated interest rate, which is deferred while a student, and begins to be charged nine months after graduation
- repayment usually 10 years in length
Stafford Loans
- administered by federal family education loan (FFEL)
- available to graduate and undergraduate students, but not to less than half-time students
- based upon financial need with limits applying as to the amount of funds that may be received, both in any year and cumulatively.
- interest rate fluctuates with the 91 day T-Bill rare plus a stated premium rate (usually around 3%).
- Can be subsidized or unsubsidized
- Loan origination and insurance fees are frequently charged by lenders.
