Education Funding: Financial Aid Flashcards
Types of Federal Student Aid
- Federal Pell Grant
- Federal Supplemental Educational Opportunity Grant
- Federal Work-Study
- Federal Direct Loan (subsidized and unsubsidized loans)
- Federal Perkins Loan Programs
- Teacher Education Assistance for College and Higher Education (TEACH) Grant
- Iraq and Afghanistan Serice Grants
- Completion of the Free Application for Federal Student Aid (FAFSA) is required
- this helps determine the Expected Family Contribution (EFC) and is based on income, assets, benefits, household size and number of children currently attending college
Federal Grants for Education
Federal Pell Grants: every student that qualifies receives up to $6495/year for up to 12 semesters.
awarding of Pell Grant must proceed FSEOG
Federal Supplemental Educational Opportunity Grants (FSEOG): for exceptional need and awarded by college of $100-$4,000 per year until college’s funds from US Dept of Ed exhausted for the year.
* colleges awarded funds on FIFO basis
Teacher Education Assistance for Higher Education (TEACH) Grants: awarded to students who plan to teach in elementary or secondary schools for low income.
Iraq and Afghanistan Service Grants: for students or kids under 24 of members of Armed Forces when killed in service in Iran or Afghanistan after 9/11
Federal Work-Study Program
Needs-based (low EFC)
- not guaranteed even if student qualifies
On or off campus
Limited to number of positions the school has available
Types of Federal Loans
Federal Perkins Loan Program:
- for undergrad and grad students
- needs-based
William D. Ford Federal Direct Loan Program
-
Direct Stafford Loans
- can be subsidized (low EFC) for undergrad where gov’t pays interest while in school
- unsubsidized, based on costs and other aid; borrower pays all accrued interest
- repayment begins 6 months postenrollment/graduation
- credit score does not affect eligibility -
Direct PLUS Loans
- available to parents of dependent students and to graduate and professional degree students
Parent PLUS Loans: loans to parents for undergrad students only
- only financial federal aid option given in parent’s name
Graduate PLUS Loans: loans to grad students
- always unsubsidized
- credit score does affect eligibility
5 Other Forms of Financial Aid
- State government aid
- Aid from college/university
- Scholarships
- Tax credits for education expense
- American Opportunity Tax Credit
- Lifetime Learning Tax Credit
5. Aid for the Military
Education Tax Credits
- American Opportunity Tax Credit (formerly Hope Scholarship Credit)
- partially refundable tax credit for qualified education costs for first 4 years of undergrad ed up to $2,500 per year per student
* 100% of the first $2,000 of qualified education expenses
- 25% on the next $2,000 of qualified education expenses
- MAGI must not exceed phased out thresholds for the year
2. Lifetime Learning Tax Credit - non-refundable tax credit for 20% of qualified education expenses up to $10,000 ($2,000 per year per family)
- any degree program meant to improve job skills, not just undergrad
- taxpayer’s income must be below certain threshold
Qualified Education Expenses
- tuition and fees paid directly to the school
- student activity fees
- books, supplies and equipment (even if not paid directly to the school for the AOTC)
5 Education Financing Strategies
- Government Loans (Direct/Stafford Loans, Plus Loans, Perkins Loans)
- Private and bank loans
- Personal and family loans
- Retirement plan loans
- Cash-value life insurance loans
US Dept of Education Borrowing Limits Facts
Loan limits rise from freshman to junior year
Independent students receive more each year
The maximum subsidized loan is lower than the total that can be acquired
Graduate programs have larger loan amounts available to them (particularly in health profession programs)
6 Strategic Benefit of Federal Loans
- High return on investment
- Potential loan forgiveness for service, government and military jobs
- Potential low-interest debt
- potential tax benefits
- Some corporations may pay debt as an employee benefit
- Repayment flexibility
- Income-driven
- Hardship deferment/forebearances, etc.
Two Perspectives to Use Answering Test Questions
- What do the facts provided, particularly the goals and values of the client, reveal about what is optimal in that specific case/
- What is financially optimal for the client
4 Income Driven Repayment Plans for US Dept of Education
and guidelines
- REPAYE Plan (Revised Pay As You Earn Repayment Plan)
- PAYE Plane (Pay As You Earn Repayment Plan)
- IBR Plan (Income-Based Repayment Plan)
- ICR Plan (Income-Contingent Repayment Plan)
Range from 10-20% of discretionary income for payments
Generally plans range from 20-25 years, but may be eligible for forgiveness after 10 years
The Direct PLUS Loans for parents are the only federal direct loans that are ineligible for most beneficial repayment and loan forgiveness (but they are eligible for ICR Plan)
Loan Forgiveness Situations
Under all four plans, any remaining loan balance is forgiven if federal student loans are not fully repaid at the end of the repayment period
For any income-driven repayment plan, periods of economic hardship deferment and periods of repayment under certain other repayment plans count toward the total repayment period
The balance left to be forgiven at the end of the repayment period depends on income trajectory and how large income is relative to debt
If client is paying under an income-driven repayment plan and is eligible for public service loan forgiveness, he or she may qualify for forgiveness after making 120 monthly payments (may be non-consecutive) if working more than 30 hours per week for a non-profit or government agency
Expected Family Contribution (EFC) Calculation
Adjusted gross income - Deductions + Pretax health savings account or IRA - Taxes
Generally, parents AGI is used with pretax contributions to retirement and HSA accounts added back in
Assets in a parent’s name (including 529 Plans) have maximum weighting of 5.64% after subtracting savings allowance
Student’s assets and income, as compared to parents’, weigh much more heavily in EFC calculation than parents’
- Nonparent 529 plans are considered income to students under the EFC calculation
Assets do not include
- the home in which the client lives
- UGMA and UTMA accounts for which the client is the custodian but not the owner
- The value of life insurance
- Retirement plans i401(k), pension funds, noneducation IRAs, Keough plans, variable annuities, etc.)
6 Planning Strategies for Education Financing
- Keep assets and income in the student’s name low
- Reduce client’s’ income during the years impacting FAFSA
- Reduce or Shelter clients’ included assets
- Consider making high contributions in years before the FAFSA (use cash to reduce consumer debt and mortgage debt)
- Increase the number of family members enrolled in college at one time
- Change the student’s status from dependent to independent
- Get married before submitting the FAFSA
- Delay college until age 24
