Education Funding: Financial Aid (Slides) Flashcards
Applying for Financial Aid
(form and factors)
FAFSA (Free Application for Federal Student Aid)
- the form required in order to apply for financial aid
- Used to determine EFC (Expected Family Contribution)
EFC Factors
- Income
- Assets
- Household size
- Number of children in college
- The lower the EFC, the greater the aid
3/7 Types of Federal Student Aid
Federal Grants
- Pell Grant
- Supplemental Educational Opportunity Grant
- Teacher Education Assistance for College and Higher Education (TEACH)
- Iraq and Afghanistan Service Grants
Federal Work Study
Federal Loans
- Direct Loans
- Perkins Loans Programs
4 Federal Education Grants
Typically awarded on the basis of need
Generally do not have to be repaid
Four type of Federal Grants
- Pell Grants
- Supplemental Educational Opportunity Grants
- Teacher Education Assistance for College and Higher Education
- Iraq and Afghanistan Service Grants
Federal Grants - Pell Grants
Awarded to all undergraduate students who qualify
Need-based (low EFC)
Maximum award of $6,495
Can be received for up to 12 semesters
Federal Grants - Supplemental Educational Opportunity Grants
Awarded to undergrad students on a first-come, first-served basis
Need-based (exceptionally low EFC)
Maximum award of $4,000/year
Federal Grants - Teacher Education Assistance for College and Higher Education (TEACH)
Awarded to students who intend to each in an elementary or secondary school that serves students from low-income families
Turns into a loan if students do not fulfill the service requirement
Federal Grants - Iraq and Afghanistan Service Grants
Awarded to students whose parent or guardian died while performing military service in Iraq or Afghanistan after 9/11/01
The student must have been younger than 24 or enrolled in college at the time of the parent’s death
Federal Work-Study
Provides part-time employment to students to assist them in paying for their education
Need-based (low EFC)
Not guaranteed - based on number of positions the school has available
Federal Education Loans
Money that the student or parent borrows to finance education
Must be repaid with interest
Can be based on need
Two loan programs
- Federal Perkins Loan Program (discontinued but clients may still hold these loans if attended college before 2018)
- William D. Ford Federal Direct Loan Program
Federal Perkins Loan Program
Loans provided by the school
Available to undergraduate and graduate students
Need-based (exceptionally low EFC)
2 Types of William D. Ford Federal Direct Loan Program
Two types of loans provided by the federal government
- Stafford Loans (subsidized and unsubsidized)
- PLUS Loans
- Parent PLUS
- Graduate PLUS
Direct Loans - Stafford
Subsidized: Available to undergraduates and is based on financial need. The government pays the interest on the loan while the student is in school
Unsubsidized: Available to undergraduates and graduate students. These are NOT need-based, and the borrow is responsible for all accrued interest
Borrowers begin repayment 6 months after graduation
Credit score does NOT affect eligibility
Direct Loans - PLUS
Parent PLUS Loans: Loans to parents for undergraduate students only
Graduate PLUS Loans: Loans to graduate students
Always subsidized
Credit score DOES affect eligibility for these loans
- this is the only federal option given in the parent’s name
5 Other Forms of Financial Aid
State government aid
Aid from the college/university
Scholarships
Aid for the military
Tax creditys
AOTC (American Opportunity Tax Credit)
Partially refundable tax credit for the first four years of undergraduate education
Credit is equal to 100% of the first $2,000 spent on qualified education expenses, plus 25% of the second $2,000 spent on qualified education expenses
Maximum credit of $2,500 per year per student
Taxpayer’s modified adjusted gross income cannot exceed phase out thresholds
Lifetime Learning Tax Credit (LLC)
Nonrefundable tax credit for 20% of qualified education expenses up to $10,000
Maximum credit of $2,000 per family
Expenses do not need to be for undergraduate education
Qualified Education Expenses
Tuition and fees
Student activity fees
Expenses related to books, supplies, and equipment
- must be paid to the school for the LLC, but not the AOTC
Room and board, insurance, medical expenses, transportation and other personal or living expenses are NOT included
5 Loan Strategies for Financing Education
- Government loans
- Private and bank loans
- Personal and family loans
- Retirement plan loans
- Cash-value life insurance loans
3 Government Loan Programs
- Federal Perkins Loans (program expired in 2017)
- Loans were awarded by the institution to low EFC undergrate and graduate students
- Clients may be paying on this, but ended
- Direct Stanford Loans
- Available to undergraduate and graduate students
- Subsidized or unsubsidized
- Direct PLUS Loans
- Parent PLUS or Graduate PLUS
- Credit score affects eligibility
- The amount a student is eligible to receive is based on the school’s figure for the cost of attendance
- There are federal annual limits to the amount of subsidized and unsubsidized loans that can be given and the total amounts a client may borrow
- The limits vary depending on the student’s year in school and whether the student is considered a dependent or independent Student
Qualifying for Loans
- Students must complete the Free Application for Federal Student Aid (FAFSA), which determines the Expected Family Contribution (EFC)
- EFC = AGI - Deductions + Pre-tax HSA or IRA - Taxes
- The difference between a school’s cost of attendance and a student’s EFC is consider to be the financial need
- A lower EFC allows more and better opportunities for financingt education costs
Expected Family Contribution (EFC) Factors
- Family’s income
- Assets
- Does not include home, UGMA/UTMA accounts that the client doesn’t own, value of life insurance, or retirement plans
- Household size
- Number of children currently attending college
Possible Benefits of Financing Education with Student Loans
- High return on on investment
- Repayment flexibility and potential loan forgiveness
- Potential low-interest debt
- Potential tax benefits
- Some corporations may pay debt as an employee benefit
4 Federal Loan Repayment Plans
- Income-Driven Repayment Plans
- Revised Pay As You Earn Repayment Plan (REPAYE)
- Pay as You Earn Repayment Plan (PAYE)
- Income-Based Repayment Plan (IBR)
- Income-Contingent Repayment Plan (ICR)
The Parent PLUS Loan is the only direct loan ineligible for repayment plans and loan forgiveness, but is eligible for the ICR plan. Payments range from 1-20% of discretionary income
Federal Loan Forgiveness
- Under all four plans, any remaining loan balance at the of the repayment period is forgiven
- Periods of economic hardship deferment count toward the total repayment period
- Repayment periods can range from 20-25 years, except for public service loan forgiveness (PSLF), which is 10 years
Planning Strategies (for Education Costs)
- Keep assets and income in the student’s name low
- Reduce the client’s income and assets during the years impacting FAFSA
- Consider making high contributions in years before the FAFSA
- Increase the number of family members enrolled in college at one time
- Change the students’ status from dependent to independent
Personal Family Loans (for Education)
- These should be offered only after the FAFSA is filed
- The loan provider must charge at least the applicable federal rate
- interest must be reported as taxable income
- A formal agreement could be drawn up
- Forgiveness of loans exceeding $15,000 requires that the lender file a gift tax return
Other Financing Strategies (for Education)
- Private Education Loan
- Depends on credit history of borrower and cosigner
- Less flexibility regarding repayment
- Retirement Plan Loan
- Suboptimal option because there is a high opportunity cost for being out of the market, and there is a risk of job loss
- Cash-Value Life Insurance Loan
- Reduces available death benefit
