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CFP Review TS > Education Funding: Financial Aid (Slides) > Flashcards

Education Funding: Financial Aid (Slides) Flashcards

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CFP® flashcards
1
Q

Applying for Financial Aid

(form and factors)

A

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

  1. Income
  2. Assets
  3. Household size
  4. Number of children in college
  • The lower the EFC, the greater the aid
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2
Q

3/7 Types of Federal Student Aid

A

Federal Grants

  1. Pell Grant
  2. Supplemental Educational Opportunity Grant
  3. Teacher Education Assistance for College and Higher Education (TEACH)
  4. Iraq and Afghanistan Service Grants

Federal Work Study

Federal Loans

  1. Direct Loans
  2. Perkins Loans Programs
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3
Q

4 Federal Education Grants

A

Typically awarded on the basis of need

Generally do not have to be repaid

Four type of Federal Grants

  1. Pell Grants
  2. Supplemental Educational Opportunity Grants
  3. Teacher Education Assistance for College and Higher Education
  4. Iraq and Afghanistan Service Grants
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4
Q

Federal Grants - Pell Grants

A

Awarded to all undergraduate students who qualify

Need-based (low EFC)

Maximum award of $6,495

Can be received for up to 12 semesters

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5
Q

Federal Grants - Supplemental Educational Opportunity Grants

A

Awarded to undergrad students on a first-come, first-served basis

Need-based (exceptionally low EFC)

Maximum award of $4,000/year

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6
Q

Federal Grants - Teacher Education Assistance for College and Higher Education (TEACH)

A

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

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7
Q

Federal Grants - Iraq and Afghanistan Service Grants

A

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

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8
Q

Federal Work-Study

A

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

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9
Q

Federal Education Loans

A

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
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10
Q

Federal Perkins Loan Program

A

Loans provided by the school

Available to undergraduate and graduate students

Need-based (exceptionally low EFC)

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11
Q

2 Types of William D. Ford Federal Direct Loan Program

A

Two types of loans provided by the federal government

  1. Stafford Loans (subsidized and unsubsidized)
  2. PLUS Loans
  3. Parent PLUS
  4. Graduate PLUS
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12
Q

Direct Loans - Stafford

A

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

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13
Q

Direct Loans - PLUS

A

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
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14
Q

5 Other Forms of Financial Aid

A

State government aid

Aid from the college/university

Scholarships

Aid for the military

Tax creditys

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15
Q

AOTC (American Opportunity Tax Credit)

A

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

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16
Q

Lifetime Learning Tax Credit (LLC)

A

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

17
Q

Qualified Education Expenses

A

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

18
Q

5 Loan Strategies for Financing Education

A
  1. Government loans
  2. Private and bank loans
  3. Personal and family loans
  4. Retirement plan loans
  5. Cash-value life insurance loans
19
Q

3 Government Loan Programs

A
  1. Federal Perkins Loans (program expired in 2017)
    1. Loans were awarded by the institution to low EFC undergrate and graduate students
    2. Clients may be paying on this, but ended
  2. Direct Stanford Loans
    1. Available to undergraduate and graduate students
    2. Subsidized or unsubsidized
  3. Direct PLUS Loans
    1. Parent PLUS or Graduate PLUS
    2. Credit score affects eligibility
    3. The amount a student is eligible to receive is based on the school’s figure for the cost of attendance
    4. 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
    5. The limits vary depending on the student’s year in school and whether the student is considered a dependent or independent Student
20
Q

Qualifying for Loans

A
  1. Students must complete the Free Application for Federal Student Aid (FAFSA), which determines the Expected Family Contribution (EFC)
  2. EFC = AGI - Deductions + Pre-tax HSA or IRA - Taxes
  3. The difference between a school’s cost of attendance and a student’s EFC is consider to be the financial need
  4. A lower EFC allows more and better opportunities for financingt education costs
21
Q

Expected Family Contribution (EFC) Factors

A
  1. Family’s income
  2. Assets
    1. Does not include home, UGMA/UTMA accounts that the client doesn’t own, value of life insurance, or retirement plans
  3. Household size
  4. Number of children currently attending college
22
Q

Possible Benefits of Financing Education with Student Loans

A
  1. High return on on investment
  2. Repayment flexibility and potential loan forgiveness
  3. Potential low-interest debt
  4. Potential tax benefits
  5. Some corporations may pay debt as an employee benefit
23
Q

4 Federal Loan Repayment Plans

A
  1. Income-Driven Repayment Plans
    1. Revised Pay As You Earn Repayment Plan (REPAYE)
    2. Pay as You Earn Repayment Plan (PAYE)
    3. Income-Based Repayment Plan (IBR)
    4. 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

24
Q

Federal Loan Forgiveness

A
  1. Under all four plans, any remaining loan balance at the of the repayment period is forgiven
  2. Periods of economic hardship deferment count toward the total repayment period
  3. Repayment periods can range from 20-25 years, except for public service loan forgiveness (PSLF), which is 10 years
25
Q

Planning Strategies (for Education Costs)

A
  1. Keep assets and income in the student’s name low
  2. Reduce the client’s income and assets during the years impacting FAFSA
  3. Consider making high contributions in years before the FAFSA
  4. Increase the number of family members enrolled in college at one time
  5. Change the students’ status from dependent to independent
26
Q

Personal Family Loans (for Education)

A
  1. These should be offered only after the FAFSA is filed
  2. The loan provider must charge at least the applicable federal rate
  3. interest must be reported as taxable income
  4. A formal agreement could be drawn up
  5. Forgiveness of loans exceeding $15,000 requires that the lender file a gift tax return
27
Q

Other Financing Strategies (for Education)

A
  1. Private Education Loan
    1. Depends on credit history of borrower and cosigner
    2. Less flexibility regarding repayment
  2. Retirement Plan Loan
    1. Suboptimal option because there is a high opportunity cost for being out of the market, and there is a risk of job loss
    2. Cash-Value Life Insurance Loan
      1. Reduces available death benefit

CFP Review TS (8 decks)

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