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CFP Exam > Education Planning > Flashcards

Education Planning Flashcards

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1
Q

what does FAFSA stand for?

A

Free Application for Federal Student Aid

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2
Q

what does EFC stand for?

A

Expected Family Contribution

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3
Q

what is the EFC?

A

a formula developed by Congress used to determine how much a family could contribute towards their child’s education

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4
Q

what does the EFC consider?

A

family size, number of family members in college at the same time, income, assets, unusual financial burdens (like medical bills)

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5
Q

when is a student considered independent?

A
  • over age 23
  • married
  • working on Masters or Doctorate
  • have legal dependents other than a spouse
  • veteran of US armed forces
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6
Q

Federal Pell Grant

A
  • need based, dependent on EFC amount

- only eligible for students earning an undergrad degree

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7
Q

Stafford Loan

A
  • student loan
  • repayment begins 6 months after leaving school or falling below part-time status
  • 2 types (subsidized and unsubsidized)
  • appropriate if the parents intend to repay the loans
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8
Q

Subsidized Stafford Loan

A
  • need based

- interest is paid for by the federal government while the undergrad is in school

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9
Q

Unsubsidized Stafford Loan

A
  • not need based
  • available to undergrad and grad students
  • interest begins to accrue when the funds are disbursed
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10
Q

Parent Loans for Undergraduate Students (PLUS)

A
  • loan for parents to pay for children’s undergrad studies
  • not need base,d but depends on parent’s credit score
  • unsubsidized
  • appropriate for parents who can afford to make a loan payment but may have not saved anything for education
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11
Q

Grad PLUS loan

A
  • for grad students
  • dependent on student credit score
  • max amount you can borrow is cost of attendance minus any other financial assistance received
  • begin payments 6 months after graduation
  • interest accrues as you go, but you can pay it as you go or add to the balance
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12
Q

Federal Perkins Loan Program

A
  • expired in 2017
  • for students with exceptionally low EFC amounts
  • need based
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13
Q

what are the two types of campus-based financial aid?

A
  1. Federal Supplemental Education Opportunity Grant (FSEOG)

2. Federal Work Study

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14
Q

what does FSEOG stand for?

A

Federal Supplemental Education Opportunity Grant

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15
Q

what does PLUS stand for?

A

Parent Loans for Undergraduate Students

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16
Q

what does IBR stand for?

A

Income Based Repayment

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17
Q

what is Income Based Repayment (IBR)?

A

monthly student loan repayment of 10-15% of discretionary income with remaining debt forgiveness after 25 years

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18
Q

what does PAYE stand for?

A

Pay as You Earn Repayment

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19
Q

what is Pay as You Earn Repayment (PAYE)?

A
  • available if borrower has a high debt-to-income ratio
  • monthly student loan repayment of 10% of discretionary income with remaining debt forgiveness after 20 years
  • only Direct Federal loans and PLUS loans to grad students are eligible
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20
Q

what is Graduated Repayment?

A
  • loan paid over 10 years starting off lower than the Standard Repayment Plan and increases every 2 years
  • advantageous for student starting off in an entry-level job, but results in more interest being paid
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21
Q

what is Extended Repayment?

A
  • available when the loan balance is over $30k

- payments can be either fixed or graduated, and are payable over 25 years

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22
Q

what is Income Contingent Repayment?

A

-similar to PAYE, except 20% of discretionary income or payment amount on a fixed payment over 12 years, with loan balances forgiven after 25 years

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23
Q

what are the 3 types of qualified state tuition plans?

A
  1. prepaid tuition
  2. 529 plan
  3. 529A ABLE plan
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24
Q

prepaid tuition is considered an asset of who for financial aid purposes?

A

the parent

25
Q

what is prepaid tuition?

A
  • can be used to pay for in-state college credit at today’s cost
  • purchasing college credits today and using them when your child goes to college
26
Q

advantage of prepaid tuition

A

lock in tuition cost in today’s dollars

27
Q

disadvantages of prepaid tuition

A
  • only earn a return equal to tuition inflation
  • child may receive a scholarship and not use the tuition credits
  • parents may return tuition credits but will only receive principal back
  • state schools may have less than desirable curriculum for student’s area of interest
  • does not include room and board costs
28
Q

529 plan is considered an asset of who for financial aid purposes?

A

the parent

29
Q

what is a 529 plan?

A
  • savings plan typically for parents and grandparents to contribute funds to invest in a diversified portfolio based upon child’s age
  • appreciate in asset value is tax-free if used for qualified education expenses
30
Q

contribution pro-rate for 529 plan

A

an individual can contribute $75k in one year without any gift tax consequences ($15k x 5)

couple electing gift splitting can contribute $150k in one year ($15k x 2 x 5)

31
Q

advantages of 529 plan

A
  • possible state income tax deduction for contributions
  • no AGI phase out for who can participate
  • account owner controls the assets (parent or grandparent)
  • can change beneficiary anytime
  • contributor can remove assets from their gross estate
32
Q

disadvantages of 529 plan

A

-10% penalty on earnings and earnings are included in gross income if not used for qualified education expenses

33
Q

what are the exception to the 10% penalty on 529 plan earnings not used for qualified education expenses

A

death, disability, and scholarship for the beneficiary

34
Q

what are the qualified education expenses for a 529 plan?

A

tuition, fees, books, supplies, equipment, room and board if enrolled at least 1/2 time

35
Q

can 529 be used towards primary/secondary education?

A

yes, up to $10k of annual distributions can be taken from a 529 plan to pay for tuition

36
Q

can 529 be used towards student loans?

A

yes, an aggregate amount of $10k can be distributed to pay student loans

37
Q

what is a 529A ABLE account?

A
  • Achieving a Better Life Experience account
  • assist persons with disabilities similar to a regular 529 plan
  • only 1 ABLE account may be established for each eligible beneficiary
  • beneficiaries of the ABLE account must be entitled to benefits under Social Security Disability or have filed a disability with the IRS
  • contributions can be made by anyone not to exceed $15k in total per year
38
Q

the Coverdell Education Savings Account (ESA) is considered an asset of who for financial aid purposes?

A

the parent

39
Q

Coverdell Education Savings Account

A
  • contributions limited to $2k per year per beneficiary
  • contributions are phased out based on AGI
  • contributions grow tax-deferred unless used for qualified education expenses, in which case the earnings are tax-free
  • can change beneficiary at anytime
  • funds must be used by age 30 of beneficiary
  • 10% penalty on earnings and earnings are included in gross income if not used for qualified education expenses
  • cannot make contributions beyond 18th birthday of beneficiary
40
Q

can Coverdell ESA be used towards primary/secondary education?

A

yes

41
Q

qualified expenses for a Coverdell ESA

A

tuition, fees, books, room and board, and computer related expenses

42
Q

Roth IRA contributions limit

A

$6,000 per year (as per 2021 tax laws), plus $1,000/year if age 50+

43
Q

Roth IRA contribution details

A
  • not tax deductible
  • grow tax-deferred and qualified distributions are excluded from gross income
  • account owner can always withdraw contributions and conversions without tax consequences
  • for non-qualified distributions the earnings are included in gross income and subject to 10% penalty
  • 10% penalty is waived for education expenses but earnings are still included in gross income
44
Q

qualified distribution rule from a Roth IRA

A
  • must meet a 5-year holding period, AND

- either death, disability, attainment of age 59.5, or first time house purchase up to $10k

45
Q

Series EE / Series E Savings Bond

A
  • sold at face value
  • $25 minimum purchase($10k max)
  • available only through Treasury Direct online
  • non-marketable
  • non-transferable
  • do not pay interest periodically
  • bond slowly increases in value over 30 years based on fixed rate at time of purchase
  • interest is not subject to federal income taxes until bond is redeemed
  • interest is not taxed at state or local level
46
Q

what does UGMA stand for?

A

Uniform Gift to Minor’s Act

47
Q

what does UTMA stand for?

A

Uniform Transfer to Minor’s Act

48
Q

assets in an UGMA or UTMA are considered belonging to who for financial aid purposes?

A

the child

49
Q

primary risk of using an UGMA or UTMA to fund a child’s education

A

child can use the assets for something other than education

50
Q

what investments can be included in an UTMA?

A

real estate, stocks, mutual funds, bonds

51
Q

what investments can be included in an UGMA?

A

stocks, mutual funds, bond

NOT real estate

52
Q

how is student loan interest deductible?

A
  • above-the-line (before AGI)
  • limited to $2,500
  • loan must have been used for tuition, room, board, supplies, or other necessary expenses
53
Q

Lifetime Learning Credit (LLC)

A
  • available for tuition and fees related to undergrad, grad, or professional programs
  • can be claimed for an unlimited number of years
54
Q

Lifetime Learning Credit tax credit amount

A

20% of up to $10,000 in qualified expenses

maximum credit is $2,000 per year per family

55
Q

qualified expenses for Lifetime Learning Credit

A

tuition, fees, student activity fees, books, supplies, and equipment AS LONG AS these are paid directly to an eligible education institution

56
Q

American Opportunity Tax Credit

A

-applies to tuition and fees for 4 years of post-secondary education

57
Q

American Opportunity Tax Credit amount

A

100% of first $2,000 in qualified expenses plus 25% of second $2,000 in qualified expenses

max tax credit is $2,500 per year per student

58
Q

qualified expenses for the American Opportunity Tax Credit

A

tuition, fees, student activity paid directly to the university

other expenses that do not have to be paid directly to the university are books, supplies, and equipment

CFP Exam (24 decks)

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