Education Planning Flashcards
what does FAFSA stand for?
Free Application for Federal Student Aid
what does EFC stand for?
Expected Family Contribution
what is the EFC?
a formula developed by Congress used to determine how much a family could contribute towards their child’s education
what does the EFC consider?
family size, number of family members in college at the same time, income, assets, unusual financial burdens (like medical bills)
when is a student considered independent?
- over age 23
- married
- working on Masters or Doctorate
- have legal dependents other than a spouse
- veteran of US armed forces
Federal Pell Grant
- need based, dependent on EFC amount
- only eligible for students earning an undergrad degree
Stafford Loan
- 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
Subsidized Stafford Loan
- need based
- interest is paid for by the federal government while the undergrad is in school
Unsubsidized Stafford Loan
- not need based
- available to undergrad and grad students
- interest begins to accrue when the funds are disbursed
Parent Loans for Undergraduate Students (PLUS)
- 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
Grad PLUS loan
- 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
Federal Perkins Loan Program
- expired in 2017
- for students with exceptionally low EFC amounts
- need based
what are the two types of campus-based financial aid?
- Federal Supplemental Education Opportunity Grant (FSEOG)
2. Federal Work Study
what does FSEOG stand for?
Federal Supplemental Education Opportunity Grant
what does PLUS stand for?
Parent Loans for Undergraduate Students
what does IBR stand for?
Income Based Repayment
what is Income Based Repayment (IBR)?
monthly student loan repayment of 10-15% of discretionary income with remaining debt forgiveness after 25 years
what does PAYE stand for?
Pay as You Earn Repayment
what is Pay as You Earn Repayment (PAYE)?
- 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
what is Graduated Repayment?
- 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
what is Extended Repayment?
- available when the loan balance is over $30k
- payments can be either fixed or graduated, and are payable over 25 years
what is Income Contingent Repayment?
-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
what are the 3 types of qualified state tuition plans?
- prepaid tuition
- 529 plan
- 529A ABLE plan
prepaid tuition is considered an asset of who for financial aid purposes?
the parent
what is prepaid tuition?
- 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
advantage of prepaid tuition
lock in tuition cost in today’s dollars
disadvantages of prepaid tuition
- 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
529 plan is considered an asset of who for financial aid purposes?
the parent
what is a 529 plan?
- 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
contribution pro-rate for 529 plan
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)
advantages of 529 plan
- 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
disadvantages of 529 plan
-10% penalty on earnings and earnings are included in gross income if not used for qualified education expenses
what are the exception to the 10% penalty on 529 plan earnings not used for qualified education expenses
death, disability, and scholarship for the beneficiary
what are the qualified education expenses for a 529 plan?
tuition, fees, books, supplies, equipment, room and board if enrolled at least 1/2 time
can 529 be used towards primary/secondary education?
yes, up to $10k of annual distributions can be taken from a 529 plan to pay for tuition
can 529 be used towards student loans?
yes, an aggregate amount of $10k can be distributed to pay student loans
what is a 529A ABLE account?
- 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
the Coverdell Education Savings Account (ESA) is considered an asset of who for financial aid purposes?
the parent
Coverdell Education Savings Account
- 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
can Coverdell ESA be used towards primary/secondary education?
yes
qualified expenses for a Coverdell ESA
tuition, fees, books, room and board, and computer related expenses
Roth IRA contributions limit
$6,000 per year (as per 2021 tax laws), plus $1,000/year if age 50+
Roth IRA contribution details
- 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
qualified distribution rule from a Roth IRA
- must meet a 5-year holding period, AND
- either death, disability, attainment of age 59.5, or first time house purchase up to $10k
Series EE / Series E Savings Bond
- 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
what does UGMA stand for?
Uniform Gift to Minor’s Act
what does UTMA stand for?
Uniform Transfer to Minor’s Act
assets in an UGMA or UTMA are considered belonging to who for financial aid purposes?
the child
primary risk of using an UGMA or UTMA to fund a child’s education
child can use the assets for something other than education
what investments can be included in an UTMA?
real estate, stocks, mutual funds, bonds
what investments can be included in an UGMA?
stocks, mutual funds, bond
NOT real estate
how is student loan interest deductible?
- above-the-line (before AGI)
- limited to $2,500
- loan must have been used for tuition, room, board, supplies, or other necessary expenses
Lifetime Learning Credit (LLC)
- available for tuition and fees related to undergrad, grad, or professional programs
- can be claimed for an unlimited number of years
Lifetime Learning Credit tax credit amount
20% of up to $10,000 in qualified expenses
maximum credit is $2,000 per year per family
qualified expenses for Lifetime Learning Credit
tuition, fees, student activity fees, books, supplies, and equipment AS LONG AS these are paid directly to an eligible education institution
American Opportunity Tax Credit
-applies to tuition and fees for 4 years of post-secondary education
American Opportunity Tax Credit amount
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
qualified expenses for the American Opportunity Tax Credit
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
