education planning Flashcards
information on the FAFSA is used to calculate what?
the expected family contribution (EFC)
what is the EFC?
it is a formula created by Congress that is used to determine how much a family should contribute towards their child’s education
what is the formula to determine financial aid?
tuition/cost of attendance - expected family contribution = financial need
students are considered independent when:
- they’re over age 23
- married
- working on masters or doctorate
- have legal dependents other than a spouse
- veteran of the US armed forces
what 5 financial aid programs are offered by the Department of Education?
federal pell grant
stafford loan
parent loans for undergraduate students
grad PLUS loans for graduate students
federal perkins loan program
federal pell grant
strictly need based and dependent on the EFC amount
only students that have not earned a bachelors or professional degree qualify
stafford loan (aks Federal Direct Loans)
primary type of financial aid provided by the US department of education
Student loans
repayment begins after a 6 month grace period of leaving school or falling below part time
there are two types of stafford loans - subsidized and unsubsidized
these are not appropriate if parents are going to repay the loans
what is the different between subsidized and unsubsidized stafford loans?
subsidized - NEED BASED
unsubsidized - NOT NEED BASED
parent loans for undergraduate students (PLUS)
loan for parents to pay for their children’s undergrad studies
NOT NEED BASED (depends on parents credit score)
not subsidized
they are appropriate for parents who can afford to make a loan payment but may not have saved anything for education
Grad PLUS loan for graduate students (PLUS Direct)
for grad or professional students enrolled at least half time
dependent on STUDENTS credit score
begin making payments after you graduate, leave school or drop below half time enrollment
interest accrues as you go
Federal Perkins Loan Program
this program expired on September 30th 2017
for students with exceptionally low EFC amounts
is NEED BASED
Federal Supplemental Education Opportunity Grant
awarded to students with low EFC
NEED BASED
Federal Work Study
on or off campus employment to help pay education expenses
what are the tax advantaged plans for education savings?
qualified state tuition plans (prepaid tuition, 529 plans)
coverdell education savings accounts
roth ira
series ee savings bonds
uniform gift of minors act
prepaid tuition
considered an ASSET OF THE PARENT for financial aid purposes
can be used to pay for in state college credit at today’s cost
advantage: lock in tuition cost in today’s dollars
disadvantages: only earn a return equal to tuition inflation, the child may receive a scholarship and not use the tuition credits, parents can get the credits back but only get the principal and not the interest, state schools may not be where the child wants to go, does not include room and board
529 plans
considered an ASSET OF THE PARENT for financial aid purposes
any appreciation in the asset value is tax free if used for qualified education expenses
advantages: possible state income tax deduction for contributions, no AGI phase out, account owner controls the assets, can change the bene at any time, contributor can remove the assets from their gross estate
disadvantages: 10% penalty on the earnings and the earnings are included in gross income if not used for qualified education expenses (exceptions to the 10% penalty include distributions on accounts of death, disability and scholarship for the bene)
what are qualified education expenses for a 529 account?
tuition and fees
books
supplies
equipment
room and board of students enrolled at least half time
(10k annually can be taken for elementary or secondary public, private or religious schools)
10k can also be taken to pay student loans
and qualified distributions can be taken for apprenticeships
529A Able Accounts
assists persons with disabilities similar to a 529 accounts
only one account can be established for each eligible beneficiary
contributions can be made by anyone- not to exceed 16k in total per year
balances are not counted in determining eligibility for an federal means tested programs as long as the balance remains under 100k
Coverdell Education Savings Accounts
considered an ASSET OF THE PARENT for financial aid purposes
contributions are limited to 2k/year per bene
there is an income phase-out for those that make too much
earnings grow tax-deferred unless used for qualified education expenses
if used for education, then it is tax free
can be used for private elementary and secondary education
can change the bene anytime
must be used by age 30 of the bene
there is a 10% penalty on the earnings and earnings are included in gross income if not used for qualified expenses
cannot contribute beyond the benes 18th birthday
Roth IRA education benefit
10% penalty is waived on nonqualified distributions used for education expenses however the earnings will still be included in gross income
qualified expenses include tuiton and fees, books, supplies, equipment, along with room and board of students enrolled at least half time
Series EE/Series E Savings Bond
sold at face value, $25 min purchase (10k annual max)
available only through treasury direct
nonmarketable and nontrasferable
do not pay interest periodically, bond slowly increases in value over 30 years based on fixed rate at time of purchase
redeemable after 1 year with 3 month interest penalty if redeemed in less than 5 years
interest is not subject to federal income taxes until bond is redeemed. if used for education expenses, may be tax free
interest is not taxed at the state or local level
UGMA/UTMA
assets are considered ASSETS OF THE CHILD when determining financial aid
taxation may be subject to kiddie tax
if child is less than 19 then the unearned income may be taxed using the parental tax brackets
if child is 19 or older then unearned income is taxed at child’s rate
child can use assets for something other than education
UTMA can have real estate, UGMA does not
Lifetime Learning Credit
available for tuition and fees related to undergraduate, graduate, or professional programs if PAID DIRECTLY TO AN ELIGIBLE EDUCATION INSTITUTION
tax credit amount is 20% of up to 10k in qualified expenses per year
max lifetime learning credit per family is 2k/year
can be claimed for an unlimited number of years
American Opportunity Tax Credit
applies to tuition and fees for 4 years of post-secondary education
100% of first 2k and then 25% of second 2k aka max per student is 2.5k/year
tuition and fees must be paid directly to the university but other expenses do not have to be
