Education Planning Flashcards
Education Funding Calculation Step 1
STEP 1: INFLATING the current tuition to its value on Day 1 of college
% used: Education inflation rate
Solve for FV
N=College age-current age
Education Funding Calculation Step 2
STEP 2: ADJUSTING the amount to solve for the PV of TOTAL funding needed Day 1 of College
SET TO BEGIN Mode
Use PV number from Step 1 as the PMT in this step!
% used: Inflation adjusted rate (1 + rate of inflation/1 + rate of inflation) - 1 x 100
*Return in numerator/inflation in denominator
Solve for PV
Education Funding Calculation Step 3
STEP 3: INVESTING the funds to hit the education savings need solve for in step 2
Change back to END mode
% used: Investment return
Solve for PV or PMT
If solving for PMT make sure to use - number
Check to see if you’re solving for monthly or annual contributions or 1-time payment
*May already have money saved and add that to PV as a negative number!
What amount can you fund a 529 plan?
$160,000
You can superfund a 529 plan for 5 years ($16,000 x 5) and use gift splitting ($80,000 x 2 = $160,000)
What amount can you fund a Coverdell ESA?
$2,000/ year per beneficiary
What are the qualified expenses for a 529 plan?
-tuition & fees
-books, computers, and related equipment & supplies
-special needs
-room & board for minimum half-time students
*Up to $10,000 in tuition expenses for K-12 schools
*Up to $10,000 in student loan payments
What are the qualified expenses for a Coverdell ESA?
-tuition & fees
-supplies, equipment
-special needs
-room & board for minimum half-time students
additional types of K-12 expenses
-can be used for elementary, secondary, college education
Can you change beneficiaries in a 529 plan and Coverdell?
Yes, you can change to another member of the beneficiary’s family
Are there income restrictions on a 529 plan?
NO, everyone can contribute to a 529 plan!
Are there time and age restrictions for a Coverdell ESA?
Yes, contributions must be made BEFORE beneficiary reaches age 18 and you need to use the account or change the beneficiary by age 30
Are there income restrictions on a Coverdell ESA?
Yes, see CFP tax tables
Are there penalties on withdrawing funds from a 529 or Coverdell ESA?
No,
UNLESS you make a withdrawal for non-qualified expenses then the earnings are subject to ordinary income tax & 10% penalty
What are the qualified expenses for EE & I bonds?
tuition and fees
What is the maximum investment in an EE & I bonds?
$10,000/year per owner
How old must you be to purchase an EE and I bond?
At least 24 year old at the time of bond issuance
When considering financial aid need and the expected family contribution amount, the UTMA/UGMA will be counted as ________________ assets
Child’s assets (20%)
Are there penalties if EE and I bonds are used for non-qualifying expenses?
No penalty, the interest in redeemed bonds will be included in federal income
Can you withdraw funds from your IRA or Roth IRA for college?
Yes, and the 10% penalty is waived if funds are withdrawn for higher education
*Note you still have to pay taxes of the distribution from IRA (income)
Are IRAs and Roth IRAs included in FAFSA EFC calculation?
NO
What is counted in the EFC for the parent’s?
brokerage accounts
What are alternative ways to fund college?
-home equity loan
-life insurance cash value
-qualified plans (401k)
-defer admission
-community college
How many years does FAFSA look back for reported income?
2 years
EFC is composed of what
Income (parents & students) + Assets (parents & students)
How much of the parent’s income is included in EFC?
22%-47%
How much of the student’s income is included in EFC?
50% over $7,040
How much of the parent’s assets are included in EFC?
5.64%
How much of the student’s assets are included in EFC?
20%
How much are others (other family members, grandparents, etc) accounts included in EFC?
0%
BUT up to 50% reduction on distributions impact on aid
Financial need formula
Cost of attendance - EFC = financial need
