Education Planning Flashcards
how to figure out College funding TVM questions
Break it down.
First find how much a single year tuition
Then total the 4 years
Take that total and break it down to a present value
College costs $18,000 this year and will increase each year by 6% for 18 years
$18000 PV 18 N 6 I FV = $51,378
If someone is getting a 9% investment return but inflation increases 6% annually, how do you find that
(1.09/1.06) -1 x 100
2.83
College costs $51,378 (you’re paying this each year) a year and inflation is 6%. Your growth rate is 9%. What is the total cost over 4 years
51,378 PMT 4 N 2.83 I {(1.09/1.06) -1 x 100} PV
197,183
End of year payment needed to save $197,183 with a growth rate of 9% over 18 years
END $197,183 FV 18 N 9 I PMT $4774
ALWAYS LOOK IS IT BEG OR END
What doesn’t qualify for the American Opportunity Credit?
Room and board
Am. Opportunity Tax Credit
-Each CHILD for first 4 years
-Tuition, books, and fees NOT Room and Board
- Enrolled at least half time at Vocational, College or University
What is the max Am Oppo Tax credit?
$2,500 per CHILD
Am Oppo Tax Credit Calc
100% of the first $2,000 then 25% of the next $2000 for a total of $2500
Am oppo tax credit is phased out for who
single filers and families w/joint returns over the AGI threshold
Am Oppor Tax Credit doesn’t cover expenses paid by
529s and Coverdells
How many tax favored vehicles can a taxpayer use per child?
Only one per child per year. Can’t combine American oppo with Lifetime Learning Credit or deduction for tuition expenses
Lifetime Learning Credit limit per family
$2000 annually
20% of the first $10,000
Lifetime Learning Credit pays for what
qualified tuition and expenses for undergraduate or graduate degree courses enrolled at least 1/2 time
What can Lifetime learning credit also be used for
improve job skills at an eligible institution if enrolled less than 1/2 time
Who can use lifetime learning credit
Single filers and families filing joint w/income BELOW annual income limits
Can a Taxpayer claim the Am Oppo credit and Lifetime Learning Credit in the same year?
Yes - but can’t use both credits on the same child.
Lifetime Learning credit is a per WHO credit?
per TAXPAYER not per student - so a taxpayer can claim LLC and AM Oppo in the same year just not on the same child.
If a parent pays w/Coverdell can they use lifetime learning credit on that?
No - not on the same expenses
How does a parent qualify to use the lifetime learning credit
child must be a dependent and parent must pay the tuition
What is the student loan interest deduction max?
$2,500 per year as a for AGI deduction, regardless of if they itemize
Which deduction has the widest options for use?
student loan interest - can be used for transportation, room and board, supplies, fees and tuition
What are some college funding strategies you may not think of right away
home equity loan or line of credit, borrowing from qualified pension plan or life insurance policy
what are some standard college funding strategies
regular savings, 529, coverdell, govt savings bonds, UTMA or UGMA
What did they add to 529 coverage in 2018
K-12 public private or religious schools up to $10,000
What is the primary school limit per year on a 529?
$10,000
2 types of 529
Prepaid tuition
529 savings plan
total funding for 4 years of college is what type of calculation?
Present value of an annuity due
Prepaid tuition covers costs if they increase?
Yes. If costs go up the prepaid tuition is guaranteed to pay for tuition for in state public schools and may be transferred to private or out of state
Are 529 contributions tax deductible?
Not federally but sometimes state
How many years worth can you put into a 529 at the start
5 years “forward funding”
Can owner’s control a 529’s investments?
No. But you can typically change investments once a year or if a new beneficiary is named
Is there a contributor income limit on 529?
No. Contributions can be made regardless of the contributors income
What can a 529 savings plan pay for?
“Qualified higher education expenses” tuition, books and fees are tax-free unless they exceed qualified expense
What is the penalty if the 529 money is not used to qualified education expenses and what does it apply to?
10% and it applies to the earnings not the principal
If a 529 withdrawal is not used for qualified education expenses, how is it taxed?
As ordinary income although some plans allow to transfer to a beneficiary in a lower tax bracket
Who is the Coverdell designed for?
Low and middle income taxpayers
Are contributions to Coverdells tax deductible?
No. (Sometimes 529 are state tax deductible but not federal)
Who can contribute to a Coverdell?
Anyone can contribute to an account for the same child. As long as it doesn’t exceed $2,000
How are the contributions to a Coverdell treated re: the beneficiary?
As non taxable gifts to the beneficiary
Coverdell funds are taxed how when used for qualified education expenses?
Tax free
Who owns the Coverdell?
The child
Can you transfer a Coverdell to a 529?
Yes - without triggering a tax. But, since Coverdell is owned by child should NOT if the 529 is owned by the parent.
Distributions of Coverdell’s are part what and what
part principal and part earnings. If they aren’t used for qualified edu. expenses there’s a 10% tax.
Which is more flexible UTMA or UGMA
UTMA - can hold real estate and partnerships in addition to cash, stocks, bonds, mutual funds
UGMA age of maturity
18
UTMA age of maturity
21 or 25 depending on the state
Drawback of UTMA or UGMA for a minor
they are taxed on unearned income that is distributed or held in the account
Most UTMA and UGMAs can be converted into a what
529 - but the securities in the UTMA or UGMA must be sold first which could result in capital gains
Withdrawals from UTMA or UGMA must be used for whom?
the minor
A series EE bonds price is what relative to its face value
Price is 1/2 face value. Face value as low as $50
How does interest accrue for EE bonds
it accrues until they are worth their face value at maturity
Series EE interest rate
90% of the AVG 5 year treasury rate over the prir 6 months
EE bonds are safe and liquid although cashing in before maturity results in what
A reduced yield
How can EE bonds be exempt from Federal taxes?
Used for college tuition and fees
If you transfer EE bonds to a 529 is there tax?
No but the qualifications for income limits must be met in the year they’re redeemed. There are phase outs for this exclusion if they make too much $
Expected Family Contribution Amount
a percentage of parents and students assets they are expected to contribute toward the cost of college each year
Whos income and assets are included to find EFC?
Parents and students
For the most part, all Parents assets counts toward EFC except what
Retirement assets and home equity
Federal Govt expects a smaller contribution of whos assets towards college
Parents
Accounts owned by who are excluded from EFC?
Grandparents
Assets owned by whom result in greater reduction of financial aid?
The student
Which accounts will have the greatest negative effect on student financial aid?
UTMA or UGMA
ASSET contributions for financial aid include what percent of the parents net worth
5.64%
Parents contribution amount is what plus what
Adjusted income + assets = parents contribution amount
Parents adjusted income based on AGI minus what
an allowance for taxes and basic living expenses
Do dependent students have to contribute assets and income?
Yes
Student percentage for assets
20% of net worth then add that to income amount
Student income amount calculation
50% of students income after subtracting income protection allowance then add that to asset amount
Factors for Asset Protection Allowance
family’s income, family size, number of family members in college and age of oldest parent
Assets excluded from EFC
-home equity in primary residence
- retirement plans
- cash value life insurance
- annuities
- val of small business owned by family
Coverdell and 529s count toward EFC if who owns them?
the Parents
Strategy around Asset Protection for college funding
Invest in countable assets up to protection limits then invest in non-countable assets
If you use IRA or 401k to pay for college what happens
No penalties but the principal and earnings count as earned income on the following years Aid application
Are 529 and Coverdell withdrawals counted as income on next years aid application?
No - retirement plans are
Do pell grants have to be repaid?
No it’s a grant
Who are Pell grants awarded to generally
-vocational or undergraduate students who don’t have a bachelors
- lower income families
How many Pell grants per year
Only one
Can you receive a Pell grant for more than 1 school at the same time?
No
What factors into Pell grant
EFC, your cost of attendance, full time or part time, did you go the full academic year
Perkins Loans
Don’t exist anymore
Are available to be forgiven based on occupation
What was the rate, grace period, and repayment term on a Perkins loan
5% fixed, 9 month grace period, 10 year repayment term
Perkins Loan forgiveness took place over a what period
5 year
What is the Dept of Education major form of financial aid?
Federal Direct Loan (stafford loan)
What were Federal Direct Loans formerly called?
Stafford loan
Subsidized Direct loan is based on what
student financial need. Gov pays interest while student is in school
What does repayment of a Subsidized direct loan start
6 months after graduation
Direct Unsubsidized loan
NOT based on financial need
can delay paying interest until you leave school
When is interest expected to be repaid on a Direct Unsubsidized loan?
Within 60 days from the funds dispersal to the time the principal is paid off
Direct Unsubsidized have what type of rate?
Fixed rate for the life of the loan
Federal PLUS Loan is for who?
Parents who have a kid enrolled at least 1/2 the time
Are PLUS loans need based?
No - based on total cost of college minus any other fin. aid grants and scholarships
Can graduate students use a PLUS loan?
Yes
Max interest rate on a PLUS loan (this is important)
9% - can change once a year
When does interest start on a PLUS loan?
As soon as the first disbursement and until the loan is repaid
How many installments on a PLUS loan
2 installments first installment never greater than 1/2 the loan amount
Max Pell Grant this is important
$6,895
How many pell Grants can you get per year?
1
How is a Pell Grant pro rated based on your credits?
If full time is 20 credits and you’re taking 15 credits you would get 75% of the grant
Max interest rate on a Stafford Loan? (subsidize or unsibsidized) this is important
8.25%
A subsidized loan does not accrue interest until after the deferment period which is (3 things)
6 months after graduation, leaving school, going below 1/2 time status
When does an unsubsidized loan start accruing interest?
as soon as the funds are disbursed
How can you get extra deferment?
-Going 1/2 time to grad school
-in an approved fellowship program
-training program for the disabled
-can’t get work for 3 years
- economic hardship for 3 years
What does a PLUS loan have that other loans don’t? (bad)
An origination fee, typically 4%
2 Campus based Financial Aid Options
- Federal Supplemental Education Opportunity Grant
- Federal Work Study Program
FSEOG gives priority to people who have received
Pell grants
FSEOG range is from (what amount can you receive)
$100 to $4,000
Perkins loan max rate (this is important)
5%
Who is the lender on a Perkins loan?
The school itself, even though its federal money
What is the deferrment on Perkins loan?
9 months - remember subsidized loan has 6 months
Another name for a Qualified State Tuition Plan
529
If you make a gift of 85k into a 529 this year and live 1 second into next year, how much is still included on your estate?
3 years - you get 1 year for the year you made the gift and since you lived at least 1 second into the next year you get that year also so you gifted a total of 35k
When would you have to pay tax on funds from a coverdell?
If they’re not used for qualified education expenses
Who owns the coverdell the parents or the kid?
The kid
Max annual coverdell contribution?
2k
Age max for fund use on coverdell vs 529
30 years on coverdell, no age limit on 529
AGI for single and families on a Coverdell (this is important)
If you’re in the middle of these you can only do half so for example if you make $102,500 you can only put $1,000 into the account
One Drawback of Coverdell (relative to other funding methods)
precludes the American Opp Credit or the Lifetime Learning Credit
Say you owe 30k education expenses, how could you pay using a 529 and Coverdell?
Pay 20k of the expenses with a 529 and then pay 10k from a diff type of account and then use the coverdell for $2000 of that
529 pays for 10k of elementary school ed but Coverdell pays for how much?
Unlimited
How to calculate Phase out on a Covedell Contribution
(UPPER AGI Limit - ACTUAL AGI) / (Upper AGI - Lower AGI) * Contribution limit (say $4,000 for 2 kids) then divide the answer by each child
Can an 18 year old receive coverdell contributions?
No
American Educational Opportunity credit has what tax feature for the student
If you have zero tax liability you can get $1,000 refund
Who can use the American Educational Opp credit?
The taxpayer
the Spouse
The Dependent
Max a household can claim on Lifetime Learning Credit
10k per household but you only get 20% of that
What type of student (enrollment) can use the American Opp Credit?
at least half time
Clue on lifetime learning?
It’s lifetime so more than likely you’re not going full time
Can you contribute to a coverdell and 529 in the same year for the same beneficiary?
Yes as long as the contributor’s AGI isn’t over the limit
Is paying a dependent’s college directly subject to gift taxes?
No - paying for college is an exempt gift and is not subject to gift taxes
If you’re given coverdell as an answer choice you need to be aware of what?
The contribution limit. More than likely you can’t contribute enough to cover the whole cost of college
If a question asks you to cover “all of the required costs of college” what would you most likely choose?
529 Savings plan - prepaid tuition only pays for tuition. Coverdell is probably not going to have enough to pay for everything due to cap.
On FAFSA - is child support or IRA/401k contributions counted?
Yes - counted as income.
Which of the following is paid for by a 529
books, room and board, tuition, supplies
All are paid for by a 529
No matter who its coming from - how much can a student accumulate in their Coverdell?
NO MORE THAN 2K TOTAL
mom, dad, uncle, no matter who can’t accumulate more than 2k
If Im a grad student can I get a pell grant?
No but you can use a PLUS loan
If Im part time can I get a Pell grant?
Yes
Full or part time - can you use a pell grant?
Yes you can use a pell grant for full or part time but undergrad only
FSEOG able to be used for part time student?
Yes - FSEOG is available for part or full time
If I’m part time can I use the American Education Opp Credit?
Yes you can for a total of 4 years
Perkins loans characteristics
Repayment can be extended up to 10 years
Undergrad OR GRAD
Basis of Financial Need
Could a grad student have used a Perkins loan?
Yes
Perkins loans - undergrad and grad?
Yes
Can a grad student use the Amer Edu Opp Credit?
No - you would need to use the Lifetime Learning, PLUS loan or Perkins loan
American Opp Credit apply to half time student?
Yes you must be going at least half time
What financing is available for undergrads?
Subsidized Stafford, Unsubsidized Stafford, Perkins Loan, FSEOG, Pell Grant
Which of the following is able to be paid for by a coverdell
Computer/Laptop
Transportation
Books/supplies
Tuition, room & board
All. Coverdell coverALL INCLUDING transportation
Who controls the 529 the beneficiary or the account holder?
Account holder
Is a 529 included in your estate if you’re the owner?
No not included for estate tax purposes
Fastest way to get the most money into a 529
Married couple both contributing 5 years worth - 170k total
How often can you transfer beneficiaries on a 529
not more than once every 12 months
When might someone be subject to a gift tax on a 529
if the new beneficiary is a generation lower than the first beneficiary- relevant amount should be subject to the gift tax exclusion
How is the american opp credit received?
Its paid as a credit, not a deduction, so you will receive cash back most likely in the form of a tax refund
What do you do with the american opp credit refunds year to year?
You save them up to contribute to future years costs. For example you keep first 3 years and in year 4 you have $7500 to put toward tuition
For financial aid purposes, a 529 is an asset of whom?
The owner, not the beneficiary
Pell grant factor in other aid student receives?
No
FSEOG factor in other student aid?
Yes
TEACH grant
For students who plan to pursue teaching $4000 a year
How long must you teach after receiving TEACH grant?
4 years
Who decided who got a perkins loan
The school
Is EFC taken into account on an unsubsidized loan?
No - its not based on need
Limit you can borrow on a PLUS loan
cost of attendance minus any other financial aid. If school costs 10k and you receive 6k financial aid the parent can borrow 4k
