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CFP Exam > Education Planning > Flashcards

Education Planning Flashcards

1
Q

Stafford Loans

A
  • federally funded program
  • Direct Subsidized and Unsubsidized, and available to undergraduate & graduate (but graduate not subsidized loan)
  • only undergraduates qualify for subs., and
    generally subs. if based on financial need
  • Subsidy is gov’t paying interest while
    student is in school and during 6 month
    following graduation
  • eligible to half time students, but not part time
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2
Q

Parent Loans for Undergraduate Student (PLUS Loan) – Federally Funded

A
  • parents borrow for children’s undergrad. Can borrow unlimited amount, except can’t be higher than cost of schooling
  • not available to part-time students (but programs shorter than academic year may be eligible for reduced loan amount)
  • Loans are NOT need-based
  • Interest rate is fixed & repayment begins w/ in 60 days of disbursement (though may be delayed until after school)
  • Grad PLUS loan program available directly for grad/profressional students themselves
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3
Q

Direct Consolidation Loans (Federally Funded)

A
  • Allows for combination of multiple student loans into one
  • parent loan can’t be consolidated w/ student loan
  • interest rate is weighted avg. of interest rates on loans included, rounded to next highest one-eighth of 1%
  • Becomes delinquent on student loan first day after missing payment. If more than 90 days delinquent, servicer may report to major credit bureaus.
  • Loan delinquent for 27- days under fed direct loan program or fed family education loan program is in default
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4
Q

Perkins Loans

A

Low interest rate loans funded by the federal government but administered by individual schools. These loans were available both to undergraduate and graduate students. They were need-based and were available to students who were attending on at least a half-time basis and who had an exceptional financial need.

Limits applied to the amount of funds that were borrowed. These loans featured a 5% interest rate, which was not charged during the period that the individual was a student. In addition, borrowers were not charged interest until nine months following graduation, leaving school, or dropping to less than half time, at which time repayment begins. Repayment is typically for 10 years.

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5
Q

Free Application for Federal Student Aid (FAFSA)

A

application student files for federal student aid

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6
Q

Pell Grants

A
  • only available to undergrad
  • based on substantial financial need
  • all students (including part-time) are eligible, though part time may be eligible for reduced
  • Max amount available changes each year, but unlikely to be enough to completely pay tuition
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7
Q

Federal Supplemental Educational Opportunity Grants (FSEOGs)

A
  • funded by fed government but administered by individual schools
  • Available to undergrad only & need-based
  • Available to part-time students
  • Limited based on amount available. Pell Grant recipients given highest priority in receiving
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8
Q

TEACH Grant

A
  • provides grants to students who agree to serve as full-time teacher in high-need field in public or private elementary or secondary school that serves low-income students
  • failure to comply w/ service obligation results in conversion to unsubsidized Stafford loans
  • students enrolled less than full-time will have grant amounts reduced
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9
Q

Federal Work-Study program

A
  • eligible student provided employment to help cover cost of education
  • federal funds used by schools to administer program
  • gov’t and employer share in payments made to students
  • eligibility based on financial need
  • available to undergrad & grad and part & full time
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10
Q

Custodial Accounts (UGMA & UTMAs)

A
  • Child gains access of funds at age of majority (age 18 or 21), even if funds were not used for college education
  • Account cannot be transferred
  • UTMA can be funded w/ any cash-type asset, including securities & MFs, and real estate.
  • UGMA cannot be funded w/ real estate
  • child is considered owner if there’s an appointed custodian
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11
Q

Series EE and I Savings Bonds

A
  • permits qualified taxpayers to exclude from gross income all or portion of interest earned on redemption of eligible EE or I bonds issued after 1989
  • To qualify for exclusion, bondholder must be at least 24 when bond purchased, and taxpayer (or spouse, or dependent, etc.) must incur tuition.
  • Income phaseout when distro occurs so important to monitor client’s income
  • Series EE bonds can be converted tax-free to Section 529 Plans
  • Eligible educational expenses include tuition and fees (and its reduced by scholarships, financial assistance, etc.)
  • Non-eligible expenses include cost of room and board and books
  • Eligible expenses must be incurred in same tax year in which eligible bonds are redeemed
  • Child can be named as beneficiary, but cannot be co-owner.
  • Spouses must file MJF
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12
Q

Coverdell Education Savings Account (CESA)

A
  • Incentive for parents, grandparents, others to save for child’s education expenses
  • Total contributions to all CESAs for beneficiary (who must be under 18 when made) cannot be more than $2,000 in a year
  • Contributions are not deductible, but earnings accumulate tax free.
  • Distributions for qualified education expenses are tax-free
  • Qualified expenses can be used for K-12 also, and includes tuition, room and board
  • CESA established in trust or custodial acct
  • Contribution subject to phaseout of modified AGI
  • All funds must be used before student is 30. Any remaining will be disbursed and earnings will be s.t. income tax & 10% penalty
    Owner can change beneficiary (only 1 rollover allowed per year)
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13
Q

Section 529 Plans (Qualified Tuition Program - QTP)

A
  • Income Tax benefits: no AGI phaseout for contributions, tax-free earnings growth, tax-free withdrawals for qualified higher education expenses
  • For distributions for elementary or secondary school, only a max of $10k, otherwise consists of part earnings and part contributions & earnings would be taxed
  • If withdrawals. not used for qualified expenses, included in gross income and s.t. 10% penalty tax
  • contributions limits vary based on state (typically $100k - $250k)
  • Owner is typically contributor
  • Plan can be rolled over to any family member
  • Two types: prepaid tuition plan & college savings plan
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14
Q

529 Plan - Prepaid Tuition Plan

A
  • Can prepay future tuition and today’s rates or purchase credits to apply to future costs.
  • Typically apply to tuition and mandatory fees only
  • Child has to go to public college or university within state usually
  • If student goes somewhere not covered by plan, provisions made to pay a sum for that purpose, though likely not be equivalent amount
  • inflation based performance & may be suitable for risk-averse investor.
  • May offer state-guaranteed return on assets.
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15
Q

529 Plan - College Savings Plan

A
  • Typical 529 plan rules outlined. Market based performance, and suitable for risk-tolerant investor.
  • No state-guaranteed return on assets
  • Covers tuition, fees, books, supplies, and room and board (students attending at least half-time)
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16
Q

UGMA or UTMA Section 529 Plan

A
  • Many states that have 529 plans will permit roll over proceeds to 529
17
Q

ABLE Accounts (Achieving Better Life Experience)

A
  • provide individuals w/ disabilities and their families w/ ability to fund a tax-preferred savings account to pay for qualified disability-related expenses
  • contributions can be made by anyone
  • annual limitation on contributions is amount of annual gift tax exemption
  • After overall limitation on contributions are reached, designated beneficiary can contribution additional amount up to lesser of 1) fed. poverty line for one-person household or 2) individuals compensation for tax year
  • designated beneficiary can claim savers credit
  • Amounts from QTPs (529 plans) can be rolled to ABLE w/out penalty, provided ABLE is owned by designated beneficiary or member of designated beneficiary’s family. Can only roll over amount of annual limitation and any rolled over in excess is included in gross income
18
Q

Direct Transfers & Custodial Accounts

A
  • Consider income shifting to kid’s lower tax bracket
  • Custodial arrangements like UTMA and UGMA have disadvantages, like kids given right to property at age of majority
  • Custodial account usually subject to kiddie tax so formal trust may be better at minimizing that problem
19
Q

Kiddie Tax

A
  • applies to unearned (i.e., investment income) greater than $2,600 in 2024
  • first $1,300 tax free bc offset by standard deduction
  • next $1,300 taxed at kid’s marginal tax rate
  • any unearned income exceeding $2,600 is taxed at estate & trust marginal bracket
  • should be structured for growth rather than income to avoid kiddie tax
20
Q

Minors Trust [2503(c)]

A
  • Designed to use gift tax annual exclusion
  • gift to individual under 21 will not be considered a gift of future interest as long as property and income are payable to child at age 21
  • Typically escapes kiddie tax as income is subject to trust’s tax bracket
  • Funds must be given when child reaches age 21
21
Q

Current Income Trust [2503(b)]

A
  • Must have income paid out annual to beneficiary (so presents problems in avoiding kiddie tax)
  • Principal need not be distributed at any specified age
  • important to choose investments that increase in value but do not pay income while child is young
22
Q

Crummey invasion trust

A
  • transfers money to trust in way that avoids gift tax and keeps money out of estate of donor
  • Can withdrawal from trust amount equal to less of annual addition or annual gift tax exclusion
  • Distributions can be taken at any age
23
Q

Using Retirement Plans to Fund College Expenses

A
  • Many qualified retirement plans permit participant to borrow without imposing premature distribution penalty
  • Under “substantially equal periodic payment” exception to IRC Section 72(t), participant can turn some or all of retirement account into period certain or life annuity for preretirement use at any time w/out usual 10% premature distribution penalty. As long as withdrawal roughly equal amounts annually for at least 5 years following commencement of distros, or until reaching age 59.5 (whichever is laster), retirement money can be used for any reason
  • generally not recommended unless client overfunded for retirement
  • may be appropriate if large plans that will require substantial RMDs
  • IRA owner can withdraw funds for qualified education expense but likely taxable as ordinary income
  • Roth IRAs can be good source
24
Q

Assume that an adult client is currently in a low marginal income tax bracket and does not anticipate major income increases in the future. He is interested in a low-risk investment purchased in his name that may provide favorable income tax treatment when used for the higher education tuition expenses of his only child. He is also not interested in incurring the expense of establishing a trust when saving for his child’s college education costs. Identify a viable alternative to recommend to the client.
A. An UGMA account
B. A passbook savings account in the child’s name
C. Municipal bonds purchased in the name of the client
D. Series EE savings bond

A

D - Series EE Savings Bond

25
Q

Erin’s grandmother recently established a CESA on behalf of Erin, age five, and contributed $2,000 to the account. Now, Erin’s father wants to contribute an additional $2,000 to the account in this same year. Is this permitted?
A. Yes, because both the grandmother and father are family members of Erin.
B. No, only Erin’s father is allowed to establish a CESA.
C. Yes, up to $2,000 per donor can be contributed on Erin’s behalf.
D. No, $2,000 is the maximum contribution per beneficiary in any single year.

A

D - No, $2k max contribution

26
Q

Identify a difference between a Section 529 plan and a Coverdell ESA (CESA).
A. The account balance in a Section 529 plan must be distributed to the child upon reaching age 30.
B. The CESA may not be used for higher education expenses.
C. Contributions made to a Section 529 plan are not subject to income limitations.
D. Contributions made to a CESA and not used for qualified education expenses may be reclaimed.

A

C - Contributions to Section 529 Plan not subject to income limitations

27
Q

George and Betty wish to establish a Section 529 college savings plan for both of their grandchildren. In 2020, what is the maximum amount that they can contribute without making a taxable gift for federal gift tax purposes? A. $75,000 B. $150,000 C. $265,000 D. $300,000 (2020 annual exclusion is $15k)

A

D - $300,000 (two grandchildren)

28
Q

Gift Tax Implications for 529 Plans

A
  • can contribution up to 5 times annual exclusion amount
  • contributions removed from contributor’s gross estate. Even though contributor retains control, still removed. But if does not outlive 5 year period, then contribution exclusion prorated annually
29
Q

Transfer of Funds if account for one student no longer needed. What variables should be considered?

A

Portability and control of account at age of majority

30
Q

Portability of funds for various types of accounts

A
  • 529s, if parents are owners, can be transferred to another beneficiary’s family member if permitted by plan
  • Coverdell ESAs (CESAs) can be transferred
  • UGMAs and UTMAs cannot be transferred
  • Trusts it depends on beneficiary
31
Q

Control of funds at age of majority for various accounts

A
  • 529s: account owner’s assets, funds are not transferred to student at 18
  • Coverdell (CESA) - all funds must be used before age 30
  • UGMA & UTMA - becomes child’s funds at age of majority. Not required to use funds for education
  • Trusts 2503(b) - can hold funds beyond beneficiary’s age
  • 2503(c) - principal & income by age 21
  • trusts w/ spendthrift provision - disburses funds for college expenses only and remains in control of trustee beyond age of majority
32
Q

American Opportunity Tax Credit

A
  • Credit extends to 1st 4 years of postsecondary education. Max $2,500 allowed
  • 100% of first $2k of qualified postsecondary expenses, and 25% of next $2k of
  • qualified expenses include tuition, fees, and course material (room & board excluded)
  • Up to 40% of credit refundable
  • one of the credit is refundable if the taxpayer claiming the credit is a child who (1) is under age 18 (or a student who is at least age 18 and under age 24 and whose earned income does not exceed one-half of her own support), (2) has at least one living parent, and (3) does not file a joint tax return.
  • Student must be enrolled at least half-time
  • issued on per student basis & qualifying child must be listed as dependent of taxpayer
  • Subject to MAGI phaseouts
  • Not available to married taxpayers filing separately or students who have drug convictions
33
Q

Lifetime Learning Credit

A
  • can be claimed for unlimited years while student pursuing education
  • Doesn’t require enrollment in degree program or require half-time enrollment
    Permitted for 20% of first $10k of quialified expenses
  • per family credit
  • max credit is $2k
  • subject to MAGI phaseouts
34
Q

Student Loan INterest Deduction

A
  • Interest paid during tax year on qualified education loan is deductible as above-the-line deduction up to max of $2.5k per year
  • phaseout limits apply
35
Q

Coordination rules for education tax benefits

A
  • A taxpayer can claim an American Opportunity Tax Credit or Lifetime Learning Credit for the taxable year and can also exclude from gross income amounts distributed from a Section 529 plan or CESA, but only if the Section 529 plan or CESA tax-free distributions are not used to pay the same expenses for which either the American Opportunity Tax Credit or Lifetime Learning Credit was claimed.
  • The American Opportunity Tax Credit and Lifetime Learning Credit may not both be claimed in the same year for the same student.
  • Taxpayers may waive the American Opportunity Tax Credit or Lifetime Learning Credit even when they qualify for one of the credits. This may be the case if the tax savings resulting from the credit is less than the savings from the income tax-free treatment of Section 529 plan withdrawals.
  • The student loan interest deduction may be used in combination with any of the other educational tax benefits, including the American Opportunity Tax Credit or the Lifetime Learning Credit.
36
Q

Employer Assistance Programs

A
  • May provide unlimited amount of assistance to employee so long as job related. Section 162 benefit as part of employers deductible business expenses
  • May also provide up to $5,250 of non-job related education assistance as a tax-free employee benefit under IRC Section 127. Benefit limited to lesser of amount qualifying for educational expenses (tuition, fees, books, supplies, or equipment) or $5,250

CFP Exam (11 decks)

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