Education Planning (Lesson 6) Flashcards
What does FAFSA stand for and what does it do?
- Free Application for Federal Student Aid
- Starts the financial aid process
- Used to Calculate the Expected Family Contribution amount
What is the EFC and what does it do?
- Formula developed by congress used to determine how much a family should contribute towards their Childs education
- Formula determines what type of financial aid the student qualifies for
What does the formula consider?
- Size of the family
- number of family members in college at the same time
- income
- assets
- unusual financial burdens such as medical bills
What is the formula for Financial need
Cost of attendance - Expected family contribution = Financial need
When is a student considered independent
- Over age 23
- Married
- Working on Masters or Doctorate
- if they have legal dependents other than spouse
- veteran of the US armed forces
What is a Federal Pell Grant
- on a strictly need based and dependent on the EFC amount
- EFC determines a students eligibility and how much is awarded
- only students that have not earned bachelors or professional degree qualify
What is a Stafford loan
- are student loans
- Repayment begins after a 6 month grace period of leaving school or falling below part time status (6 semester hours) - Subsidized vs Unsubsidized
- Stafford loans are not appropriate if the parents intend to repay the loan
Who pays the interest on Subsidized Stafford loans while the undergrad is in school
Federal government
When does the interest begin on Unsubsidized Stafford loans
when the funds are disbursed
Which Stafford loan is need based
Subsidized
Who are Unsubsidized Stafford loans available to
Undergrad and graduate students
What are Parent Loans for Undergraduate Students (PLUS)
- Loans for parents to pay for their children’s undergrad studies
- Not need based but depends on parents credit score
Are PLUS loans subsidized
No
When are PLUS loans appropriate
- for parents who can afford to make a loan payment buy may not have saved anything for education
Who is eligible for Grad Plus loan for Graduate Students? (PLUS Direct)
A graduate or professional student enrolled at least half time at an eligible school in a program leading to a graduate or professional degree or certificate
What are PLUS Direct plans dependent on?
- Students credit score
- Maximum amount you can borrow is the cost of attendance minus any financial assistance you receive
When do payments begin on PLUS direct loans
6 months after graduation, leave school, or drop below half time enrollment but interest accrues as you go
What is the Federal Perkins Loan Program
- for students with exceptionally low EFC amounts
- Need based
What are two types of Campus based financial aid
- Federal supplemental Education Opportunity Grant (Needs based/low EFC)
- Federal Work study
What is a Income based repayment
- monthly payment is 10 - 15% of discretionary income with remaining debt forgiveness after 25 years
- forgiveness amount is taxable in year forgiven
- recalculated each year
What loans are eligible for IBR and which are not
- Stafford loans and most other Federal loans are eligible
- PLUS loans other than PLUS direct loans are not eligible for IBR
What is a Pay as you earn repayment plan (PAYE)
- Available if the borrower has a high debt to income ratio
- Monthly student loan repayment of 10% of discretionary income with remaining debt forgiven after 20 years
Which loans are eligible for PAYE
- Direct federal loans (not Stafford)
- Plus loans to graduate students (Not regular plus loans)
What is a graduated repayment plan
- loan paid over 10 years
- starts off lower than the standard repayment plan and increases every 2 years
- results in more interest being paid
What is a extended repayment plan
- available when the loan balance is over $30,000
- payments can be fixed or graduated
- payable over 25 years
What is a income contingent repayment plan
- similar to pay as you earn
- 20% of discretionary income of payment amount on a fixed payment over 12 years - balance forgiven after 25 years
What is a prepaid tuition plan?
- Considered an asset of the parent for financial aid purposes
- can be used to pay for in state college credit at todays cost
What are the advantages of a prepaid tuition plan
lock in tuition cost in todays dollars
what are disadvantages of a prepaid tuition plan
- Only earn a return equal to tuition inflation
- child may receive a scholarship and not use the tuition credits
- Parents can return the tuition credits but only receive principal back typically without interest
- state schools may have less than desirable curriculum in the students area of interest
- Only designed to include tuition not room and board
What is a Savings plan or 529 plan
- considered an asset of the parent for financial aid purposes
- any one can contribute to a savings plan
- any appreciation is tax free if used for qualified education expenses
- Couple that uses gift splitting can contribute $150,000 in one year using the 5 year rule
- Removed from contributors gross estate
What are the advantages of Savings Plans or 529 plans?
- possible state income tax deduction
- No AGI phaseout
- Account owner controls the assets
- Account owner can change the beneficiary
- contributor can remove assets from their gross estate
What are the disadvantages of Savings Plans or 529 plans?
- 10% penalty on the earnings and the earnings included in gross income if not used for qualified expenses
What are the exceptions to the 10% penalty for including distributions in gross income for 529 plans
- death
- disability
- scholarship for beneficiary
- Earnings portion is still taxable though
what are qualified education expenses for 529 plans
- tuition and fees
- books
- supplies
- equipment
- room and board for students at least half time
- $10,000 can be used for elementary or secondary public, private, or religious school
- $10,000 for student loans
- Apprenticeships that are register with the Secretary of Labor under the National Apprenticeship Act
What are 529A ABLE Accounts
- Achieving a Better Life Experience accounts (ABLE)
- assist persons with disabilities similar to a Section 529 Tuition plans
- only one ABLE account for each beneficiary
- beneficiaries need to be eligible for SS disability or SS income or filed a disability certification with the IRS
Who can contribute to an ABLE account
- Anyone
- limited to $15,000
- 529 plans can be rolled over into ABLE accounts as long as the beneficiary is the same or a family member of the beneficiary
Are ABLE account balances counted in determining eligibility for any federal means tested programs
- No as long as the balance remains under $100,000
- If over $100,000 SSI payments will be suspended until account balance is under this amount
What are Coverdell Education Savings accounts
- Considered an asset of the parent for financial aid purposes
- Contributions are limited to $2000 per year per beneficiary
- AGI phase out (Amounts on CFP sheet)
- Contributions grow tax deferred unless used for qualified education expenses (if used for qualified education expenses all tax free)
- Account owner can change the beneficiary at anytime
- 10% penalty on earnings and earning are included in gross income if not used for qualified education expenses
Can a Coverdell ESA be used for private elementary and secondary eduction
Yes
When must the funds of a Coverdell ESA be used by
used by the time beneficiary turns 30
When can an account owner make contributions to a Coverdell ESA
up until the beneficiary turns 18 years old
What are qualified education expenses for Coverdell ESA accounts for both elementary/secondary and higher education?
Elementary/Secondary Expenses
- Tuition and fees
- books
- supplies
- equipment
- tutoring
- computer related expenses
- certain special needs services for special needs beneficiaries
Higher Education
- tuition and fees
- books
- room and board
- computer related expenses
What is a qualified distribution from a Roth IRA
- 5 year holding period and
- Death, Disability, attainment of age 59 1/2 or first time home purchase limited to $10,000
- Contributions and conversions can always be withdrawn tax free
What is the penalty for nonqualified distributions and what are the exemptions
- 10% penalty and earnings are included in gross income
- Education benefit waves the penalty but earnings are still taxable
What are qualified education expenses for Roth IRAs
- Tuition and fees
- books
- supplies
- equipment
- room and board of a student enrolled at least half time
What is a Series EE/Series E Savings bond
- Sold at face value
- minimum of $25 and $10,000 annual maximum
- Nonmarketable and nontransferable
- Do not pay interest increase slowly in value over 30 years
- redeemable after one year with 3 month interest penalty if redeemed in less than 5 years
When is interest taxable on a Series EE bond and where is it taxed
- taxed when bond is redeemed
- taxable for federal only not state or local
- can be tax free if redeemed for education purposes
What are UGMA and UTMA accounts
- considered an asset of the child for financial aid purposes
- may be subject to kiddie tax
- child can use funds for anything not just education
What assets can an UTMA account hold
- real estate
- stocks
- mutual funds or bonds
What assets can an UGMA account hold
- Stocks
- Mutual funds and bonds
Interest on student loans is deductible above or below the line and is limited to?
- Above the line
- limited to $2,500
What is the Lifetime Learning credit and what is the credit amount
- available for tuition and fees related to undergraduate, graduate, or professional programs
- tax credit is 20% of up to $10,000 in qualified expenses per year
- Maximum lifetime credit amount per family is $2,000 per year
- Claimed for an unlimited amount of years
What are qualified expenses for the Lifetime Learning credit
- tuition and fees
- student activity fees
- books
- supplies
- equipment (Fees must be paid directly to institution)
What is the American opportunity tax credit and what is the credit amount
- applies to tuition and fees for four years of post secondary education
Tax credit is:
- 100% of first $2,000 in qualified expenses and
- 25% of second $2,000 in qualified expenses
- Maximum credit is $2,500 per year per student
What are qualified expenses for the American opportunity tax credit
- tuition and fees (Paid directly to college)
- student activity fees (Paid directly to college)
- Books (Does not have to be paid directly to college)
- supplies (Does not have to be paid directly to college)
- equipment (Does not have to be paid directly to college)
Can the AOTC and LLC be claim in the same year
yes just not for the same child
How much can an employer reimburse an employee for education before it is included in income
$5,250
What is the maximum amount of AOTC per year
$2,500 per student
What is the maximum amount of LLC per year
$2,000 per family
Maximum that can be contributed to Coverdell account
$2,000 per donee (AGI Phaseouts)
Which education savings and education credits have AGI phaseouts
- Coverdell
- LLC
- AOTC
What option is best for parents that have not started saving for college, with children that are near college age, and have a higher AGI
PLUS Loan
Can room and board be used in the calculation for LLC and AOTC
No
Which to forms of saving vehicles cannot be used for books and supplies
- Prepaid tuition
- EE Bond
Which to savings plans only includes room and board if the student is greater than or equal to half time
- 529 plan
- Roth IRA
