Financial Fundamentals - Ch 8 Flashcards

Question

What is the Standard Repayment method for Stafford Loans ?

Answer 1

-Schedule will amortize the loan for up to a 10-year time period, with minimum monthly payments of at least $50. -Pays the loan in the shortest amount of time.

Answer 2

Schedule allows borrowers with more than $30,000 outstanding in either FFEL Stafford Loans or Direct Stafford Loans, to repay the loans over a period of time not to exceed 25 years. - Lower monthly payment, - pay three times the amount of interest

Answer 3

- Repay a Stafford Loan for up to 10 years. -Start with make low payments, but the payments will increase every two years. -Allows borrowers to increase their loan payments as their income increases. - Under the graduated repayment schedule, no monthly loan payment will be more than three times the lowest monthly loan payment.

Answer 4

-Schedule caps the monthly payment based on the borrower’s income and family size. -To qualify for the IBR schedule, the amount of payment calculated using the IBR method must be less than the monthly payment under the standard repayment schedule over a 10-year term. -

Answer 5

* Stafford loans (FFEL or direct) * PLUS loans made to graduate or professional students (PLUS loans made to parents are not eligible) * Consolidation student loans

Answer 6

* Monthly payment will be 10 percent of discretionary income (15 percent for borrowers with a loan balance prior to July 1, 2014) and cannot be more than required under the standard 10-year repayment plan. * For subsidized loans, if the repayment amount calculated under the IBR schedule is less than the monthly interest that is due, the federal government will pay the remaining interest for up to three consecutive years from the date loan payments commence. Beyond the third year, any interest deficiencies will be added to the outstanding balance of the loan. * If a borrower has been paying the IBR schedule for 20 years (25 years for borrowers with a loan balance prior to July 1, 2014), still has a balance due, and meets certain other requirements, the balance due will be canceled. * If a borrower is making payments under the IBR schedule for 10 years, has Direct Stafford Loans, and has been working in public service for a qualifying employer for 10 years, the remaining balance due can be canceled. - If a borrower has FFEL Stafford Loans, it is possible to convert the loans to a Direct Stafford Loan to take advantage of the 10 Year Public Service Loan Forgiveness Program. The borrower will still have to meet the 10-year payment requirement on a Direct Stafford Loan. Any outstanding loan amount forgiven may be subject to income taxation

Answer 7

The income contingent repayment (ICR) schedule is for Direct Stafford Loans, Direct Graduate PLUS Loans, Direct Consolidation Loans, and FFEL Consolidation Loans only. Parent Direct or FFEL PLUS. - Loan borrowers are NOT eligible for the ICR repayment schedule unless the loans are consolidated to a Direct or FFEL Consolidation Loan. The amount of payment under the ICR schedule is the lesser of: * The amount required under a 12-year repayment schedule times an income percentage factor that varies based on annual income. * 20 percent of the borrower’s monthly discretionary income -If after 25 years, the loan has not been repaid, the outstanding balance will be canceled.

Answer 8

Available if the borrower has a: - High debt-to-income ratio - Caps the monthly payment based on the borrower's income and family size. These loans are available to use the PAYE schedule: * Direct Stafford loans * Direct PLUS loans made to graduate or professional students (PLUS loans made to parents are not eligible) * Direct and FFEL Consolidation loans (consolidated PLUS loans made to parents are not eligible) Benefits: * The monthly payment will be 10 percent of discretionary income and cannot be more than required under the standard 10-year repayment plan. * For subsidized loans, if the repayment amount calculated under the PAYE schedule is less than the monthly interest that is due, the federal government will pay the remaining interest for up to three consecutive years from the date loan payments commence. Beyond the third year, any interest deficiencies will be added to the outstanding balance of the loan. * If paying under the PAYE schedule for 20 years, still has a balance due, and meets certain other requirements, the balance due will be canceled. * If payments under the PAYE schedule for 10 years, has Direct Stafford Loans, and has been working in public service for a qualifying employer for 10 years, the remaining balance due can be canceled. Any outstanding loan amount forgiven may be subject to income taxation.

Answer 9

Repayment schedule will " CAP the monthly payment " based on the borrower's income and family size. The following loans are available to use the REPAYE schedule: * Direct Stafford loans * Direct PLUS loans made to graduate or professional students (PLUS loans made to parents are not eligible) * Direct and FFEL Consolidation loans (consolidated PLUS loans made to parents are not eligible) Benefits: * Monthly payment will be 10 % of discretionary income. * For subsidized loans, if the repayment amount calculated under the REPAYE schedule is less than the monthly interest that is due, the federal government will pay the remaining interest for up to three consecutive years from the date loan payments commence, and will pay half of the remaining interest beyond the three-year period. * For unsubsidized loans, if the repayment amount calculated under the REPAYE schedule is less than the monthly interest that is due, the federal government will pay half of the remaining interest that is due, for all periods. * If paying undergraduate loan payments under the REPAYE schedule for 20 years (25 years if any loans are graduate or professional loans), still has a balance due, a nd meets certain other requirements, the balance due will be canceled. * If making payments under the REPAYE schedule for 10 years, has Direct Stafford Loans, and has been working in public service for a qualifying employer for 10 years, the remaining balance due can be canceled. Any outstanding loan amount forgiven may be subject to income taxation

Answer 10

Repayment schedule will vary, based on the borrower’s income. - As the borrower’s income increases (or decreases), the repayment amount will increase (or decrease). -The repayment period is up to 10 years.

Answer 11

- A time when payments are suspended but may or may not incur interest expense. -Subsidized Stafford Loan - borrower will NOT be responsible for interest payments during the forbearance period. -Unsubsidized Stafford Loans- the borrower is responsible for interest charges during forbearance period.

Answer 12

-Loan program for undergraduate and graduate students with exceptional financial need. - The Perkins Loan is a low interest rate loan (5%), which is offered through a university’s financial aid office. - The university serves as the lender and the federal government provides the funds. -Repayment begins after a 9-month grace period. The grace period begins once the student graduates, leaves school, or drops below half-time status - No new Perkins loans are available after September 30, 2017.

Answer 13

- PARENT LOAN to pay for a "dependent’s" undergraduate expenses. - Student must be attending at least 1/2 time, in an eligible school. - NOT needs based. - NO debt-to-income ratio limitations, and require only that the parents do not have bad credit. -For parents that have NOT saved enough for the child’s education, their child is close in age to attending college, and the parents have sufficient cash flow to repay the loans. -PLUS Loans are available as a Direct PLUS Loan from the U.S. Department of Education. -The amount of a PLUS Loan a parent may borrow is the cost of attendance minus any other financial aid awards. -School determines the amount of Loan to receive. - Loan funds are disbursed in at least 2 equal payments and sent to the school and are used to pay tuition, fees, room and board. - Remaining funds are paid directly to the parents or can be held by the school for future education expenses. - Interest begins when first disbursement is paid. - NO subsidized PLUS Loans and repayment begins either 60 days after the loan is fully disbursed or may be postponed until six months after the dependent student ceases to be enrolled on at least a half-time basis. The parents can elect either repayment method. - Cost = interest expense + fee of about 4.3 percent for funds disbursed in 2019 and 2020 of the amount borrowed. -Eligible for deferment or forbearance, however it continues to accrue interest that can be paid immediately or added to the outstanding principal of the loan.

Answer 14

Students seeking graduate and professional degrees. -Based on the student's credit history, although a parent may endorse (agree to make the loan payments if the student is unable) the loan if the student has an adverse credit history. -NOT needs based -Students must have applied for the max. Stafford Loan amount available for graduate students. + Cost of Attendance - Other financial Aid _____________________ = Amount of Loan

Answer 15

Grace period depends on the type of loan: -PLUS Loans - 60 days after final disbursement -Stafford Loans (Direct and FFEL) - 6 months -Federal Perkins Loans - 9 Months

Answer 16

-Consolidate ALL of a student’s outstanding loans into one payment. -The interest rate for a consolidation loan is based on a weighted average of the interest rates of the loans being consolidated. - NO application fee to consolidate federal student loans into a Direct Consolidation Loan. -Eligible for consolidation if in the grace period or be in repayment. -Loan begins within 60 days of the funds being disbursed and the repayment period is from 10 to 30 years. The following loans are eligible for consolidation: * Subsidized and unsubsidized Direct and FFEL Stafford Loans * Federal Perkins Loans * Parent PLUS Loans * Graduate PLUS Loans

Answer 17

NOT Based on Income

Answer 18

Revised Pay as You Earn (REPAYE) Pay As You Earn (PAYE) Income based Repayment ( IBR ) Income contingent Repayment ( ICR)

Answer 19

YES. -Student loan debt is one of the exceptions in bankruptcy and is typically NOT a dischargeable debt. -While it is possible for student loan debt to be discharged under an undue hardship exception, these exceptions are not often granted and the student loan payments must continue to be made

Answer 20

NO Neither Perkins nor Stafford loans require a cosigner. - Private student loans often require a parent to co-sign for the loan. - From the lender’s perspective, a loan to a student is a high risk because students likely have no assets, no credit history and a very uncertain future income stream. - When parents or grandparents co-sign a loan, they become responsible for repaying the loan if the student falls behind on their payments.

Answer 21

Jobs on campus or off campus for undergraduate or graduate students to help students pay for their education expenses. - -Eligible, students must complete the FAFSA and have financial need. -Universities will pay students in the FWS an hourly rate, not less than the minimum wage. -Earnings in an FWS program cannot exceed the amount of a total FWS award, as described in the student’s financial aid package. -Income earned through FWS does not count as student income on the FAFSA and, therefore, does not reduce future financial aid

Answer 22

3 types of tax-deferred savings vehicles permitted by Congress are: * Qualified Tuition Plans (Includes Prepaid Tuition & College Savings Plans) * Coverdell Education Savings Accounts * U.S. Government Savings Bonds

Answer 23

States may sponsor a prepaid tuition plan that will allow a parent to purchase college credits today and use those credits when the child attends college. - States typically require parents to reside in the state where they are purchasing prepaid tuition credits and then use those credits to attend a college that is part of the state university system. - Only pay the cost of tuition, NOT room and board - Only 10 states still offer prepaid tuition plans to new investors. Those states are: Florida, Maryland, Massachusetts, Michigan, Mississippi, Nevada, Pennsylvania, Texas, Virginia, and Washington. - credits are considered assets of the parent for financial aid purposes. As previously discussed, a smaller percentage of a parent’s income and assets are deemed available for education than the child’s. ________________________________________________________________________ -Another type of prepaid tuition plan- Private College 529 Plan, allows parents to purchase prepaid tuition credits to nearly 300 private universities across the country. Parents purchase prepaid tuition credits that can be used to attend universities such as Stanford, Notre Dam

Answer 24

-college saving on a tax-deferred basis with attendance at any eligible education institution. - According to the IRS, “An eligible education institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U.S. Department of Education.” -Distributions are federal and state income tax-free, as long as they are used to pay for qualified education expenses. - Qualified education expenses: tuition and fees, books, supplies, and equipment. Qualified education expenses also include room and board for students enrolled at least half-time and cannot exceed the greater of: * Allowance for room and board as part of the cost of attendance provided by the school as part of the financial aid process. * The actual amount charged if the student resides in housing owned or operated by the university

Answer 25

The Tax Cuts and Jobs Act of 2017 expanded the definition of qualified expenses to allow distributions of up to $10,000 / YR per beneficiary to pay tuition at elementary or secondary public or private schools. - (SECURE) Act of 2019 further expanded qualified distributions to include fees, books, supplies, and equipment required for an apprenticeship program registered and certified with the Secretary of Labor under Section 1 of the National Apprenticeship Act, and distributions of up to $10,000 (lifetime maximum) for qualified student loan repayments (including those for siblings), effective for distributions made after December 31, 2018.

Answer 26

NO. A federal income tax deduction is not permitted for contributions to a College Savings Plan.

Answer 27

Yes, owner of the Savings Plan can change the beneficiary to another beneficiary who is a family member of the original beneficiary. - However, when the 529 Savings Plan was funded from a Uniform Gift to Minors (UGMA) or Uniform Transfer to Minors (UTMA) account, the beneficiary may only be changed with the consent of the original beneficiary at age of majority. This is because gifts to UGMA/UTMA accounts are irrevocable gifts to the minor beneficiary A family member includes the following beneficiaries: * Son, daughter, stepchild, foster child, adopted child, or their descendants * Brother, sister, stepbrother, or stepsister * Stepfather or stepmother * Son or daughter of a brother or sister * Brother or sister of father or mother * Son-in-law, daughter-in-law, and first cousin * Father, mother, or ancestor of either

Answer 28

YES. Contributors to a Savings Plan are permitted to open a Savings Plan in any state. -The funds in that Savings Plan can be used to pay for qualified education expenses at ANY eligible institution regardless of whether the institution is in the same state as the Savings Plan or not.

Answer 29

-Contributions limited to the amount necessary to provide for the qualified education expenses of the beneficiary. - Individual states impose contribution limits per beneficiary, based on the most expensive university in a state, allowing contribution limits of $250,000 - $500,000 in most state plans. - A student may be the beneficiary of multiple Savings Plans. - A contributor can contribute up to the annual gift tax exclusion amount ($15,000 in 2021) and not incur any gift tax liability. Spouses can elect gift splitting and give two times the annual gift tax exclusion amount or $30,000 ($15,000 x 2 for 2021) in ONEYEAR, PER beneficiary, and not incur gift tax liability. - In addition to the annual exclusion, each person has an $11,700,000 (2021) lifetime applicable gift tax exclusion.

Answer 30

College Savings Plans permit a contributor to contribute up to five times the annual gift tax exclusion amount or $75,000 (5 x $15,000) as a lump sum, in one year. - The $75,000 gift tax exclusion is for one beneficiary and the contributor will not incur gift tax liability if the contributor elects to treat the gift as an annual exclusion gift, for that year of the gift, and for each of the next four years.

Answer 31

YES. Distributions of contributions are always income tax-free and penalty free. Non qualified distributions are taxable and carry a 10 % penalty tax. Non qualified distributions are treated as a pro rata distribution of contributions and earnings.

Answer 32

* Death of the beneficiary * Disability of the beneficiary If the distribution is included in income because the beneficiary received: * Tax-free scholarship * Veterans’ educational assistance * Employer-provided educational assistance * Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance -If beneficiary is attending a U.S. military academy, and the distribution is not in excess of the cost of attendance -If distribution is included in income only because the qualified education expenses were taken into account in determining the American Opportunity or Lifetime Learning Credits

Answer 33

YES The contributor or beneficiary is permitted to change the investment selection up to 2x / per year.

Answer 34

NO A 529 plan is owned by a third party, such as a grandparent or a non-custodial divorced parent, the assets are not reported on the FAFSA, _ Qualified distributions are treated as untaxed income to the child on the FAFSA for the following year. - This income for a child has a greater negative impact on financial aid than assets of the parent, so ownership by third parties should generally be avoided, or distributions limited to the final two years of postsecondary education when the income will no longer impact an upcoming FAFSA (due to prior-prior year income reporting).

Answer 35

-A tax deferred trust or custodial account established to pay for qualified higher education or qualified elementary / secondary school expenses. -Qualified higher education expenses include tuition, fees, books, room, board, and computer related expenses. -Qualified education expenses are tax-free, as long as the distribution does not exceed the qualified education expenses, reduced by any financial assistance. - Limits for contrbution : -Any distributions in excess of qualified education expenses or distributions not used for qualified education expenses will cause the earnings to be taxable as ordinary income and to be subject to a 10 percent penalty.

Answer 36

If the distribution is due to: * Death of the beneficiary * Disability of the beneficiary If the distribution is included in income because the beneficiary received: * Tax-free scholarship * Veterans’ educational assistance * Employer-provided educational assistance * Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance -If the beneficiary is attending a U.S. military academy, and the distribution is not in excess of the cost of attendance -If the distribution is included in income only because the qualified education expenses were taken into account in determining the American Opportunity or Lifetime Learning Credits

Answer 37

Coverdell ESA is established the beneficiary must be under age 18 or qualify as a special needs beneficiary. Contributions limited to $2,000 / beneficiary per year NOT they are not deductible for federal or state income taxes. Although a beneficiary can have multiple Coverdell ESAs, the total annual contribution to all Coverdell accounts cannot exceed $2,000 per beneficiary. Contributions to Coverdell accounts must be in cash and contributions are not permitted once the beneficiary attains age 18 unless the beneficiary has special educational needs.

Answer 38

The phase-out for contributing to a Coverdell ESA is based on the taxpayer’s Modified Adjusted Gross Income (MAGI). For most taxpayers, MAGI is the same as adjusted gross income (AGI). The phase-out limits for a Coverdell ESA are: * Single: $95,000 - $110,000 * Married Filing Jointly: $190,000 - $220,000

Answer 39

YES, A Coverdell ESA owned by the parent or by the student who is a dependent of the parent is treated as an asset of the parent for financial aid purposes

Answer 40

YES.. Assets from one Coverdell can be rolled over to another Coverdell, however, there is a limit of one rollover of funds that are distributed then contributed into another ESA as a rollover (within 60 days) per year. There is no limit on the number of trustee-to-trustee transfers during the year.

Answer 41

YES. U.S. Government Series EE (issued after 1989) and Series I bonds can be redeemed to pay for qualified education expenses with the interest earned on the bonds excluded from taxable income. YES. For purposes of excluding interest income using U.S. Government savings bonds, qualified education expenses only include tuition and fees. Expenses for room and board are not permitted. In order to receive the income exclusion benefit, the bond must be purchased in the name of the parent (or parents), the bonds must be issued when the owner is at least 24 years old, and the bonds must be redeemed in the year that qualified education expenses are incurred

Answer 42

YES There are also MAGI based income limitations determining who can benefit from the interest income exclusion for Series EE and I bonds. The income limitations (as of 2021) are: * Single: $83,200 - $98,200 * Married Filing Jointly: $124,800 - $154,800 If a taxpayer’s MAGI in the year in which the bonds are redeemed is less than the threshold, then the taxpayer is eligible to exclude the interest income.

Answer 43

-Deductions reduce taxable income -tax credits are a dollar for dollar reduction in tax owed

Answer 44

The tax law does allow taxpayers that pay interest related to a student loan to deduct up to $2,500 of interest expense per year. NO. Taxpayers do not have to itemize their deductions to receive the student loan interest deduction because the deduction is taken before adjusted gross income (also known as an adjustment for AGI). Taxpayers with income in excess of the phase-out thresholds are not eligible to deduct student loan The phase-outs (as of 2021) are based on MAGI: * Single: $70,000 - $85,000 * Married Filing Jointly: $140,000 - $170,000

Answer 45

YES. Credit card interest is deductible as part of the student loan interest deduction if the credit card charges incurred were solely for qualified education expenses

Answer 46

YES. Loan Forgiveness or any discharge of indebtedness is considered income for federal and state income tax purposes unless a specific exception applies under Internal Revenue Code Section 108. Therefore, if someone borrowed $1,000 and the loan is subsequently forgiven, it would generally be treated as taxable income. There is an exception under IRC 108 for specific student loans. Generally, student loan forgiveness is excluded from income if the forgiveness is contingent upon the -student working for a specific number of years in certain professions.

Answer 47

* The American Opportunity Tax Credit (formerly the Hope Scholarship Credit) * Lifetime Learning Credit Credits are more valuable to taxpayers than income tax deductions, as credits are a dollar for dollar reduction in any federal income taxes owed.

Answer 48

American Opportunity Tax Credit (AOTC): - Tax credit max $2,500 / student per year for the first 4 years of qualified education expenses for postsecondary education. - YES. To qualify, students must be in their first four years of college and enrolled on at least a half-time basis. The credit is not available if, at any time, the student was convicted of a state or federal felony drug offense. The tax credit is calculated as follows: * 100% x the first $2,000 of qualified education expenses, plus * 25% x the second $2,000 of qualified education expenses. Since the AOTC is “per student,” a family that has multiple children in the first four years of college may qualify for multiple American Opportunity Tax Credits in one year.

Answer 49

Qualified education expenses : -tuition and fees (including student activity fees) as long as those fees are paid directly to the university. - books, supplies, and equipment, but they do not have to be purchased directly from the university

Answer 50

To qualify for the AOTC the taxpayer must pay qualified education expenses for the taxpayer, the taxpayer’s spouse, or dependent of the taxpayer. Taxpayers with income in excess of the phase-out thresholds are NOT eligible for the AOTC. The 2021 phase-outs are based on MAGI: * Single: $80,000 - $90,000 * Married Filing Jointly: $160,000 - $180,000

Answer 51

-Lifetime Credit ! -The credit is one per family ! -Lifetime Learning Credit provides a tax credit of up to $2,000 (2021) per family for an unlimited number of years of qualified education expenses. -Qualified education expenses must be related to a postsecondary degree program or to acquire or improve job skills. Tax credit is calculated as follows: 20% x qualified education expenses (up to $10,000)

Answer 52

NO. Qualified education expenses include tuition and fees, student activity fees, books, supplies, and equipment as long as those fees are paid directly to an eligible education institution.

Answer 53

To qualify for the Lifetime Learning Credit the taxpayer must pay qualified education expenses for the taxpayer, the taxpayer’s spouse, or a dependent of the taxpayer. Taxpayers with income in excess of the phase-out thresholds are not eligible for the Lifetime Learning Credit. The 2021 phase-outs are based on MAGI: - Single: $80,000 - $90,000 - Married Filing Jointly: $160,000 - $180,000

Answer 54

AOTC qualified education expenses include related expenses of books, supplies, and equipment, regardless of whether the expenses are paid directly to the university. The Lifetime Learning Credit requires related educational expenses such as activity fees, course books, supplies, and equipment MUST BE PAID DIRECTLY TO THE UNIVERSITY in order for these expenses to be included in the credit.

Answer 55

YES. A taxpayer or dependent student must receive a Form 1098-T as a condition to being entitled to one of the education credits. -Higher education institutions must provide a Form 1098-T (Tuition Statement) to the IRS and to the student, indicating the amount paid by or billed to the student for qualified tuition and related expenses for the tax year. However, a Form 1098-T may not reflect the total amount of qualified expenses. Food, books, etc, will not be on it.

Answer 56

YES. Adjustments to Qualified Education Expenses If the student receives any tax-free education assistance, the amount of qualified education expenses is reduced by that amount before calculating the AOTC or Lifetime Learning Credit. Examples of tax-free education support include: * Pell Grants * Tax-Free Scholarships * Employer-Provided Education Assistance * Tax-Free Distribution from a Savings Plan or Coverdell ESA

Answer 57

The general rule is that a taxpayer is not allowed to receive a double benefit for the same expenses. * Cannot claim both the AOTC and the Lifetime Learning Credits for the same child in the same year. * Cannot claim both the AOTC and the Lifetime Learning Credits for the same qualified education expenses. * Cannot use the same expenses used for a tax-free distribution from a Qualified Tuition Plan (529 Savings Plan) or Coverdell ESA and use those expenses to calculate an AOTC or Lifetime Learning Credit. * Cannot claim an AOTC or Lifetime Learning Credit if the taxpayer received tax-free education assistance, such as a scholarship, grant, or employer-provided education assistance (unless the student elects to treat the Pell grant or scholarship as taxable income paying for living expenses, as noted previously). * Cannot take a tax-free distribution from both a Section 529 Savings Plan and an ESA, or from a 529 plan or ESA along with a tax-free redemption of Series EE or I bonds for the same expenses.

Answer 58

Examples of not qualified education expenses for the AOTC and Lifetime Learning Credits are: * Room and Board * Insurance * Student Health Fees * Transportation Expenses

Answer 59

Scholarships -Grants of financial assistance made available to students to assist with the payment of education-related expenses.

Answer 60

1. YES. A scholarship or fellowship is tax-free to the recipient if the recipient is: * Used for a degree at an eligible education institution * Recipient uses the proceeds to pay for qualified education expenses. 2. YES. A scholarship or fellowship may be taxable if the scholarship or fellowship is used for: * Expenses that do not qualify * Payments for services * Scholarship prizes

Answer 61

Expenses That Do Not Qualify Expenses that do not qualify as qualified education expenses for the purpose of tax-free scholarships include: * Room and Board * Transportation Expenses * Equipment and Other Fees not Required for Attendance

Answer 62

Distributions from an IRA can be used for college funding, but will generally be treated as taxable income but NO 10% early withdraw penalty.

Answer 63

1. Contributions 2. Conversions 3. Earnings

Answer 64

Distributions of earnings may be tax-free, if the distribution is a qualified distribution as noted: 1. Distribution must occur at least 5 years after the Roth IRA owner established and funded the Roth IRA, and 2. At least one of the following requirements must be met: * Roth IRA holder must be at least 591⁄2 when the distribution occurs * Disabled * Death * Distributed assets limited to $10,000 are used towards the purchase or rebuilding of a first home for the Roth IRA holder or a qualified family member.

Answer 65

YES. Contributions to a Roth IRA consist of after-tax dollars for which no tax deduction is taken at the time of the contribution. Contributions to a Roth IRA represent the owner’s basis in the IRA and can be withdrawn, without tax consequences at any time.

Answer 66

Conversions represent pre-tax dollars, typically in a Traditional IRA, that were converted to a Roth IRA. Conversions withdrawn after 5 years of the date of conversion are NOT subject to a 10 % penalty.

Answer 67

NO. IF Distribution is a qualified distribution, there is no tax or penalty associated with the distribution. If the distribution is not a qualified distribution, then any amount distributed in excess of the contributions and conversions will be treated as taxable income, but will have NO 10 % penalty if the funds are used for: qualified higher education expenses. Qualified higher education expenses include tuition, fees, books, supplies, and equipment at an eligible educational institution for the taxpayer, the taxpayer’s spouse, the taxpayer’s child, or the taxpayer’s grandchild. An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in the student aid programs administered by the U.S. Department of Education.

Answer 68

1. NO, Funds inside the Roth IRA are NOT countable assets for financial aid calculation purposes, 2. YES. the distributions are reported as untaxed income on the FAFSA and may impact the need-based financial aid offered for the academic year that begins two years after the year of the distribution (based on prior-prior year income reporting on the FAFSA). 3. YES. saving for college in a Section 529 Savings Plan is more advantageous than saving in a Roth IRA with the intent to distribute contribution amounts to pay for college expenses.

Answer 69

1. The Uniform Gift to Minors Act (UGMA) allows minors to own cash or securities. 2. The Uniform Transfer to Minors Act (UTMA) allows minors to own cash, securities, and real estate. -Governed by state law that requires the custodian of the account, usually a parent or grandparent, to manage the account for the benefit of the minor child. -When the child reaches age of majority (18 or 21 depending on the state), the child can access the account without permission of the custodian

Answer 70

1. Once a child reaches the age of majority, he can use the assets in an UGMA / UTMA for something other than a college education. The account custodian, or parent, will be unable to control the asset to ensure the funds are used for a college education. 2. Earnings may cause a “kiddie tax” issue. -The kiddie tax rules state that if unearned income is above a certain threshold ($2,200 in 2021), then the additional unearned income is taxed at the parents’ tax rate, which is likely to be higher than the child’s rate. Unearned income is any income that is not derived from working, which includes interest, dividends, and realized capital gains

Answer 71

1. To be subject to the kiddie tax rules, one of the following conditions must be present: * Children under the age of 19, or * Full time students under the age of 24 -Unearned income is above a certain threshold ($2,200 in 2021), then the additional unearned income is taxed at the parents’ tax rate, which is likely to be higher than the child’s rate. - Unearned income is any income that is not derived from working, which includes interest, dividends, and realized capital gains

Answer 72

A program established by an employer to reimburse employees for education expenses. -Education expenses may or may not be directly related to the employee’s current job duties; it depends on the employer’s policy- 2. Reimbursement of education expenses by an employer, up to $5,250 (2021) per year, is not taxable to the employee. Any education expenses reimbursed above $5,250 are included in income for the employee. 3. Yes. To qualify for the tax-free reimbursement of education expenses, the employer’s education assistance program must be in writing, and the reimbursement must be for tuition, fees, books, supplies, and equipment

Answer 73

NO. Life insurance cash values are not countable assets in the federal financial aid formula, so a significant amount of accumulation can occur without impact on financial aid

Answer 74

1. Withdrawals from the cash value in a universal life insurance policy are taxed on a FIFO (first-in-first-out) basis, so tax-free withdrawals can be made up to the cost basis of the policy (approximately equal to the premiums paid). 2. Once all of the basis has been distributed, additional withdrawals will be taxed as ordinary income; however, rather than continuing to take withdrawals, loans can be taken against the remaining cash value on a tax-free basis. 3. Loans from cash value life insurance policies have the advantage of low interest rates and no required repayment schedule. The trade-off for not repaying the loan, though, is that the death benefit is reduced by the amount of the loan if the insured dies before the loan is repaid.

Answer 75

1. Allow for loans up to the lesser of $50,000 or 50 percent of the vested account balance. 2. These loans must be repaid (with interest) to the plan in five years, usually by payroll deduction. 3. The loan does NOT affect need-based financial aid because it is not treated as income, and there are no debt-to-income ratio requirements to qualify for the loan. 4. The borrowed funds are not taxable, and there is no 10 percent penalty;

Answer 76

1. When a child enrolls in college, any assets held in the child's name will be considered 20 % available by the financial aid needs analysis formula. 2. On the other hand, the parents' discretionary assets are assessed at a maximum rate of 5.64 percent. 3. Retirement assets, home equity, annuities, and cash value of life insurance are excluded.

Answer 77

Since student assets have a greater impact on financial aid, assets in the student's name (e.g., UGMA and UTMA accounts) should be spent first; preferably before the first FAFSA is filed

Answer 78

1. Income reported on the FAFSA is for the prior-prior year; therefore, the first year of income that is reported on the FAFSA will be the year the student starts his or her junior year of high school. In other words, the base year of income that is reported on the FAFSA is 2 years before the high school graduation year. 2. For example, income for 2019 will be used on the FAFSA for 2021-2022.

Answer 79

-529 Plans -UGMA/UTMA -PLUS Loans -Unsubsidized Stafford Loans -Scholarships

Answer 80

529 Plans UGMA/UTMA Coverdell ESA Series EE Bonds American Opportunity Tax Credit Lifetime Learning Credit Interest Deduction on Higher Education Loans Subsidized Stafford Loans PLUS Loans Grants Scholarships

Answer 81

Filing the Free Application for Federal Student Aid (FAFSA). starts the Financial Aid Process. -

Answer 82

No Exception is when the student elects to treat the Pell Grand as table income paying for living expenses.

Answer 83

Use Uneven cash flow Method to solve : Age 4 is today, so starts saving at age 5 savings rate= 9% inflation rate 6% 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 I---- I----I---I---I-----I-----I-----I-----I----I------I-----I-----I------I-------I-----I------I-----I 0 0 0 0 0 0 0 0 0 0 0 0 0 0 15 15 15 15 0 1 2 3 4 5 6 7 8 9 10 11 12 13 CF's are noted above STEP 1 - Solve for NPV ---------------------------------------------------------------------------- 0 CF 0 CF 13 Nj -15,000 CF 4 Nj I = ( 1.09 /1.06 - 1) x 100 = 2.8302 orange shift NPV = $ 38,948.6887 Step 2: Solve for Annual Savings required to meet goal ------------------------------------------------------------------------------ 13 N ( there 13 annual payments ) 9 I $ 38,948.6887 PV PMT = - $ 5,202.2424 /yr 0 FV

Answer 84

Begins the - FINANCIAL AID PROCESS * Free Application for FEDERAL Student Aid (FAFSA) * File after Oct. 1 for next fall , Complete every year. - File for Oct. 2023, for the 2024 and 2025 academic yrs - Income is based on 2022 * Used to determine "Expected Family Contribution" amount (EFC). * Cost Of Attendance for each university includes living expenses. * FAFSA simplification Act of 2020 - calculation for AID Cost of attendance ( tuition/fees, allowance of living cost, food ) - EFC Expected Family Contribution - Other financial Assistance ------------------------------------------------------ Amount of Financial need.

Answer 85

EFC = Expected Family Contribution - those with MORE FINANCIAL AID NEED have a LOW EFC - NOT based on academics - Based Parent and student Income and assets

Answer 86

1. Qualified Tuition Plans: - 529 plan as approach age 18, less risky invest allocation - Tax-deferred - Distributions for qualified education expenses are federal and state income tax-free - No federal income tax deduction for contributions - No phase-outs - Allows $10k /yr for K-12 public or Private school cost - annual gift rules in 2021 was $!5k, - Couple can contribute $30k /yr without gift tax - Front load with 5 yrs at $15k = $75,000 all in ONE year - Married Couple could do $150,000 ( 5 x $15,000 x 2 ) in one year, per beneficiary and no gift taxes ( PG.370) 2. Prepaid Tuition Plans: - state specific - NO phase out for Income - Locks in today's dollars for future college cost at a specif school - Allows parent to buy college credits today and use those credits when the child attends college - No income tax consequences to the parents for the difference between the amount paid for the college credits and the current cost of the college credits

Answer 87

Federal Pell Grant ---------------------------------------------------------- -No repayment -Based on Financial Need -Never runs out! if qualify you get. -Amount dependent based on family’s EFC, cost of attendance, and whether the student is attending full-time or part-time. - Paid directly to school or student - Can receive a max of 12 semesters.

Answer 88

* UGMA allows minors to own cash or securities. * UTMA allows minors to own cash, securities, and real estate. 2. When the child reaches age of majority (18 or 21 depending on the state), the child can access the account without permission of the custodian. - Counts as child asset with filing on the FAFSA - Also can produce the Kiddie Tax. This rules states that if UNEARNED INCOME is above a certain threshold ($2,200 in 2021), then the "additional unearned income" is taxed at the "parents’ tax rate", which is likely to be higher than the child’s rate. - Unearned income is any income that is not derived from working, which includes interest, dividends, and realized capital gains.

Answer 89

American Opportunity Tax credit:_________________ - First 4 yrs of undergrad and at this Half -time - “Per student,” a family that has multiple children in the first four years of college may qualify for multiple American Opportunity Tax Credits in one year - Tax credit up to $2,500 per student/ year for the first 4 years of qualified education expenses for postsecondary education. - Qualified education expenses = tuition &fees (including student activity fees) as long as those fees are paid directly to the university. - To qualify, there is an Income Limit Phase-out - The credit is not available if, at any time, the student was convicted of a state or federal felony drug offense. - The tax credit is calculated as follows: * 100% x the first $2,000 of qualified education expenses, plus * 25% x the second $2,000 of qualified education expenses. ______________________________________________________________________ - 2 types of federal tax credits for education related expenses: * American Opportunity Tax Credit * Lifetime Learning Credit - The taxpayer cannot claim both the AOTC and Lifetime Learning Credits for the same child in the same year

Answer 90

- Tax credit of up to $2,000 (2021) PER FAMILY and LIFETIME - Unlimited number of years of qualified education expenses. - The qualified education expenses must be related to a postsecondary degree program or to acquire or improve job skills. - Qualified education expenses = tuition and fees, student activity fees, books, supplies, and equipment as long as those fees are paid directly to an eligible education institution - There is Income phase-out - The tax credit is calculated as follows: 20% x qualified education expenses (up to $10,000) = $ 2,000 MAX

Answer 91

FINANCIAL AID: STAFFORD LOANS: * Administered by the U.S. Department of Education. * Students with low incomes and large loan balances are only required to repay up to 10 percent of their income each year. * 10 -15 years to repay * Loan forgiveness- The Student Aid and Fiscal Responsibility Act forgives loans after 20 years of repayment Subsidized Stafford Loan- - Qualification for a subsidized loan is NEEDS BASED on student . - Government pays interest on the loan while the borrower is attending school and during the six-month grace period after graduation before repayment begins. Unsubsidized Stafford loans - NOT needs-based, - Interest starts from the time the funds are disbursed. Students may pay the interest expense as it is incurred or allow the interest to be added to the loan’s outstanding principal.

Answer 92

GOV. SERIES EE & SERIES I BONDS YES * Redeemed with Interest earned as tax-free to pay for qualified education expenses. - Must be bought in the Name of the PARENT. The student cannot be an owner of the bond * Bonds must be issued when the owner is at least 24 years old * Must be redeemed in the year that qualified education expenses are incurred * May convert the bonds into a College Savings Plan (529 Plan) or Coverdell Education Savings Account