Module 7 Education Planning Flashcards
Which of these education funding techniques provide(s) tax advantages, regardless of the contributor’s modified adjusted gross income (MAGI)?
Coverdell Education Savings Account (CESA)
Section 529 plan
Series EE or Series I savings bonds
A)
I only
B)
II and III
C)
I, II, and III
D)
II only
The answer is II only. Section 529 plans offer significant tax advantages regardless of the contributor’s modified adjusted gross income. The tax advantages of CESAs and education savings bonds are phased out at higher levels of MAGI.
LO 7.2.3
Select the CORRECT statement(s) regarding the employer’s Educational Assistance Program.
Graduate courses are included in qualifying expenses.
The Educational Assistance benefits do not have to be for work-related courses.
Only full-time students qualify for the Employer-provided Educational Assistance Program.
Educational Assistance Program can be used with an education tax credit for the same expenses.
A)
I and III
B)
II, III, and IV
C)
III only
D)
I and II
The answer is I and II. The Educational Assistance benefits do not have to be for work-related courses. The employer or employee cannot claim an education credit (American Opportunity Tax or Lifetime Learning Credit) for the same expenses. The Educational Assistance is available to full-time and part-time students enrolled in either undergraduate- or graduate-level courses.
LO 7.3.2
All of these statements regarding scholarships are CORRECT except
A)
scholarships are merit-based.
B)
scholarships are usually awarded by the federal government.
C)
scholarships may be given for academics, athletics, art, theater, or music.
D)
scholarships are awarded for either graduate or undergraduate study.
The answer is scholarships are usually awarded by the federal government. Scholarships are usually awarded by the institution, not the federal government, as an incentive for students to study at the awarding institution.
LO 7.2.1
An employer’s Educational Assistance Program could apply to which of these expenses?
Books and supplies
On-campus housing
Full-time, graduate tuition
Part-time, undergraduate tuition
A)
I, III, and IV
B)
I and II
C)
III and IV
D)
III only
The answer is I, III, and IV. Under this program, an employer can reimburse an employee’s tuition (both graduate and undergraduate), enrollment fees, books, supplies, and equipment; these benefits are excluded from the employee’s income up to $5,250 per year. Meals, transportation, and lodging are not qualifying expenses for this program.
LO 7.3.2
Which of these statements concerning education tax credits and savings opportunities is CORRECT?
A)
The American Opportunity Tax Credit reduces a family’s tax dollar-for-dollar in an amount equal to 100% of the first $2,000 of qualified education expense and 25% of the next $2,000.
B)
The contribution limit for Coverdell Education Savings Accounts (CESAs) is applied per year per donor.
C)
The American Opportunity Tax Credit is only available for the first two years of postsecondary education.
D)
The Lifetime Learning Credit is equal to 100% of qualified education expenses up to a certain limit.
The answer is the American Opportunity Tax Credit reduces a family’s tax dollar-for-dollar in an amount equal to 100% of the first $2,000 of qualified education expense and 25% of the next $2,000. A parent who claims a child as a dependent is entitled to take the American Opportunity Tax Credit for the education expenses of the child. The Lifetime Learning Credit is equal to 20% of qualified education expenses up to a certain limit. The American Opportunity Tax Credit is available for the first four years of postsecondary education. The contribution limit for CESAs is applied per year per student (not donor).
LO 7.2.2
Identify the financial aid programs available through the U.S. Department of Education that are need-based, have eligibility requirements, and require completion of the FAFSA.
Pell Grant
Supplemental Educational Opportunity Grant(SEOG)
Unsubsidized Stafford Loan
Teacher Education Assistance for College and Higher Education (TEACH) Grants
A)
III only
B)
I, II, and IV
C)
III and IV
D)
I and II
The answer is I, II, and IV. The U.S. Department of Education offers various federal grants to students attending four-year colleges or universities, community colleges, and career schools. Each requires completion of a Free Application for Federal Student Aid (FAFSA) and fulfilling need-based eligibility criteria. The federal grants include federal Pell Grants, Federal Supplemental Educational Opportunity Grants (FSEOG), Teacher Education Assistance for College and Higher Education (TEACH) grants, and Iraq and Afghanistan Service grants. An unsubsidized Stafford Loan is not based on income and is not need-based.
LO 7.1.3
Which of these expenses are qualified for a Coverdell Education Savings Account (CESA)?
K–12 tuition
Books
Fees
Supplies
A)
II and IV
B)
I and II
C)
III and IV
D)
I, II, III, and IV
The answer is I, II, III, and IV. All of these are qualified expenses for a CESA.
LO 7.2.3
Which of these statements concerning educational tax credits and savings opportunities is CORRECT?
A)
The lifetime learning credit is equal to 100% of qualified educational expenses up to an annual limit.
B)
The original Hope credit was available for the first four years of postsecondary education, but the American opportunity tax credit is only available for the first two years of college.
C)
A parent who claims a child as a dependent is entitled to take the American Opportunity tax credit or lifetime learning credit for the educational expenses of the child.
D)
The contribution limit for Coverdell Education Savings Accounts (CESAs) is applied per year per donor.
The answer is a parent who claims a child as a dependent is entitled to take the American Opportunity tax credit or lifetime learning credit for the educational expenses of the child. The lifetime learning credit is calculated as a percentage of qualified education expenses. Currently, a maximum of 20% of $10,000 qualified expenses ($2,000) is allowed, and is phased out at certain income limits. The original Hope credit was only available for the first two years of college, but the American Opportunity tax credit is available for four years of college. The current contribution limit for a CESA is $2,000 per beneficiary, regardless of how much any particular donor may wish to contribute.
LO 7.3.1
In calculating the expected family contribution (EFC) for federal financial aid, which of these parental assets is included?
Home equity
Cash value of life insurance policies
Account balances in retirement plans
A)
I, II, and III
B)
None of these
C)
III only
D)
II and III
The answer is none of these. Almost all parental assets are included in calculating the EFC, but these three types of assets are excluded.
LO 7.1.2
Which of these statements regarding the Expected Family Contribution (EFC) as it relates to student financial aid is NOT correct?
A)
Student income includes taxable and nontaxable income from the year preceding the award year.
B)
Student assets include the value of everything the student owns or everything that has been saved on his behalf.
C)
Parental assets and income are assigned a higher rating in the EFC calculation than student assets and income.
D)
Parental assets include almost everything owned by the parents with notable exceptions.
The answer is parental assets and income are assigned a higher rating in the EFC calculation than student assets and income. Actually, parental assets and income are assigned a lower rating in the EFC calculation than student assets and income. The other statements are correct.
LO 7.1.2
Jack and Barb have two children, Matt, age three, and Charity, age five. They want to invest a lump sum today that will provide for four years of education when Matt starts college at the age of 18. State College costs $14,000 annually today, and they believe education inflation will remain constant at 6% and that they can receive a 7% return on their investment. What is the amount they would require?
A)
$47,517
B)
$47,965
C)
$55,220
D)
$49,336
The answer is $47,965. (NOTE: calculations were not rounded between steps. Your answers might vary slightly due to rounding.) Inflate today’s college tuition to when child starts college: 15 [N]; 6 [I/YR]; 14,000 [PV] solve for [FV] = 33,551.8147. STEP 2 calculate present value needed at start of school, using inflation-adjusted interest rate: 1.06 [INPUT]; 1.07 [DOWNSHIFT] [%CHG] {0.9433} [I/YR]; 4 [N]; 33,551.8147 [PMT]. Set calculator to BEG mode [DOWNSHIFT] [Beg/End] solve for [PV] = 132,337.5434. STEP 3 take lump sum needed at start of college and calculate the present value needed today. 132,337.5434 [FV]; 15 [N]; 7 [I/YR]; solve for [PV] = 47,965.2159.
LO 7.1.1
Susan is applying for college financial aid using the Free Application for Federal Student Aid (FAFSA). For purposes of calculating the expected family contribution (EFC), assets titled in whose name are assigned a higher weighting?
A)
Assets are assigned the same weighting without regard to being titled in Susan’s or her parents’ names
B)
Assets titled in the names of Susan, her parents, and her grandparents are all given the same weighting
C)
Assets titled in Susan’s name
D)
Assets titled in the names of Susan’s parents
The answer is assets titled in Susan’s name. Student assets and income are assigned a higher weighting (20%) in the EFC calculation than parental assets and income (5.64%). Therefore, the titling of assets must be carefully considered when saving for education purposes. The assets of a student’s grandparents are not considered when calculating EFC.
LO 7.1.2
Ryan’s son, Anthony, turned 6 years old today. He has plans for Anthony to attend a 4-year private university at age 18. Currently, tuition is $46,500 per year and is expected to increase at 6.5% per year. Ryan can earn an annual compound investment return of 9%. Calculate the lump sum that he needs on Anthony’s first day of college to be able to pay for his entire college education.
A)
$383,591.79
B)
$382,594.77
C)
$373,819.66
D)
$362,206.96
The answer is $382,594.77.
Step 1: Determine the future cost of college for the first year.
46,500 +/– PV
6.5 I/YR
12 N
Solve for FV = 99,002.9752, or $99,002.98
Step 2: Determine the account balance necessary to fund college education.
BEG mode (money is needed at the beginning of college)
99,002.9752 +/– PMT
2.3474 I/YR [(1.09 ÷ 1.065) – 1] × 100 = 2.3474
4 N
Solve for PV = 382,594.7657, or $382,594.77
LO 7.1.1
Mr. and Mrs. Smith come to you for advice on the financing of their son’s college education at their state university. Even though their annual family income exceeds $100,000, they have not saved enough for his college expenses. You advise that their best opportunity to acquire education funds would be through
A)
Parent Loans for Undergraduate Students (PLUS) loans
B)
supplemental education opportunity grants
C)
Pell Grants
D)
Subsidized Stafford Student Loans
The answer is Parent Loans for Undergraduate Students (PLUS) loans. PLUS loans allow parents to borrow money for their children’s education. The loans are not need-based, and therefore potentially available to any parent. Each of the other options is based on student financial need, and the Smiths are unlikely to qualify. Stafford loans may also be offered without considering financial need, on a nonsubsidized basis, but this question specifies subsidized Stafford loans, which are need-based.
LO 7.2.1
Olen and Kiera Littrell have three children. Their oldest child is currently in college, their second child will be starting college next semester, and their third child is still in high school. Olen works at the assembly plant with an income of $45,000 and Kiera is not employed. They rent an apartment and carry various credit card balances. What potential avenues would they most likely have to finance college expenses?
Perkins loans
Subsidized Stafford loans
Federal Supplemental Educational Opportunity Grants (FSEOGs)
Pell grants
A)
II, III, and IV
B)
I, II, III, and IV
C)
III and IV
D)
I and II
The answer is II, III, and IV. Stafford Loans can be subsidized or unsubsidized—subsidized are needs-based. The Littrells most likely would qualify for the subsidized Stafford loans. They would also qualify for Pell grants and FSEOG, which are needs-based. Although students may have existing Perkins loans, the program officially ended on September 30, 2017; therefore, they would not be an option for the Littrells.
LO 7.2.1
Barbara is the beneficiary of a Section 529 college savings plan established by her parents. This year, Barbara withdraws $15,000 from the plan to furnish her new apartment. Which of these statements regarding the tax treatment of this withdrawal is CORRECT?
The withdrawal is included in Barbara’s gross income.
Only the income portion of the withdrawal is subject to a 10% tax penalty.
A)
I only
B)
II only
C)
Neither I nor II
D)
Both I and II
The answer is II only. Because Barbara did not use the withdrawal to pay for qualified education expenses, only the income portion of the withdrawal is included in her gross income and is subject to a 10% tax penalty.
LO 7.2.4
Which of these is a characteristic of a prepaid tuition plan?
A)
Suitable for a risk-tolerant investor
B)
No state-guaranteed return
C)
Usually restricted college enrollment options
D)
Market-based performance
The answer is usually restricted college enrollment options. In addition to usual restricted enrollment options, inflation-based performance is also a characteristic of a prepaid tuition plan. This plan is suitable for risk-averse investors and may offer a state-guaranteed return on assets.
LO 7.2.3
All funds within a Coverdell Education Savings Account (CESA) must be used before the student reaches what age to avoid income taxation and a penalty on the earnings of the account when disbursed?
A)
35
B)
25
C)
21
D)
30
The answer is 30. All funds within a CESA must be used before the student reaches age 30. Any remaining funds will be disbursed to the CESA beneficiary, and the earnings will be subject to income tax and a 10% penalty.
LO 7.2.3
All of these statements regarding the expected family contribution (EFC) as it relates to student financial aid are CORRECT except
A)
student assets and income are assigned a higher rating in the EFC calculation than parental assets and income.
B)
student assets include the value of everything the student owns or that has been saved on the student’s behalf.
C)
student income includes only taxable income from the year preceding the award year.
D)
the home equity in the parents’ home is excluded from parental assets.
The answer is student income includes only taxable income from the year preceding the award year. Student income includes both taxable and nontaxable income from the year preceding the award year.
LO 7.1.2
Valarie is planning to go to college in the fall and wants to apply for a federal grant. She is interested in the Pell grant but does not know if she will be able to apply. Pell grants are available to which of these students?
Part-time students
Full-time students
Graduate students
Undergraduate students
A)
I, II, III, and IV
B)
I and IV
C)
I, II, and IV
D)
II and III
The answer is I, II, and IV. Pell grants are available to half-time, full-time, and part-time (less than half-time) undergraduate students.
LO 7.1.3
Which of these is considered qualified education expenses for the purpose of Coverdell Education Savings Accounts?
Private elementary school tuition
Room and board at a private boarding school for secondary education
Graduate tuition
Undergraduate tuition
A)
III only
B)
I and II
C)
I, II, and IV
D)
I, II, III, and IV
The answer is I, II, III, and IV. All of these items are considered qualified education expenses for purposes of Coverdell Education Savings Accounts (CESAs).
LO 7.2.3
Which of these types of student financial aid must be repaid?
Grants
Loans
Scholarships
Credits
A)
II only
B)
I, II, and III
C)
I and IV
D)
II and III
The answer is II only. Only loans must be repaid.
LO 7.2.1
Jackson wants to know how much he must invest today to accumulate $80,000 for his children’s college education in 15 years. He believes he can earn a 4% rate of return. What amount would Jackson need to invest today to have $80,000 in 15 years?
A)
$21,110.77
B)
$42,441.55
C)
$57,218.95
D)
$44,421.15
The answer is $44,421.15.
END mode
1, DOWNSHIFT, P/YR
DOWNSHIFT, C ALL
80,000, FV
15, DOWNSHIFT, xP/YR (15 appears on display)
4, I/YR
Solve for PV = -44,421.1502, or $44,421.15
If Jackson invests $44,421.15 today, and earns a 4% rate of return, he will reach his $80,000 goal in 15 years.
LO 7.2.2
You are working with new financial planning clients, Dan and Patrice, on educational funding issues for their three dependent children. Dan and Patrice will file jointly this year, as they have always done, and anticipate an AGI of $110,000. Their oldest child, Ben, age 23, is in his first year of graduate school studying to be a pharmacist. Ben graduated from college in three years, so the American Opportunity tax credit was claimed for three years of Ben’s education. Their middle child, Margaret, age 19, had a conviction for felony drug possession last year. She’s “cleaned up her act” and will be a full-time student at a community college this year. Their youngest child, Francis, age 7, is a good kid who wants to be a doctor when he grows up.
Which of these statements concerning educational tax credits and incentives is CORRECT?
Ben and Margaret would each qualify for the American Opportunity tax credit (AOTC).
Ben and Margaret would each qualify for the Lifetime Learning credit.
Dan and Patrice may make a contribution to a Coverdell account for Francis.
Only Ben would qualify for the Lifetime Learning credit.
A)
III and IV
B)
II and III
C)
II only
D)
I and III
The answer is II and III. Ben and Margaret both qualify for the Lifetime Learning credit. The Lifetime Learning credit may be claimed for graduate studies and may be claimed for a child with a felony drug conviction. Note that the Lifetime Learning credit would allow a total of $10,000 of education expenses to be utilized on Dan and Patrice’s tax return. (The Lifetime Learning credit limitation of $10,000 is applied per return, whereas the AOTC limitation of $2,500 is per student.) The parent(s) who claims a child as a dependent is entitled to take the tax credit for the educational expenses of the child. The AGI is under the phaseout thresholds for the Lifetime Learning credit. Even though the AOTC may generally be claimed for four years, Ben does not qualify for the AOTC because it may not be claimed for graduate work, only the first four years of undergraduate work. The AOTC may not be claimed for a child who has a felony drug conviction, so Margaret does not qualify for the AOTC. Dan and Patrice may make a Coverdell contribution, as their AGI does not exceed the phaseout limit of $190,000 to $220,000 for a married couple filing jointly. (The AGI limitations will be provided on the examination.)
LO 7.3.1
Which of these expenses qualify for an employer’s Educational Assistance Program?
Books
On-campus housing
Part-time, graduate school tuition
Full-time, undergraduate tuition
A)
I, II, and III
B)
III and IV
C)
IV only
D)
I, III, and IV
The answer is I, III, and IV. With the Educational Assistance Program, an employer can reimburse an employee’s undergraduate and graduate tuition, enrollment fees, books, supplies, and equipment; these benefits are excluded from the employee’s income up to $5,250 per year. Meals, transportation, and lodging are not qualifying expenses for this program.
LO 7.3.2
Which of these statements regarding 529 accounts and EFC is CORRECT?
If a parent owner with student beneficiary, a 529 account is included in EFC calculation at parent’s rate.
Distributions for college from relative-owned accounts, reduce future financial aid eligibility by 0% of the distribution amount.
If other family members establish an account as owners with student as beneficiary, assets are NOT counted for EFC calculation.
Distributions for college from parent-owned 529 accounts reduce future financial aid eligibility by 50% of the distribution amount.
A)
I only
B)
I and III
C)
II and IV
D)
I, II, III, and IV
The answer is I and III. Statement II and Statement IV are incorrect. Distributions for college from relative-owned accounts reduce future financial aid eligibility by 50% of the distribution amount (two years following distribution). Distributions for college from parent-owned 529 accounts do not impact EFC and do not reduce future financial aid eligibility.
LO 7.1.2
Which of the following are common features between the Coverdell Education Savings Account (CESA) and the Section 529 plan?
A)
Neither provides any federal income tax deductibility to the contributors.
B)
Both have an age restriction for use of funds.
C)
The CESA can only be used for K-12 education expenses.
D)
Both have an income phaseout.
The answer is neither provides any federal income tax deductibility to the contributors. Only the CESA has an income phaseout and age restriction at age 30. Both can be used to pay for qualified elementary and secondary school expenses as well as college expenses, but neither plan is deductible for federal income tax purposes.
LO 7.2.3
All of these are ways to lose federal student aid eligibility except
A)
failure to maintain satisfactory academic progress in college or career.
B)
be in default on a federal student loan.
C)
conviction of a drug offense.
D)
failure to pay on a subsidized Stafford Loan while enrolled at least half time.
The answer is failure to pay on a subsidized Stafford Loan while enrolled at least half time. Repayment on federal student loans generally does not begin until after you leave college or drop below half-time enrollment.
LO 7.1.3
You discuss Coverdell Education Savings Accounts with Grant and Julie as a possible college funding vehicle for Abby. Which of the following statements describing a provision of a Coverdell ESA as used in the education funding process is CORRECT?
A)
The annual contribution limit for a single beneficiary is $2,000.
B)
The beneficiary may accept annual contributions of $2,000 from multiple contributors.
C)
Withdrawals for qualified education expenses are taxed at the student’s income tax rate rather than the parents’ rate.
D)
All funds within the Coverdell ESA must be used before the student reaches age 25.
The answer is the annual contribution limit for a single beneficiary is $2,000. Contributions to a Coverdell ESA are limited to $2,000 per year per child, regardless of the number of donors to the account. All funds within the Coverdell ESA must be used before the student reaches age 30. If the beneficiary has not been changed to another family member of the original beneficiary by age 30, any remaining funds will be disbursed to the original beneficiary, and the earnings will be subject to income tax and a 10% penalty. Qualified withdrawals from a Coverdell ESA are received income tax-free.
LO 7.2.3
Tom and Samantha have a modified adjusted gross income (MAGI) of $250,000 and want to know which available tax benefit or combination of available tax benefits can they use to help pay for their daughter’s college expenses. Which of these is available to the couple?
A)
Coverdell Education Savings Account (CESA)
B)
American Opportunity Tax Credit and Series EE savings bonds
C)
Section 529 Qualified Tuition Program (QTP)
D)
Lifetime Learning Credit and Coverdell Education Savings Account (CESA)
The answer is Section 529 Qualified Tuition Program (QTP). Tom and Samantha’s MAGI makes them ineligible for the American Opportunity Tax Credit, Lifetime Learning Credit, CESA, and Series EE savings bonds. Section 529 Qualified Tuition Programs do not have income limitations.
LO 7.2.4
Which of these expenses are qualified for a Section 529 plan?
K–12 tuition
Post-secondary tuition
Fees
Supplies
A)
I and III
B)
I, II, III, and IV
C)
II, III, and IV
D)
I and II
The answer is I, II, III, and IV. All are qualified expenses for a Section 529 plan.
LO 7.2.2
Which of these statements regarding Section 529 plans is CORRECT?
Beneficiaries of Section 529 plans do not gain control of the assets at the age of majority.
There are three types of Section 529 plans: prepaid tuition plans, ongoing tuition payment plans, and education savings plans.
A)
Neither I nor II
B)
I only
C)
Both I and II
D)
II only
The answer is I only. Statement I is correct. Statement II is incorrect. There are two types of Section 529 plans: prepaid tuition and education savings plans.
LO 7.2.3
John Hedrick wants to pay one-half of the college costs for his daughter, Ruth. She will be attending a private college with annual costs of $20,000 today. Ruth is 10 years old and will be starting college in eight years. If these costs are expected to increase annually by 8%, how much will Mr. Hedrick need to provide for her first year of college?
A)
$23,409
B)
$18,509
C)
$37,019
D)
$27,371
E)
$74,037
The answer is $18,509. You are just being asked to arrive at the inflated value of one-half of the first year’s tuition payment. As such, this becomes a simple future value calculation with the following keystrokes: 8 N; 8 I; 10,000 PV (1/2 of $20,000); FV = $18,509.
LO 7.1.1
To be eligible to receive federal student aid, you must
be enrolled in an eligible program as a regular student seeking a degree.
be enrolled in an eligible program as a regular student pursuing a certificate.
be a citizen or eligible noncitizen of the United States.
maintain satisfactory academic progress.
A)
I, III, and IV
B)
II only
C)
I and IV
D)
I, II, III, and IV
The answer is I, II, III, and IV. To be eligible to receive federal student aid, you must meet these requirements:
Be a citizen or eligible noncitizen of the United States.
Have a valid Social Security number.
Have a high school diploma or a General Educational Development (GED) certificate, or have completed homeschooling. If you don’t, you may still be eligible for federal student aid if you were enrolled in college or career school prior to July 1, 2012. Go to
https://studentaid.gov/understand-aid/eligibility
for additional information.
Be enrolled in an eligible program as a regular student seeking a degree or certificate.
Maintain satisfactory academic progress.
Not owe a refund on a federal student grant or be in default on a federal student loan.
Register (or already be registered) with the Selective Service System, if you are a male and not currently on active duty in the U.S. Armed Forces.
Not have a conviction for the possession or sale of illegal drugs for an offense that occurred while you were receiving federal student aid (such as grants, work-study, or loans). If you have such a conviction, you must complete the Student Aid Eligibility Worksheet to determine if you are eligible for aid or partially eligible for aid.
LO 7.1.3
Tom is an independent student living on his own and is educating himself about government assistance available for higher education expenses. Tom should know that all of the following are government-sponsored financial aid programs except
A)
the Lifetime Learning Credit.
B)
the subsidized and unsubsidized Stafford Loans.
C)
the Pell Grant.
D)
the Supplemental Educational Opportunity Grant (SEOG).
The answer is the Lifetime Learning Credit. The Lifetime Learning Credit is a tax credit and not a government-sponsored financial aid program.
LO 7.2.1
