Section 1 Financial Aid Flashcards
For in-state students, the annual average cost at a public university, including room and board, was $27,330; college costs generally increase by a factor of three every ___ years
17
What is the three step process for education funding down the road…
Step 1: Figure the cost of college for each year x years in the future
Step 2: Figure the lump sum needed when the college begins
Step 3: Figure how much needs to be saved each year to have that amount then
There are two great examples in this section; assure you understand!
What is the equation for finding the real rate of return
real rate = nominal rate - inflation rate / 1 + inflation rate
SO, you can make 7% per year on an investment, but inflation is 3%/year; SO…
7-3=4/1.03=3.8835 real rate
Kid born, planning for college in 18 years, cost today = 18k/year, w tuition increasing at 6% per year; Inflation is 3% per year; after tax return of 9% on investments; how much does he need to save at the end of each year to have enough to cover college in eighteen years
$4,774 (this is the written example, spelled out in section)
child born, college in 18 years, four years of college; current costs $40k/year, but that will increase 5%/year; they can get an annual return of 7%/year; How much must they put away at the end of each year to have all the money needed at the beginning of first year of college?
$10,292 (this is the video example)
Step 1: cost of college in 18 years; 18(n) 5(i) -40k(pv) fv=$96,265
Step 2: find the lump sum needed in 18 years; Begin; 1.9048(i) 96,265(pmt) 4(n) pv=$-374,398
Step 3: Determine how much needs to be saved at start of each year: 374,398(fv) 18(n) 7(i) PMT=10,292
KEYS: In step 2, we adjust for inflation; so, in step 3 we only need to use the growth rate, NOT the inflation-adjusted rate!
money is given in two forms of financial aid:
needs-based
non-needs-based
As the EFC increases, the available financial aid award decreases; parents and students are required to provide info on their respective: (2)
Income and Assets
A parent’s income contribution is based on their AGI minus an allowance for (2)
taxes and basic living expenses
What two assets are NOT counted towards the EFC
retirement assets and home equity
Students are expected to contribute as well, and the available student income amount is determined by taking ___% of a student’s income after subtracting certain allowances
50%
Are UGMA/UTMA accounts counted as the student’s assets for financial aid
yes
You are definitely going to deal w this on your cfp exam. It is important to understand that the student’s income and assets are rated much more highly w respect to EFC than the parents’ income and assets. You don’t need to memorize (I don’t think) these numbers, but here are the inclusion amounts for parents and kids:
parents: income inclusion 22% to 47%, assets inclusion 5% to 5.65%
students: income inclusion 50%, assets inclusion 20%
Are 529 accounts owned by a grandparent considered part of the student’s assets
No! they are excluded from the EFC calculation
The FAFSA determines a student’s eligibility for federal financial aid, to include ___ and ____
Pell grants and Stafford loans
Is cash value life insurance, annuities, or value of a family owned small biz considered when determining EFC?
no
