Chapter 7 Finance 407
A Coverdell ESA can be established for any child under the age of 21 by a parent, grandparent, other family members of friends, or even by the child.
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A Federal Pell Grant is a grant from the federal government that requires repayment.
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A Federal Perkins loan is provided to undergraduate and graduate students that have no financial need.
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College Savings Plans are similar to Coverdell ESAs, and have the same attributes, rules, and tax ramifications.
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Coverdell ESAs currently permit up to $5,500 in annual contributions, whereas QTPs allow large contributions reaching as high as $100,000 and above.
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In 2016, Roth IRAs allow up to $5,000 of annual contributions for individuals below the age of 50.
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Interest paid on student loans for undergraduate and graduate education may not be deduced as an adjustment to the taxpayer's AGI.
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Many state universities and all private colleges allow for prepayment of tuition at current prices for future enrollment.
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Most financial aid packages do not depend upon the financial need of the student.
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No vehicles are available that allow the family or taxpayer who bear the burnt of education expenses to realize tax savings and benefits.
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One of the drawbacks of Coverdell ESAs is that, if the beneficiary/child taxes a tax-free distribution from the ESA, the beneficiary/child cannot also receive either the American Opportunity Tax Credit or Lifetime Learning Credit in the same year.
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Only a few forms of scholarships are awarded by groups that are separate and apart from the school, state, or federal government.
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Parents should be reminded that families are in a better position to fund college expenses over a short time period.
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Prepaid Tuition Plans are plans where prepayment of tuition is allowed at inflated prices for enrollment in the future.
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QTPs generally require an increase in the risk level of investments that the closer the child gets to the targeted year to begin college.
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Repayment of Stafford Loans begins after a grace period of 3 years following graduation, leaving school, or dropping below half-time enrollment.
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The Federal Supplemental Education Opportunity Grant (FSEOG) is awarded to undergraduate students with high EFC's.
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The Life time Learning Credit can only be claimed for a limited number of years.
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The owner-contributor in a college savings plan has the right to specifically direct which individual securities will be purchased within the plan.
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There is a maximum EFC allowed to qualify for financial aid.
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A common method for reducing a family's EFC is creating a trust for the child and diminishing the family's estate through gifts.
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A consolidation loan provides borrowers with a way to consolidate various types of federal student loans with separate repayment schedules into one loan.
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A subsidized loan is based on the financial need of the student is determined by the EFC formula.
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Coverdell ESAs are designed to offer tax benefits to those individuals who wish to save money for a child/grandchild's higher education expenses.
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Federal work-study programs enable undergraduate and graduate students to earn money for education expenses through jobs that pay at least minimum wage.
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If a portion or all of the withdrawal from a QTP is spent on anything other than qualified higher education expenses, the owner-contributor will be taxed at her own tax rate on the earnings portion of the withdrawal.
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If used to pay for qualified higher education expenses at an eligible institution or state tuition plan, Series EE Savings Bonds provide significant tax savings, that is, no federal income tax on the interest.
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Most states have programs that are similar to federal student financial aid.
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Once expenses have been identified and adjusted for inflation, one can determine the estimated 4- year cost of a college education.
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QTPs allow individuals to either participate in Prepaid Tuition Plan whereby tuition credits are purchased for a designated beneficiary for payment or waiver or higher education expenses, or participate in College Savings Plan whereby contributions of money are made to an account to eventually pay for higher education expenses of a designated beneficiary.
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QTPs are attractive to states because they can provide incentives to residents and nonresidents to invest in higher education and into that state's educational system.
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QTPs provide significant tax savings, allow for substantial investment for a child's education, and provide a tool for avoidance of gift and estate taxes.
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The American Opportunity Tax Credit is a tax credit available for qualified tuition, enrollment fees, and course materials incurred in the first 4 years of post-secondary education for the taxpayer, spouse, or dependent.
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The EFC formula takes into account various factors, including the number of children in private school or college, the size of the family, the amount of years until the parent's retirement, and large financial burdens, such as medical bills.
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The EFC indicates how much of a student's family's resources ought to be available to assist in paying for the student's education.
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The Lifetime Learning Credit is a tax credit available to pay for tuition and enrollment fees for undergraduate, graduate, or professional degree programs.
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The Stafford loan in the primary type of financial aid provided by the U.S. Department of Education.
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The U.S. Armed Forces have numerous programs and scholarships available to pay for tuition.
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The Uniform Gift to Minors Act (UGMA) allows parents the option to put assets in a custodial account for a child.
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The financial aid process is initiated by filling out financial aid forms available from high schools, the U.S. Department of Education, or from the college the student will attend.
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Under the Employer's Educational Assistance Program, an employer can pay for an employee's undergraduate or graduate tuition, enrollment fees, book, supplies, and equipment while these employer benefits are excluded from the employee's income up to $5,250.
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When formulating a college education savings plan, one of the most significant considerations is how much time exists before the child enters college.
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