Lesson 8 CFP- Education and Education Funding

What are the four primary methods for solving an education funding calculation:

1. Uneven Cash Flow Method 2. Traditional Method 3. Account Balance Method 4. Hybrid Approach

What are 401k loans?

401(k), 403(b), or 457 retirement plan may allow for loans up to the lesser of $50,000 or 50 percent of the vested account balance. These loans must be repaid (with interest) to the plan in 5 years, usually by payroll deduction. 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. The borrowed funds are not taxable, and there is no 10 percent penalty; however, if separation of service from the employer occurs before the loan is fully repaid, the entire loan balance must be immediately repaid or will be treated as a distribution subject to tax plus a 10 percent penalty if under age 591⁄2. There is no 10 percent penalty exception for distributions from a qualified plan used to pay for higher education expenses.

What are coverdell education savings accounts?

A Coverdell Education Savings Account (ESA) is a tax deferred trust or custodial account established to pay for qualified higher education or qualified elementary / secondary school expenses. For a Coverdell ESA, qualified higher education expenses include tuition, fees, books, room, board, and computer related expenses. Qualified elementary and secondary expenses include tuition, fees, books, supplies, equipment, tutoring, computer related expenses, and special needs services for special needs beneficiaries. Qualified elementary and secondary expenses also include room and board, uniforms and transportation if required or provided by the institution. Distributions from a Coverdell ESA used for qualified education expenses are tax-free, as long as the distribution does not exceed the qualified education expenses, reduced by any financial assistance. 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. Although a distribution is included in income, it may not be subject to a 10 percent penalty. Following is a list of the exceptions to the 10 percent penalty rule. When the Coverdell ESA is established the beneficiary must be under age 18 or qualify as a special needs beneficiary. Contributions to a Coverdell ESA are limited to $2,000 per beneficiary per year and 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. 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 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. While an ESA cannot be directly rolled over to a Section 529 Savings Plan, a contribution to a Section 529 plan is a qualified expense for an ESA. A distribution must be made from the ESA and the contribution made to the 529 plan for the same beneficiary (or a member of the beneficiary's family) in the same tax year. The beneficiary designation for a Coverdell can also be changed and not subject to income tax as long as the new beneficiary is a member of the original beneficiary's family and is under the age of 30. Funds in a Coverdell ESA must be distributed within 30 days of the beneficiary attaining age 30. 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.

What is the federal pell grant? What is the max pell grant award? What are the allocation choices of the pell grant funds and the effects? How many semesters can a student receive a pell grant?

A Federal Pell Grant is need-based financial aid for students who have not earned an undergraduate degree or a professional degree. One of the nice features of a Pell Grant is that it does not have to be repaid. Pell Grants are based on an academic year, from July 1st to June 30th. The amount of a Pell Grant awarded to a student is dependent upon the family's EFC, cost of attendance, and whether the student is attending full-time or part-time. The maximum Pell Grant award for the 2019-20 award year (July 1, 2019 to June 30, 2020) is $6,195 and is paid directly to the school or the student. Students have a choice of: 1) allocating their Pell Grant toward tuition, fees, and course materials, which allows the grant to be tax-free, but reduces the expenses that qualify for the American Opportunity Tax Credit (AOTC; discussed later in this chapter); or 2) allocating the Pell Grant to living expenses, causing that portion of the grant to be taxable income to the student, but allowing tuition and fees to remain qualified expenses for the AOTC.10 Effective July 1, 2012 a student may not receive the Pell Grant for more than 12 semesters. As a benefit to military families, the maximum Pell Grant amount is awarded to students whose parent or guardian died as a result of military duty in Iraq or Afghanistan after September 11, 2001 (if the student was under 24 years old at the time of the parent or guardian's death)

What is the summary of savings options

A financial planner should be able to present a client with alternative strategies to save for college education, such that the best strategy is implemented. Options to lower the amount of annual savings required include continuing to save while the child is in college and making savings payments at the beginning of each year. The primary consideration for the client when determining which funding strategy to use is the amount of current income available for education savings.

What is a standard repayment schedule for a loan?

A standard repayment schedule will amortize the loan for up to a 10-year time period, with minimum monthly payments of at least $50. The standard repayment schedule has the borrower repaying the loan in the shortest amount of time. The shorter repayment schedule allows the borrower to pay the least amount of interest on the loan, as compared to the other repayment schedules.

What is the grace period for repayment of student loans?

After graduating, leaving school, or falling below half-time status, borrowers have a grace period before repayment begins. The grace period depends on the type of loan, as described below.

What are employer-provided education assistance programs?

An employer-provided education assistance program is a program established by an employer to reimburse employees for education expenses. The education expenses may or may not be directly related to the employee's current job duties; it depends on the employer's policy. Reimbursement of education expenses by an employer, up to $5,250 (2019) per year, is not taxable to the employee. Any education expenses reimbursed above $5,250 are included in income for the employee. 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.

With respect to education planning what is the traditional method and serial payments?

As indicated, the traditional method of education fund uses real dollars and the annuity due funding plan to calculate the present value of the cost of education.

What is campus-based aid? What are the three types? What is the difference between campus based aid and Federal Pell Grant?

Campus-based aid is administered directly by the financial aid office of the university. The three types of campus-based aid are Federal Supplementary Educational Opportunity Grant, Federal Work-Study and Federal Perkins Loan Program. Schools may offer some or all three campus-based aid programs. Unlike the Federal Pell Grant, which provides funding to all students who qualify, campus-based aid may or may not be available if a student qualifies. Once the school has allocated their campus-based aid, no further aid can be allocated from that program for the year. Students should apply early for financial aid, as the campus-based aid may not always be available.

What are college savings plans?

College Savings Plans (or 529 Savings Plans) allow for 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 from a College Savings Plan are federal and state income tax-free, as long as they are used to pay for qualified education expenses. Qualified education expenses include: 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. The American Recovery and Reinvestment Act of 2009 expanded qualified education expenses to include computer technology or equipment. Computer technology and equipment includes any computer and related peripheral equipment, such as a printer, internet access, and software used for educational purposes. The Tax Cuts and Jobs Act of 2017 further expanded the definition of qualified expenses to allow distributions of up to $10,000 per year per beneficiary to pay tuition at elementary or secondary public or private schools. A federal income tax deduction is not permitted for contributions to a College Savings Plan. However, states that have a state income tax will generally offer a state income tax deduction for those residents that contribute to their state's College Savings Plan. There are no phase-outs (income limitations) on who can contribute to a College Savings Plan and a Savings Plan can be opened benefiting anyone (e.g., family member, friend, neighbor, or the owner of the plan). The owner of the Savings Plan can at any time 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. When a beneficiary is changed, there are no gift tax consequences as long as the new beneficiary is a family member assigned to the same generation as the original 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 A transfer which occurs by reason of a change in the designated beneficiary, or a rollover of credits or account balances from the account of one beneficiary to the account of another beneficiary, will be treated as a taxable gift by the old beneficiary to the new beneficiary if the new beneficiary is assigned to a lower generation than the old beneficiary, as defined in IRC Section 2651, regardless of whether the new beneficiary is a member of the family of the old beneficiary. The transfer will be subject to the generation-skipping transfer tax if the new beneficiary is assigned to a generation that is two or more levels lower than the generation assignment of the old beneficiary. 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. ollege 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. A married couple can elect gift splitting and contribute a lump-sum amount of $150,000 (5 x $15,000 x 2) in one year, per beneficiary and not incur gift tax liability. The IRS will recognize 1/5 of the contribution as being contributed each year, even though the lump-sum amount was contributed in one year. This strategy is often referred to as "front loading" the Section 529 plan Note that if the donor makes a gift of $75,000 (and chooses front-loading to avoid gift taxes), and then dies before the full 5 years have passed, a portion of the gift will be brought back into the donor's gross estate for federal estate tax purposes. Investment options for Savings Plans typically include mutual funds and annuities and most Savings Plans offer age banded investments that become more conservative as the beneficiary becomes closer to age 18. The contributor or beneficiary is permitted to change the investment selection up to twice per year. Savings Plans offer a unique advantage for grandparents looking for ways to provide for the grandchildren's college education. Funds in a Savings Plan are not included in the grandparent's gross estate when calculating any estate tax due. As discussed previously, the grandparent's contribution may be recognized as a series of annual exclusion gifts over a five year period. If during that five year period the grandparents die, any remaining years (excluding the year of death) are brought back into the gross estate. Grandparents still retain control over the asset and have the flexibility to change the beneficiary or remove the funds from the Savings Plan. If the 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, but 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). Assets in a College Savings Plan owned by the parent or by the student who is a dependent of the parent are considered assets of the parent for financial aid purposes. Remember, a smaller percentage of a parent's income and assets are deemed available for education than the child's. Anytime an asset is treated as an asset of the parent, it results in more favorable treatment when determining the amount of financial aid the family qualifies to receive. tate savings plans often provide additional benefits other than the benefits discussed above. These benefits might include state income tax deductions for contributions or return enhancements. To encourage residents to save for college education, states may provide a state income tax deduction on contributions to a savings plan. Generally, the deduction is limited to a certain amount per beneficiary or donor. For example, deposits made to a Louisiana savings plan account can be excluded from taxable income reported on the account owner's Louisiana income tax return, up to $2,400 per year per beneficiary for single account owners and up to $4,800 per year per beneficiary for account owners filing a joint return. Louisiana also permits unused exclusions to be carried forward to subsequent tax years. In addition to a tax deduction, the Louisiana savings plan provides "Earnings Enhancements," which are effectively an additional contribution to the plan that increases the plan value and grows over time based on the plan account investment choices. In addition to benefits discussed above, states often provide scholarships for state residents to attend state schools. These scholarships are often merit based and require academic achievement while in college to maintain the scholarships.

What are consolidated loans?

Consolidation loans take all of a student's outstanding loans and consolidate them 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. The following loans are eligible for consolidation: • Subsidized and unsubsidized Direct and FFEL Stafford Loans • Federal Perkins Loans • Parent PLUS Loans • Graduate PLUS Loans Prior to the Higher Education Reconciliation Act of 2005, a borrower enrolled in school at least half-time could request to begin repaying a Stafford Loan early. By entering repayment early, the borrower could apply for a Direct or FFEL Consolidation Loan. However, as a result of the Higher Education Reconciliation Act of 2005, borrowers may not begin repaying a Stafford Loan or apply for a consolidation loan until after the six month grace period that begins once the borrower falls below half-time status. PLUS Loans are eligible for consolidation once the funds are fully dispersed. Repayment of a consolidation loan begins within 60 days of the funds being dispersed and the repayment period is from 10 to 30 years. Borrowers should keep in mind that although the consolidation loan payment may be less than the original payments, if the repayment period is being extended to 30 years, the total cost of repayment can be significantly more under a consolidation loan because of the total interest expense. As with all debt, every effort should be made to retire the debt within a reasonable amount of time.

With respect to education planning give a synopsis of ira distributions:

Distributions from an IRA are another source of funds to pay for college education. However, these distributions have tax implications that need to be considered. In addition, the planner should work with the client to determine if taking distributions from an IRA will adversely impact retirement goals. With distributions from IRAs, taxpayers need to be concerned with whether the distribution is subject to income tax and whether it is subject to a penalty. Distributions from a traditional IRA are generally included in taxable income and may be subject to an early withdrawal penalty if the distribution is made prior to the attainment of age 591⁄2. However, there is an exception to the penalty if the distribution from the IRA is used to pay for higher education expenses.23 Therefore, distributions from an IRA can be used for college funding, but will generally be treated as taxable income. There are also tax implications to using distributions from Roth IRAs as a source of funds for college funding. Roth IRAs are generally funded with after tax contributions or conversions from traditional IRAs. The tax characteristics of funds held in a Roth IRA take one of three forms: 1. Contributions 2. Conversions 3. Earnings 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. Conversions represent pre-tax dollars, typically in a Traditional IRA, that were converted to a Roth IRA. The account owner recognized income on the amount converted and the conversion became after tax dollars since income was recognized and income taxes were paid on the converted amount. Conversions represent the owner's basis in the IRA and can be withdrawn, without tax consequences at any time. However, conversions withdrawn within five years of the date of conversion may be subject to a 10 percent penalty. Earnings represent the growth from investing contributions and conversions. Distributions of earnings may be tax-free, if the distribution is a qualified distribution. A qualified distribution from a Roth IRA must meet the following two requirements: 1. The distribution must occur at least five years after the Roth IRA owner established and funded the Roth IRA, and 2. At least one of the following requirements must be met: • The Roth IRA holder must be at least age 591⁄2 when the distribution occurs • The Roth IRA owner becomes disabled • Death of the Roth IRA owner • 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 If the 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 not be subject to the 10 percent 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. While the funds inside the Roth IRA are not countable assets for financial aid calculation purposes, the distributions are reported as untaxed income on the FAFSA and may impact the need-based financial aid offered for the following year. For this reason, 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. As mentioned above, it is important to keep in mind that using assets in an IRA to fund education expenses may impact the attainment of a client's retirement goal. It may be more appropriate to borrow for education expenses, as you cannot borrow to finance a retirement goal.

What is federal work study?

Federal Work-Study (FWS) are jobs on campus or off campus for undergraduate or graduate students to help students pay for their education expenses. To be 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. The amount of 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.

What are fellowships?

Fellowships are typically paid to students for work, such as teaching while studying for a Master's degree or conducting research while working towards a Doctorate of Philosophy degree (Ph.D.). Fellowships can also be provided to an M.D. working on a specialty field of medicine. Fellowships can last from a few weeks to a few years, depending on the depth and level of work involved. A scholarship or fellowship is tax-free to the recipient if the recipient is: • A candidate for a degree at an eligible education institution, and • The recipient uses the proceeds to pay for qualified education expenses. The recipient is considered a candidate for a degree if: • The recipient is attending a primary or secondary school or is pursuing a degree at a college or university, or • The recipient is attending an accredited education institution (that is authorized to provide full credit towards a bachelor's degree or higher, or provides training for students for gainful employment in a recognized occupation). An eligible education institution is one that maintains a regular faculty and curriculum, and normally has an enrolled student body at a place where education activities are conducted. Qualified education expenses for the purpose of tax-free scholarships and fellowships include tuition and fees, course related expenses such as books, supplies, and equipment that are required by the eligible education institution. 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

Give a summary of the current state of education planning for families:

For many families, paying for their children's college education is one of their largest financial goals, next to retiring and paying off debt. It is the responsibility of the financial planner to help the client prioritize how to allocate their cash flow and savings. Paying off a mortgage, fully funding a retirement, and saving an adequate amount for education may not be possible for some families. The planner should advise the client as to all of the education funding options, including financial aid (grants, loans, and work-study) and scholarships. The planner should also advise the family regarding tax-deferred savings, tax deductions, and tax credits. With the average cost of tuition ranging from $10,000 for a public state university and up to $35,000 + for a private university, it is important for the financial planner to also consider other cost factors besides tuition when determining the total cost of attendance, (such as room and board, insurance, travel, entertainment etc.). The total cost of attending college is likely to be an additional 50 to 75 percent of the cost of tuition. Tax deferred savings is an ideal way to save for education funding for clients with the means to save for a college education and a time horizon greater than 10 years. The longer the time horizon until the child enters college, the more beneficial tax deferred savings becomes. As the education funding section of this chapter demonstrated, the longer the time horizon (savings period), the less the family must save each year. The planner should present alternative saving strategies to the client to determine which strategy is most likely to be implemented (based on the amount of income available for education funding). For clients that do not have the means to save for college education or do not have a sufficient time horizon to take advantage of tax deferred savings, the financial planner must advise the family as to the various types of financial aid, such as grants and loans. It is also important that the planner advise the client as to the tax consequences of grants, loans, scholarships and possible tax deductions and credits related to education. With changing tax laws, education planning can be a challenging area for planners that is also very rewarding when helping a family achieve education funding goals for their children.

What are scholarship prizes?

Generally, scholarships won as a result of a competition and awarded as a prize are included in taxable income unless the scholarship meets the following requirements: The recipient is: • A candidate for a degree at an eligible education institution, and • The recipient uses the proceeds to pay for qualified education expenses. The recipient is considered a candidate for a degree if: • The recipient is attending a primary or secondary school or is pursuing a degree at a college or university, or • The recipient is attending an accredited education institution

What is the student loan interest deduction?

Generally, the interest expense on most personal loans is not tax deductible, with few exceptions, including mortgage interest on a primary residence. 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. 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 interest expense. The phase-outs (as of 2019) are based on MAGI: • Single: $70,000 - $85,000 • Married Filing Jointly: $140,000 - $170,000 To qualify for the student loan interest deduction, the student loan proceeds must have been used to pay for qualified education expenses. Qualified education expenses include tuition and fees, books, supplies, equipment, and other necessary expenses such as transportation, room and board. The qualified education expenses must have been paid by the taxpayer, the taxpayer's spouse, or a dependent of the taxpayer. As part of the student loan interest deduction, not only is the interest expense on a student loan deductible, but so are loan origination fees, credit card interest expenses, and any capitalized interest expenses. Loan origination fees are financial institution charges associated with issuing a loan. The origination fee is included on a pro-rata basis over the repayment period as a student loan interest expense deduction. 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. If the taxpayer is carrying a large credit card balance, it may be difficult to determine the portion of the outstanding balance that is only associated with qualified education expenses. In addition, because of high interest rates on credit cards, the $2,500 student loan interest expense limit will be attained with only $10,000 - $15,000 in credit card debt. Capitalized interest is the interest expense that is added to the outstanding balance of a loan, while the taxpayer is enrolled at least half-time. Remember, with unsubsidized Stafford Loans, the borrower can either pay the interest expenses as incurred or capitalize the interest expense

What are Grants?

Grants are money provided to students for postsecondary education that does not require repayment. Grants are typically awarded based on financial need. The federal government only awards grants for undergraduate studies

Does the cost of tuition increase at a higher rate than inflation?

Historically, the cost of tuition increased at a higher rate of inflation than the general consumer price index (CPI). As a result, the CPI rate could not be used when planning for education costs over a 10 - 20-year period. The following exhibit depicts the cost of college (both private and public in-state) from the 08-09 academic year to the 18-19 academic year. The average annual tuition increases over this ten-year period averaged 2.3 percent for private colleges and 3.1 percent for public colleges. During this same time, CPI has increased an average of 1.6 percent per year. 4 A reasonable estimate for tuition inflation seems to be about 200 basis points above the estimate for the CPI.

What are home equity loans?

Home equity loans and home equity lines of credit (HELOC) are popular for funding education due to their highly competitive interest rates, but the tax deduction that was previously available for interest on the first $100,000 of home equity debt is no longer available. To qualify, the parents must meet the debt-to-income ratio requirements of the lender. The disadvantage of using a home equity loan is that the payments on the debt must start immediately and the home is used as collateral for the debt, so if financial circumstances change later and the clients are not able to make payments, the home may be at risk

What is the deferment and forbearance repayment schedule?

If a borrower becomes unable to repay a student loan, it is possible to request a deferment or forbearance. During this time, payments are suspended but may or may not incur interest expense. For a subsidized Stafford Loan, the borrower will not be responsible for interest payments during the forbearance period. However, for unsubsidized Stafford Loans, the borrower is still responsible for interest charges during the forbearance period.

What does it mean if a scholarship or fellowship is considered "payment for services?"

If a scholarship or fellowship is intended to compensate the recipient for past, present or future services, such as teaching or research, then the scholarship or fellowship is included in taxable income.

What are 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 A gift or inheritance used for qualified education expenses does not reduce the amount of expenses considered when calculating the AOTC or Lifetime Learning Credit. As discussed previously, students have a choice of allocating a Pell Grant or scholarship toward tuition, fees, and course materials or allocating a Pell Grant or scholarship to living expenses, causing that portion of the grant to be taxable income to the student, but allowing tuition and fees to remain qualified expenses for the AOTC.

With respect to education planning give a synopsis of life insurance:

In some cases, cash value life insurance may be used as a savings vehicle for college funding. If there is a dual need for a death benefit and a savings element, life insurance may be a suitable choice. For example, if the parents are just starting to save for college and they want to ensure that whether they live or die the cost of college will be funded, the death benefit can provide the needed funds if the parent dies before the full amount has been saved. 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. Universal life insurance policies are popular because they can be over-funded in the early years, then premium payments can be skipped while the child is in college, allowing those funds to be used to pay for additional college expenses. Variable universal policies may be utilized if the child is young and there is a desire to invest in subaccounts that offer stock and bond investments rather than a fixed interest rate. 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). 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. 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.

What are cosigners with regards to student loans?

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. If a child becomes delinquent on a student loan, the lender may initiate collection efforts against the cosigner. If the loan is past due, late fees, additional interest, penalties, and collection costs will be added to the outstanding balance, which will ultimately negatively impact both the child and co-signer's credit report. To collect the outstanding student loan, the co-signer's wages may be garnished and/or state or federal income tax refunds may be withheld. In addition, a co-signer's Social Security benefit may be reduced to repay an outstanding student loan if such loan is owed to the federal government. More than 114,000 retirees have their Social Security benefit reduced due to outstanding student loans. This represents a major risk to a retiree's income during retirement because up to 15 percent of a Social Security benefit may be withheld, although benefits of $750 or less are generally not reduced.17 Considering that 45 percent of people age 48 to 64 do not save enough for basic needs during retirement, a reduction in Social Security benefits for student loan repayment can significantly delay retirement or even impact the ability to pay for necessary medication and medical care.18 Defaulting on student loans can have severe and long-term financial consequences for the borrower and co-signer. Families should try all possible alternatives to reduce the amount borrowed for education such as savings, grants, work-study, living at home after graduating for a period of time, and taking advantage of one of the income-driven repayment schedules which permits payments over 20 to 25 years and limits the amount of repayment to 10 to 20 percent of discretionary income

What are other benefits on the income based repayment scheduel?

Other benefits of the IBR schedule include: • The 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 under 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.

What are Parent Plus Loans?

PLUS Loans are for parents to borrow to help pay for a dependent's undergraduate education expenses. The dependent student must be attending at least half-time, in an eligible school, and in an eligible program. PLUS Loans are not based on need, have no debt-to-income ratio limitations, and require only that the parents do not have any adverse credit history. PLUS Loans are appropriate 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 less any other financial aid awards. The school determines the amount of PLUS Loan the borrower is eligible to receive. Loan funds are dispersed in at least two equal payments. The funds are sent to the school and are used to pay tuition, fees, room and board. Any remaining funds are paid directly to the parents or can be held by the school for future education expenses. For Direct Plus Loans dispersed July 1, 2018-June 30, 2019, the interest rate is 7.6 percent. The interest rate is fixed for the life of the loan. Prior to July 1, 2006, the interest rate was variable. Interest on PLUS Loans begins as soon as the first disbursement is paid. There are 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. In addition to the interest expense, PLUS Loans also charge a fee of about 4.3 percent for funds dispersed in 2018 and 2019 of the amount borrowed. Similar to a Stafford Loan, PLUS Loans are eligible for deferment or forbearance. While the loan is in forbearance, it continues to accrue interest that can be paid immediately or added to the outstanding principal of the loan.

What are Plus Loans for Graduate and Professional Degree Students?

PLUS Loans for Graduate and Professional Degree Students (or Graduate PLUS Loans) are for student's seeking graduate and professional degrees. A Graduate PLUS Loan is 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. Graduate PLUS loans are not based on financial need. In order to receive a Graduate PLUS Loan, students must have applied for the maximum Stafford Loan amount available for graduate students. The amount of Graduate PLUS Loans available is based on the cost of attendance, less other financial aid.

What are private student loans?

Private student loans (loans that are not funded or subsidized by the federal government) may be available to students who need funding beyond Stafford loans. Most private student loans will require that the parents be guarantors or cosigners of the loans, although some allow for the parent/guarantor to be removed after a set number of payments (typically 24 - 36 months) have been made on time. The terms of private student loans will vary from lender-to-lender, so a careful review of the terms of the various available private loans is essential. Private student loans are generally used only after all government-funded loans have been exhausted because the private loans have several disadvantages in comparison to federal student loans, as outlined in the Exhibit below.

What are qualified tuition plans?

Qualified tuition plans or Savings Plans, allow families to save for education expenses on a tax-deferred basis. Section 529 of the Internal Revenue Code authorized states and educational institutions to adopt qualified tuition plans, either as a prepaid tuition plan or a college savings plan.

What are Stafford Loans? How can you qualify? What are the max loan limits?

Stafford Loans are student loans administered by the U.S. Department of Education. Prior to July 1, 2010, there were two types of Stafford Loans: the Federal Family Education Loan (FFEL) and Direct Stafford Loan. However, as part of The Student Aid and Fiscal Responsibility Act, passed on March 30, 2010, the federal government has eliminated the FFEL program. Education loans will now only be issued by the U.S Department of Education as part of the Direct Loan program. With the Direct Loan program, the funds are provided by the federal government, whereas under the FFEL, the funds were provided by a bank or other lender. As part of The Student Aid and Fiscal Responsibility Act, students with low incomes and large loan balances are only required to repay up to 10 percent of their income each year. Previously, the law permitted up to 15 percent of a borrower's income to repay student loans. In addition, The Student Aid and Fiscal Responsibility Act forgives loans after 20 years of repayment, whereas prior to the Act, borrowers were eligible for loan forgiveness after 25 years of repayment A student may qualify for subsidized or unsubsidized Direct Loans. Qualification for a subsidized or unsubsidized loan is based on a student's financial need. For a subsidized loan, the federal government pays interest on the loan while the borrower is attending school and during the six-month grace period after graduation before repayment begins. With an unsubsidized loan, the borrower is responsible for interest from the time the funds are dispersed. Students may pay the interest expense as it is incurred or allow the interest to be added to the loan's outstanding principal. he following are maximum limits on the amount that can be borrowed by a dependent student under the Stafford Loan program for a full academic year: • First year students: $5,500 but no more than $3,500 of this amount can be in subsidized loans. • Second year students: $6,500 but no more than $4,500 of this amount can be in subsidized loans. • Beyond the second year: $7,500 but no more than $5,500 of this amount can be in subsidized loans. For undergraduate students who are independents (not claimed as a dependent on parent's tax return) and for dependent students whose parents did not qualify for a Parent Loan for Undergraduate Students (PLUS) Loan, the following are maximum limits on the amount that can be borrowed under the Stafford Loan program in a full academic year: • First year students: $9,500 but no more than $3,500 of this amount can be in subsidized loans. • Second year students: $10,500 but no more than $4,500 of this amount can be in subsidized loans. • Beyond the second year: $12,500 but no more than $5,500 of this amount can be in subsidized loans. For graduate or professional degree students, the following are maximum limits on the amount that can be borrowed under the Stafford Loan program in a full academic year: • Each Year: $20,500 in unsubsidized loans. • Graduate students are no longer eligible for subsidized Stafford loans The maximum amount of Stafford Loan debt a student can graduate with from graduate school is $138,500, which also includes amounts borrowed for undergraduate studies. Some health profession programs will allow students to borrow up to $224,000. No more than $65,500 out of the $138,500 can be in subsidized loans. Stafford Loan funds are paid directly to the school, which applies the loan proceeds to tuition, fees, room, and board. Any remaining amounts will be paid directly to the student. Funds are paid through the school in at least two installments. Students pay two fees associated with Stafford Loans. The first fee is an origination fee that ranges from 1.0-1.5 percent of the loan amount (depending on when the funds are dispersed), which is used to offset the cost of administering the loan. The second fee is an annual interest rate. The interest rate for unsubsidized Stafford Loans varies depending on when the funds are dispersed. For loans dispersed 7/ 1/18-6/30/19 the interest rate for undergraduate Stafford Loans is 5.05 percent. For graduate or professional Stafford Loans, the interest rate is 6.6 percent. Interest rates for Stafford Loans can be found at the U.S. Department of Education's Federal Student Aid website.12 The interest rate only applies to loans dispersed during the time periods shown below. It does not apply to any previously dispersed loans and it does not apply to unsubsidized Stafford Loans. For borrowers on active military duty, the interest rate on Direct Stafford Loans obtained prior to active duty service is capped at six percent during periods of active duty. Borrowers must begin repaying a Stafford Loan after a six-month grace period that begins after graduation, leaving school, or dropping below half-time status. For subsidized Stafford Loans, the borrower is not responsible for interest payments during the grace period. However, for unsubsidized Stafford Loans, the borrower still incurs interest charges, during the grace period, that will need to be repaid. Students generally have 10 to 25 years to repay a Stafford Loan. There are seven repayment methods for a Stafford Loan, which include: 1. Standard Repayment 2. Extended Repayment 3. Graduated Repayment 4. Income Based Repayment 5. Income Contingent Repayment 6. Pay As You Earn Repayment 7. Revised Pay As You Earn Repayment

What are prepaid tuition plans? What are the disadvantages?

States will 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. Prepaid tuition plans are designed to only pay the cost of tuition, not room and board. When the credits in a prepaid tuition plan are used to attend college, there are 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. A popular misconception about prepaid tuition is that credits are purchased at "today's cost." In fact, many states will charge a premium over the current cost per credit hour when parents purchase prepaid tuition credits. Currently, 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. Many states have been forced to close their prepaid tuition plans due to education costs increasing faster than anticipated and poor investment returns. Another type of prepaid tuition plan is the Private College 529 Plan, which 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 Dame, Emory and MIT. Parents can use the credits purchased to attend any of the nearly 300 private universities that participate in the program. Students must still meet entrance requirements, which are separate and independent of the prepaid tuition plan. There is no preferential acceptance to private universities because the parents participate in a Private College 529 Plan. The disadvantages to prepaid tuition is that universities in the home state may not offer a curriculum that appeals to the student or the student may be offered a scholarship to attend a university out of their home state. If parents decide to cancel the prepaid tuition plan or not use the tuition credits, the rules vary by state, but generally parents will receive what they paid for the tuition credit, less some administrative expenses. Some states will return any earnings on the investments. Planners should advise clients to carefully research their states' prepaid tuition plans before investing. Many plans are facing difficulty as the investment returns have not outpaced or maintained tuition inflation rates. Some states are facing significant shortfalls in the amount of assets in the prepaid tuition plans, which are not keeping up with the cost of tuition at the universities in the state and the tuition credit hours promised are exceeding the assets of the plan. As a result, many states have closed their prepaid tuition plans or have frozen the plans to prevent future purchases. However, most states offer a guarantee that the state will make up any shortfall between plan assets and the cost of tuition. Prepaid tuition 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. Anytime an asset is treated as an asset of the parent, it results in more favorable treatment when determining the amount of financial aid the family qualifies to receive.

What are the consequences of defaulting on a student loan?

Students who do not complete their degree have a higher default rate than students who complete their degree. Student loan debt is one of the exceptions in bankruptcy and is not a dischargeable debt. Borrowers that file for Chapter 7 bankruptcy must make payments to the bankruptcy trustee for five years to repay a portion of the debts owed to unsecured creditors. During this time, borrowers must continue to make the full payment due under their student loan obligations. It's quite possible, after five years of payments to unsecured creditors under Chapter 7 bankruptcy, to still face years of student loan payments.

What are nonqualified education expenses?

The AOTC and the Lifetime Learning Credits do not allow certain education related expenses to be counted as qualified education expenses. Examples of expenses that are not qualified education expenses for the AOTC and Lifetime Learning Credits are: • Room and Board • Insurance • Student Health Fees • Transportation Expenses The above expenses are not qualified expenses for the AOTC and Lifetime Learning Credit, even if the fees are a condition of enrollment and are paid directly to the education institution.

What is the american opportunity tax credit (formerly the hope scholarship credit)

The American Opportunity Tax Credit (AOTC) was created by the American Recovery and Reinvestment Act of 2009 and amended by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. The new legislation increased the amount of the tax credit and provided other benefits beyond that of the Hope Credit. The AOTC provides a tax credit of up to $2,500 per student per year for the first four years of qualified education expenses for postsecondary education. 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. Qualified education expenses include tuition and fees (including student activity fees) as long as those fees are paid directly to the university. Qualified education expenses also include books, supplies, and equipment, but they do not have to be purchased directly from the university. To qualify for the AOTC the taxpayer must pay qualified education expenses for the taxpayer, the taxpayer's spouse, or dependent of the taxpayer. In addition, taxpayers with income in excess of the phase-out thresholds are not eligible for the AOTC. The 2019 phase-outs are based on MAGI: • Single: $80,000 - $90,000 • Married Filing Jointly: $160,000 - $180,000 Taxpayers can receive up to 40 percent of the American Opportunity Tax Credit as a refundable credit. Refundable tax credits are treated as a tax payment. This means that rather than being limited to reducing the tax owed to zero (as is the limit for most tax credits), up to 40 percent of the AOTC credit can be received as a refund that is larger than the amount of money the taxpayer actually paid in during the year. However, no portion of the credit is refundable if the taxpayer claiming the credit is a child subject to the kiddie tax

What is the federal perkins loan program?

The Federal Perkins Loan program is 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. No new Perkins loans are available after September 30, 2017. Repayment on the Federal Perkins Loan begins after a nine-month grace period. The grace period begins once the student graduates, leaves school, or drops below half-time status.

What is the federal supplemental educational opportunity grant? (FSEOG Grant)? How much can be awarded?

The Federal Supplemental Educational Opportunity Grant (FSEOG) is awarded to students with exceptional financial need. Pell Grant recipients with the lowest EFC are considered first for a FSEOG. Students awarded the FSEOG can receive between $100 to $4,000 per year.

What is Income Based Repayment?

The Income Based Repayment (IBR) 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. The following loans are available to use the IBR schedule: • Stafford loans (FFEL or direct) • PLUS loans made to graduate or professional students (PLUS loans made to parents are not eligible) • Consolidation student loans

What is the lifetime learning credit?

The Lifetime Learning Credit provides a tax credit of up to $2,000 (2019) per family for an 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. The tax credit is calculated as follows: 20% x qualified education expenses (up to $10,000)\ 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. An eligible education institution is any accredited public, nonprofit and private profit-making postsecondary institution eligible to participate in a student aid program administered by the U.S. Department of Education. To qualify for the Lifetime Learning Credit the taxpayer must pay qualified education expenses for the taxpayer, the taxpayer's spouse, or dependent of the taxpayer. In addition, taxpayers with income in excess of the phase-out thresholds are not eligible for the Lifetime Learning Credit. The 2019 phase-outs are based on MAGI: • Single: $58,000 - $68,000 • Married Filing Jointly: $116,000 - $136,000 An important difference between the AOTC and the Lifetime Learning Tax Credit is that 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 be paid directly to the university in order for these expenses to be included in the credit. There are many similarities between the AOTC and Lifetime Learning Credits such as the timing of when qualified expenses count toward an education tax credit calculation, adjustments to qualified education expenses, no double dipping on benefits, and nonqualified education expenses.

What is the Pay as you earn repayment schedule? What are the benefits? What loans qualify for this?

The Pay As You Earn (PAYE) repayment schedule is available if the borrower has a high debt-to-income ratio, and will cap the monthly payment based on the borrower's income and family size. The following 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) Other benefits of the PAYE schedule include: • 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 a borrower has been 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 a borrower is making 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.

What is the revised pay as you earn (REPAYE) repayment plan? What loans can use this plan?

The Revised Pay As You Earn (REPAYE) 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) Other benefits of the REPAYE schedule include: • The monthly payment will be 10 percent 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 a borrower has been 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, and meets certain other requirements, the balance due will be canceled. • If a borrower is 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. For IBR and PAYE, discretionary income is the amount of income exceeding 150% of the poverty guideline for the borrower's family. For ICR, discretionary income is the amount of income exceeding 100% of the poverty guideline for the borrower's family.

What is the teacher education assistance for college and higher education grant (TEACH)? How much does it provide to a student? How do you qualify for the TEACH grant? If you fail to meet the the requirements what can you do with the grant? What is the grace period after you initiate this process of failing to meet requirements? When does interest accrue?

The Teacher Education Assistance for College and Higher Education (TEACH) Grant provides up to $4,000 per year for students who intend to teach in a public or private elementary, middle, or high school that serves a community of low-income families.11 If a student fails to meet the teaching requirements, the grant is converted to a Federal Direct Unsubsidized Stafford Loan, which must be repaid by the student. Recipients of the TEACH grant have a six-month grace period after the grant is converted to a Stafford Loan before repayment must begin. If a TEACH grant is converted to a Stafford Loan, interest accrues from the first date the funds were disbursed. n order to be eligible for the TEACH grant, applicants must meet the following criteria: • Complete a FAFSA. • Be a U.S. citizen or eligible non-citizen. • Be enrolled in an undergraduate, post-baccalaureate or graduate program at a university that participates in the TEACH Grant program. • Be enrolled or plan to complete courses that prepare a student for a career in teaching. • Score above the 75th percentile on college admission testing or maintain a Grade Point Average (GPA) greater than or equal to 3.25. • Sign a TEACH Grant Agreement to Serve each year the grant is received. For each TEACH Grant eligible program for which TEACH Grant funds are received, the student must serve as a full-time teacher for a total of at least four academic years within eight calendar years after completing or withdrawing from the academic program for which the TEACH Grant was received.

Give me a brief on financial aid-loans from U.S. Department of education, colleges, universities w/ respect to interest rates?

The U.S. Department of Education and many colleges and universities offer low interest rate loans for students and parents. Unlike grants, most loans are not based on financial need but are part of an overall financial aid package offered to students. Some loans are based on financial need, such as the Federal Perkins Loan and Subsidized Stafford Loans, which are discussed below.

What are Uniform Gift to Minors Act (UGMA) and Uniform Transfer to Minors Act (UTMA) Custodial Accounts?

The Uniform Gift to Minors Act (UGMA) allows minors to own cash or securities. The Uniform Transfer to Minors Act (UTMA) allows minors to own cash, securities, and real estate. The UGMA / UTMA accounts are 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. UGMA and UTMA accounts were popular education savings accounts prior to the passage of Section 529 (Prepaid Tuition and Savings Plans). However, there are two primary disadvantages to using UGMA / UTMA accounts to fund a college education. The first disadvantage is that 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. The second disadvantage is that the earnings in the UGMA / UTMA may cause a "kiddie tax" issue. The kiddie tax rules state that if unearned income is above a certain threshold ($2,200 in 2019), then the additional unearned income is taxed at the tax rate for trusts and estates, 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. To be subject to the kiddie tax rules, one of the following conditions must be present: • Children under the age of 19 • Full time students under the age of 24 The UGMA/UTMA custodian can control the amount of income by investing the UGMA/UTMA funds in securities such as growth stocks which produce very little, if any, income until sold, or by investing in municipal bonds which produce tax-free income

With respect to education planning what is the account balance method:

The account balance method is a three-step approach that determines the lump-sum amount needed when the child starts college and how much must be saved to attain that lump-sum amount. Note that the method assumes parents will stop saving when the child starts college and begins withdrawals.

With respect to the Federal Methodology for FAFSA what is the automatically assessed formula?

The automatically assessed formula simply calculates the EFC at zero, which allows for the maximum amount of student aid. In order to qualify for this method for the 2019-2020 award year: • Student or parents file a Form 1040A, Form 1040EZ or the student and parents are not required to file a federal income tax return. (Note: Form 1040A and 1040EZ were eliminated beginning in 2018; however, the FAFSA for the 2019-2020 award year uses income from 2017.) • Student or parents' adjusted gross income is $26,000 or less. Once the EFC is determined by using one of the three Federal Methodologies, the EFC is subtracted from the cost of attendance at a university, which can include living expenses. The formula is: Once the FAFSA is completed, student's can then request that the information contained in the FAFSA be provided to universities. Families can access a copy of a Student Aid Report by logging in to their account at fafsa.gov, which will contain information provided on the FASFA, including the EFC. Universities will prepare a financial aid package, which helps students satisfy their financial need. Financial aid may consist of grants (money that doesn't have to be repaid), loans, and work-study programs (where the student can work on or off campus to help pay for education expenses). After determining a student's financial need, a university may not be able to offer an aid package that provides 100 percent of education expenses. The FAFSA is available for filing on October 1st of the prior year. Students are able to file the FAFSA for the 2019 - 2020 academic year on October 1, 2018. When the FAFSA is filed in October, income is reported from a year earlier. This is referred to as the "prior-prior year" income because it is the income from two years before the college semester start date on the FAFSA. Students filing the FAFSA for 2019 - 2020 will use their 2017 income information (the most recent tax return filed prior to filling out the FAFSA; two years before the start of the 2019-2020 school year). Assets, however, are reported as of the FAFSA filing date.

What is the best approach to use when there are multiple children and we need to plan for education?

The best approach to use in calculating education funding for multiple children is using the uneven cash flow method. This method allows the planner to combine multiple cash flows during the same time periods.

What is the extended repayment schedule for borrowers?

The extended repayment 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. Since the repayment period under an Extended Repayment schedule is up to 15 years longer than the Standard Repayment schedule, borrowers can expect to pay significantly more in interest using the Extended Repayment plan. Although the Extended Repayment schedule will result in a lower monthly payment, the borrower will pay three times the amount of interest, in comparison to the Standard Repayment schedule. Borrowers should consider their cash flow and ability to make monthly payments. During a borrower's initial working years after graduating, they may not be able to afford the higher payments. However, as the borrower's earnings increase, the payment amount should be increased, in order to retire the debt in a reasonable amount of time.

What are tax credits for education related expenses?

The federal tax law permits two types of tax credits for education related expenses. The two types of tax credits are: • 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.

How is the financial aid process initiated? What does it determine?

The financial aid process is initiated by completing the Free Application for Federal Student Aid (FAFSA). This form is used to determine a student's eligibility for all types of financial aid, including grants, work-study, and loans. The FAFSA9 is used to determine the Expected Family Contribution amount (EFC). The EFC is calculated based on the information provided in the FAFSA, as a family's income and assets are applied to a Federal Methodology, which determines the family's financial strength and how much it can contribute towards education costs. The Federal Methodology determines the EFC using one of three methods: 1. Regular Formula: Income and Assets 2. Simplified Method 3. Automatically Assessed Form

What is the graduated repayment schedule for borrows to repay a stafford loan?

The graduated repayment schedule allows borrowers to repay a Stafford Loan for up to 10 years. Borrowers are able to initially make low payments, but the payments will increase every two years. This feature 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.

With respect to education planning what is the hybrid approach?

The hybrid approach combines the concepts of the uneven cash flow and account balance methods. The hybrid approach is the least often used method because the ordinary annuity concept can be confusing to the first-time learner. Note that with the same facts, all methods lead to the same answer.

What is the income contingent repayment plan?

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 (PLUS Loans are discussed later in this chapter). 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. the payments calculated under the ICR schedule are insufficient to pay the monthly interest expenses, the unpaid portion is capitalized, or added to the outstanding principal, once per year. If after 25 years, the loan has not been repaid, the outstanding balance will be canceled.

What is income sensitive repayment scheduling?

The income sensitive repayment schedule is for FFEL Stafford Loans only. This 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 for an Income Sensitive Repayment Schedule is up to 10 years.

With regards to the Federal Methodology for FAFSA what does the regular formula consist:

The regular formula considers a family's income and assets. This method is the formula that is used for most families. The federal methodology considers the following: • Income • Assets • Dependency status • Household size • Number of children in college • Cost of supporting the family The EFC is based on a formula that considers both the parent's and the student's income and assets. The parent's expected contribution from their annual income is calculated by first reducing their income by their taxes and basic living expenses. Contributions based on assets owned by parents are expected to be 12 percent of discretionary assets (determined without regard to retirement assets, home equity, annuities, cash value of life insurance, and an asset protection allowance). The value used for assets is the "net worth," which is the fair market value less any debt associated with the asset. Income and assets are then totaled and a percentage is counted towards the EFC. The maximum percentage that applies is 47 percent, resulting in a net maximum of 5.64 percent (47% x 12%) of parent assets expected to be utilized for college expenses. A student's expected contribution is calculated as 50 percent of income, as reduced by an income protection allowance, plus 20 percent of their net worth. The EFC is a combination of the parent's expected contribution plus the student's contribution.

How do you select the repayment option for loans?

The repayment option that is best will vary depending on a client's circumstances, plans for the future, and attitude toward debt, as well as on the current economic environment, among other factors. For example, if the interest rate on the student loans is low, rather than paying more on the loans to pay them off faster, it may be advantageous to keep the payment as low as possible and allocate the additional funds to other goals. On the other hand, even with low interest rates, some clients may be particularly uncomfortable with debt and will have the desire to pay it off as quickly as possible. Clients can find additional information on selecting a repayment plan for their student loans at: https:// studentaid.ed.gov/sa/repay-loans. Loan service providers may offer a discount on the interest rate for payments that are set up as a direct debit from the checking account each month. While the interest rate reduction may seem to be a small amount, it can result in thousands of dollars of savings over the life of the loan. In addition, the direct debit results in payments that are always made on time, which helps to increase the borrower's credit score. For these reasons, it is advisable to always take advantage of the opportunity to set up payments via direct debit. While a detailed discussion of unique education financing options and loan terms for service members is beyond the scope of this textbook, it is worth noting that when planners are working with clients who serve, or have served, in the military, additional benefits may be available and all options should be explored

With respect to the federal methodology for FAFSA what is the simplified method?

The simplified method does not consider the family's assets. In order to qualify for the simplified formula for the 2019-2020 award year: • The parents are either not required to file a federal income tax return, or must file Form 1040A or 1040EZ. (Note: Form 1040A and 1040EZ were eliminated beginning in 2018; however, the FAFSA for the 2019-2020 award year uses income from 2017.) • The total adjusted gross income of the parents is less than $50,000. In order to qualify for the simplified formula for the 2019-2020 award year, when the student is not claimed as a dependent: • Student (and spouse, if married) must file a Form 1040A, Form 1040EZ, or is not required to file a federal income tax return. (Note: Form 1040A and 1040EZ were eliminated beginning in 2018; however, the FAFSA for the 2019-2020 award year uses income from 2017.) • Student's (and spouse, if married) adjusted gross income is less than $50,000.

With respect to education planning what is the traditional method?

The traditional method of education funding uses real dollars and the annuity due funding plan to calculate the present value of the cost of education.

With respect to education funding what is the uneven cash flow method?

The uneven cash flow method is a good approach for education funding calculations because it consists of only two steps and it works for any type of education funding situation. Other methods may not work if a client continues saving while the child is attending college and will only work if the client stops saving when the child starts going to college. The uneven cash flow method has two steps: 1. Determine the net present value of the cash flow stream in today's dollars. This step will determine the lump-sum amount needed today, to fund the college education goal. During this step, be sure to use an inflation adjusted rate of return. 2. Determine the annual savings required to fund the education goal. During this step, be sure to determine how long the client intends to save and whether the savings payments are at the beginning or end of the year.

Why is important to know "no double dipping on benefits?"

There are coordination of benefit rules when using multiple tax-deferred savings, tax deductions and tax credits to pay for higher education expenses. The general rule is that a taxpayer is not allowed to receive a double benefit for the same expenses. The following specific rules apply: • The taxpayer cannot claim both the AOTC and the Lifetime Learning Credits for the same child in the same year. • The taxpayer cannot claim both the AOTC and the Lifetime Learning Credits for the same qualified education expenses. • The taxpayer 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. • The taxpayer 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). • The taxpayer 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. It is permissible, however, to receive multiple tax benefits in the same year for the same student for different expenses. The definition of qualified expenses for 529 Savings Plans and ESAs is more extensive than for the tax credits and Series EE or I bond redemption, which may allow for the use of multiple tax advantages for different expenses.

How much do tuition and fess represent for the total cost of college?

Tuition and fees are expensive, but only represent between 40 percent and 69 percent of the total cost for college. As reflected in the chart above, universities charge a premium for out-of-state students to attend. The cost for tuition and fees for out-of-state students is often twice that for in-state students.

With respect to U.S. Government Savings Bonds, how can they be used for education?

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. 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. The qualified education expenses must be for the taxpayer, the taxpayer's spouse, or dependents of the taxpayer. If a parent is using the bonds for a child's education, they cannot be registered in the name of the child. The child can be listed as a beneficiary on the bond, but the child cannot be a co-owner. 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 2019) are: • Single: $81,100 - $96,100 • Married Filing Jointly: $121,600 - $151,600 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. If a taxpayer's MAGI is greater than the threshold limit then interest income is not excludable for a series EE or I bond. If the taxpayer's MAGI is between the lower and upper phaseout limit, the taxpayer will be permitted to exclude a portion of the interest from taxable income. In addition to the ability to exclude the interest earned on a Series EE or I bonds in the year qualified education expenses are incurred, owners of these bonds may convert the bonds into a College Savings Plan (529 Plan) or Coverdell Education Savings Account. Since only cash may be contributed to a Savings Plan or Coverdell account, the bonds must first be redeemed, and then invested in the Savings Plan or Coverdell ESA. Series EE and I bonds are deemed assets of the owner of the bond for financial aid purposes. So, if the parents own the bonds, then the bonds are deemed owned by the parents for financial aid purposes.

What is loan forgiveness?

Usually, any discharge of indebtedness or forgiveness of debt 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.20 Public service loan forgiveness, teacher loan forgiveness, law school loan repayment assistance programs, and the National Health Service Corps Loan Repayment Program are not taxable. Loan discharges for closed schools, false certification, unpaid refunds, and death and disability are considered taxable income. The forgiveness of the remaining balance under the various income-driven repayment plans after 20 to 25 years is considered taxable income.

Why is it important to know the timing of when qualified expenses count toward the tax credit calculation?

When calculating qualified education expenses for the AOTC and Lifetime Learning Credits, the taxpayer may include expenses paid in December, related to attending the university during the first three months of the following year. This includes whether the taxpayer uses cash from their checking account or funds from a loan. Most taxpayers are cash basis taxpayers, meaning that they pay tax on income in the year the income is received and deduct expenses in the year in which they are paid. This timing may be significant in consideration of the tax credits when tuition is paid for the spring semester of college. The tuition bill will typically arrive in December of the prior year. For example, if the semester begins January 9, 2020, the tuition bill will be sent in December of 2019. If tuition is paid in 2019, the Form 1098-T will show that payment for 2019, even though the bill was not due until 2020. If no other tuition payments are made in 2020 (for example, because the spring semester was the final semester prior to graduation), then a tax credit will not be available for 2020. 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. For example, course materials may have been purchased from a vendor other than the educational institution. If that is the case, then the total amount of qualifying expenses for the AOTC will be higher than what is reported on the Form 1098-T, and the taxpayer will still be able to count these expenses, as long as they are able to substantiate them as qualified expenses

What are scholarships?

cholarships are a grant of financial assistance made available to students to assist with the payment of education related expenses. Scholarships are available for academic or athletic achievement. Many private organizations will also fund scholarships based on various fields of study, religious affiliations, or military service. Scholarships can be provided to undergraduate or graduate students. Information on various scholarships and organizations awarding scholarships can be found on the Federal Student Aid website,21 which is an office of the U.S. Department of Education. There is also a research tool for scholarships available on U.S. Department of Labor website.22

Where is most financial aid administered from and what does it consist of?

inancial aid represents an important tool for families that are inadequately prepared to pay for their children's college education. Most financial aid is administered by the U.S. Department of Education, (states and universities offer aid as well), and consists of grants, loans for students and parents, and work-study programs. According to the U.S. Department of Education, 85 percent of all full-time undergraduate students received some type of financial aid (federal or state), in 2015 - 2016.

What happens to college tuitions during times of recession?

uring periods of recession, like the early 80s and 90s, tuition rates increased dramatically. During a recession, the unemployment rate increases, causing state tax revenues to decrease. State governments often react by reducing their budget, potentially impacting the state funding of higher education. In these situations, state universities often increase tuition. Periods of tuition inflation of eight percent or higher occur during the worst of economic times with high unemployment, so it can significantly impact families that have not saved enough for the cost of college education. Those families are likely to turn to financial aid to bridge the gap between funds available for education and the higher cost of attending college. Fortunately, there are alternatives to relying on financial aid. Alternatives include tax-deferred savings (typically used by families that have children ten or more years away from college), tax deductions, and tax credits, which are discussed later in the chapter.

What are tax deferred savings, deductions, credits or other education planning benefits?

work-study provided by financial aid. For families that are planning for a college education goal that is 10 or more years away, there are other opportunities besides financial aid. Congress has passed laws establishing savings accounts that allow families to save towards an education goal and permit the account to grow on a tax-deferred basis. If the funds are used for qualified education expenses, then any distributions from the savings accounts are tax-free. The types of tax-deferred savings vehicles permitted by Congress are: • Qualified Tuition Plans (Includes Prepaid Tuition and College Savings Plans) • Coverdell Education Savings Accounts • U.S. Government Savings Bonds Although each of the savings vehicles have different characteristics, features, and rules, they all share the same basic principal of excluding any appreciation and earnings from taxable income, as long as the funds are used for qualified education expenses. The Internal Revenue Service's Publication 970 provides information on education funding.

Are higher levels of education associated with lower unemployment and higher annual salaries?

yes

What kind of grants are there?

• Federal Pell Grant • Teacher Education Assistance for College and Higher Education (TEACH) Grant • Federal Supplemental Educational Opportunity (FSEOG) Grant

What are some additional college funding alternatives:

• Fully fund the plan today, as a grandparent might by using a 529 Plan. • Fund the plan from date of birth to the start date of college. • Fund the plan from date of birth through the expected college years (or some other fixed period). • Fund the savings in an ordinary annuity funding plan on a monthly or yearly basis. • Fund the savings in an annuity due funding plan on a monthly, yearly, or serial payment basis.

Give a brief on the consequences of funding selections on financial aid from specific vehicles?

• Qualified plan balances, IRA balances, and cash value of life insurance are not countable assets in the financial aid formula. • The annual pre-tax contributions to IRAs and 401(k)s are counted as income for the year. • 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 two years before the high school graduation year. For example, income for 2017 will be used on the FAFSA for 2019 - 2020. If assets held in a taxable brokerage account are to be sold to pay for college, parents can reduce the amount of income reported on the FAFSA by selling in the year the student begins his or her sophomore year of high school, 2016 for students starting college in the fall of 2019. (See Exhibit 8.13) • 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. Since UGMA/UTMA funds can used for any purpose that benefits the child, and assets are reported as of the FAFSA filing date, these funds can be used in the fall of the student's senior year to purchase items the student will need at college that are not qualified expenses for other types of savings vehicles (e.g. furniture for an apartment, bed sheets and towels, travel to visit colleges, etc.). • 529 Savings Plans, including UGMA and UTMA-owned 529 plans, are considered assets of the parent in the financial aid formula. • Qualified distributions from a 529 Savings Plan owned by the parent or the child are not treated as income on the FAFSA if the child is a dependent of the parent. If the 529 Savings Plan is owned by a third party, such as a grandparent or a non-custodial divorced parent, the assets do not show up on the FAFSA, but 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 college when the distributions will no longer impact financial aid. • When as trust has been established to provide for the education of the student as the beneficiary, the trust assets are typically included as student assets on the FAFSA, and distributions to the student/beneficiary are treated as student income. When a child enrolls in college, any assets held in the child's name will be considered 20 percent available by the financial aid needs analysis formula. On the other hand, the parents' discretionary assets are assessed at a maximum rate of 5.64 percent. Retirement assets, home equity, annuities, and cash value of life insurance are excluded. In addition, a portion of the parent assets are sheltered from consideration by an asset protection allowance. The allowance is based upon the age of the older of the parents. For example, if the oldest parent is age 40, then $9,900 of assets are protected for the 2019 - 2020 academic year; if the oldest parent is age 50, then $12,500 of assets are protected. In most cases the family is better off using a savings vehicle that financial aid considers a parent asset instead of one that is considered a child asset. Income is a much bigger factor than assets in determining financial aid.

Expenses that do no qualify for qualified education expenses for the purpose of tax free scholarships include:

• Room and Board • Transportation Expenses • Equipment and Other Fees not Required for Attendance The above expenses are not qualified expenses for the tax-free scholarships and fellowships, even if the fees are a condition of enrollment and are paid directly to the education institution. Scholarships and fellowships used to pay the above expenses will lose their tax-free status and the recipient must include that portion of the scholarship or fellowship in taxable income.