Module 8 Quiz

Calculate the lump sum necessary to fund Ethan's college attendance. Current college cost = $12,500 Expected inflation (CPI) = 2.5% Expected rate of education inflation = 5.5% Ethan's current age = 3 Ethan's age at beginning of college = 18 Anticipated years of attendance = 5 Expected 529 account annual performance = 8.75% A) $131,436 B) $139,530 C) $127,508 D) $67,229

A lump sum in the amount of $131,431 is needed to fund Ethan's college attendance. Step 1: Determine the future cost of college for the first year. END Mode 1, DOWNSHIFT, P/YR C ALL 12,500, +/-, PV 5.5, I/YR 15, DOWNSHIFT, N Solve for FV = 27,905.9562 Step 2: Determine the account balance necessary to fund college education. BEG mode (money is needed at the beginning of college) 27,905.9562, +/-, PMT [(1.0875 ÷ 1.055) - 1] × 100 = 3.0806, I/YR 5, DOWNSHIFT, N (5 periods show on display) Solve for PV = 131,435.5234, or $131,436, rounded LO 8.2.2

Which of the following statements regarding Federal Supplemental Educational Opportunity Grants (FSEOGs) is CORRECT? FSEOGs are grants given to students. Priority for FSEOGs is given to students who also receive Pell Grants. A) Both I and II B) II only C) I only D) Neither I nor II

Both statements I and II are correct. LO 8.2.1

Which of the following statements concerning a PLUS loan is CORRECT? PLUS loans are available to parents of students. PLUS loans are not needs-based. The borrower under a PLUS loan must meet federal standards of creditworthiness. A) III only B) I, II, and III C) I and II D) II and III

The answer is I, II, and III. All of these statements are correct. Other characteristics of PLUS loans include interest rates that vary with the rate of 52-week Treasury bills and the availability of reduced loans for students enrolled in programs that are shorter than an academic year. LO 8.1.3

Which of these statements concerning Pell grants are CORRECT? Pell Grants are the primary type of grants dispersed directly to students. Financial need and availability of federal funds are the criteria for receipt. Receipt of other grants is sometimes contingent upon applying for or receiving a Pell grant. The Pell grant is available to both undergraduates and graduate students. A) II and III B) I and IV C) I, II, III, and IV D) I, II, and III

The answer is I, II, and III. Only statement IV is incorrect. The Pell Grant is only available to undergraduates. LO 8.1.3

For purposes of the tax-free redemption of Series EE savings bonds, qualified education expenses include expenses for which of the following persons? The taxpayer The taxpayer's spouse Any dependent the taxpayer claims for income tax purposes A) I, II and III B) I and II C) I and III D) III only

The answer is I, II, and III. Qualified education expenses include expenses for any of these persons. LO 8.2.4

Which of the following is considered qualified education expenses for purposes of the income tax exclusion for redemptions of Series EE savings bonds? Room and board Tuition Fees Personal auto A) I, II, and IV B) II and III C) I, II, and III D) IV only

The answer is II and III. Qualified education expenses for purposes of the Series EE savings bond exclusion include tuition and fees but not room and board or a personal auto. LO 8.2.3

Which of the following statements regarding the American Opportunity Tax and Lifetime Learning Credits is CORRECT? A family may not take an American Opportunity Credit and Lifetime Learning Credit in the same year. A Lifetime Learning Credit may be used in combination with a student loan interest deduction. A) Neither I nor II B) II only C) I only D) Both I and II

The answer is II only. A family may take an American Opportunity Tax Credit and a Lifetime Learning Credit in the same year as long as they are not for the same student. Both the Lifetime Learning Credit and the American Opportunity Tax Credit may be used in combination with a student loan interest deduction. LO 8.3.1

For purposes of calculating the expected family contribution (EFC), which of the following assets is included in the student's calculation? Section 529 plan assets Custodial accounts Home equity Life insurance cash value A) II, III, and IV B) I, II, III, and IV C) II only D) I and III

The answer is II only. Custodial accounts (e.g., Uniform Gifts to Minors Act [UGMA] or Uniform Transfers to Minors Act [UTMA] accounts) are considered student assets. If the parents are listed as contributors-owners, Section 529 plan assets are considered parental assets. Home equity and life insurance cash value are exempt. LO 8.1.2

To be eligible to receive federal student aid, you must be a citizen of the United States. not owe a refund on a federal student grant. not have a conviction for the possession or sale of illegal drugs. have a high school diploma or a General Education Development (GED) certificate. A) I and III B) I, II, and IV C) II, III, and IV D) I, II, III, and IV

The answer is II, III, and IV. Citizens or eligible noncitizens of the United States are eligible to receive federal student aid. Students must meet these requirements: Have a valid Social Security number. Be a citizen or eligible noncitizen of the United States. Have a high school diploma or a General Education Development (GED) certificate, or have completed homeschooling. If you don't, you may still be eligible for federal student aid if you were enrolled in college or career school prior to July 1, 2012. Go to https://studentaid.ed.gov/eligibility/basic-criteria for additional information. Be enrolled in an eligible program as a regular student seeking a degree or certificate. Maintain satisfactory academic progress. Not owe a refund on a federal student grant or be in default on a federal student loan. Register (or already be registered) with the Selective Service System, if you are a male and not currently on active duty in the U.S. Armed Forces. Not have a conviction for the possession or sale of illegal drugs for an offense that occurred while you were receiving federal student aid (such as grants, work-study, or loans). If you have such a conviction, you must complete the Student Aid Eligibility Worksheet to determine if you are eligible for aid or partially eligible for aid. LO 8.1.3

Which of the following statements concerning the characteristics of scholarships is CORRECT? Scholarships are given only to academically or athletically gifted students. Scholarships are available for either undergraduate or graduate study. The receipt of scholarships may be contingent on fulfilling specific requirements. Scholarships are often merit-based. A) II, III, and IV B) I, II, III, and IV C) III only D) I and IV

The answer is II, III, and IV. Only Statement I is incorrect. Scholarships are generally given to academically or athletically gifted students, but they may be given on a needs basis. LO 8.2.1

Justine completes the Free Application for Federal Student Aid (FAFSA) to see if she qualifies for financial aid. The value of which of these assets will be included in the expected family contribution (EFC) calculation? Automobiles owned by Justine's parents Her father's Section 401(k) plan balance The equity in her parents' personal residence Justine's UTMA (Uniform Transfers to Minors Account) account A) I and II B) IV only C) I and IV D) III and IV

The answer is IV only. All assets owned by a student's parents are included in the EFC calculation, with the notable exceptions of home equity, cars used for regular transportation, accrued benefit or account balances in any retirement plans (e.g., Section 401[k] plans), and the cash value of life insurance policies. The value of student-owned assets, in this case the UTMA account, is also included in the EFC calculation at 20%. LO 8.1.2

Select the correct description of the relationship between income, assets, and financial aid. A) A higher percentage of assets and income included reduces the expected family contribution (EFC) and increases the available financial aid. B) A higher percentage of assets and income included increases the expected family contribution (EFC) and reduces the available financial aid. C) A higher percentage of assets and income included reduces the expected family contribution (EFC) and reduces the available financial aid. D) A higher percentage of assets and income included increases the expected family contribution (EFC) and increases the available financial aid.

The answer is a higher percentage of assets and income included increases the expected family contribution (EFC) and reduces the available financial aid. A higher percentage of assets and income included increases the expected family contribution (EFC) and reduces the available financial aid. Total cost of attendance ‒ EFC = available financial aid. LO 8.1.2

Which of the following is a college savings vehicle that permits tax-free earnings growth and a 100% tax-free distribution in payment of qualified education expenses? A) A state-sponsored Section 529 plan B) An IRA distribution C) A Uniform Gifts to Minors Act (UGMA) custodial account D) A minor's trust

The answer is a state-sponsored Section 529 plan. A state-sponsored Section 529 plan permits a tax-free distribution as long as the proceeds are used to pay for qualified education expenses. "Qualified education expenses" include tuition at an elementary or secondary public, private, or religious school, up to a $10,000 limit per tax year. LO 8.2.4

All of the following are employer guidelines associated with implementing an educational assistance program except A) the program cannot favor highly compensated employees. B) employers must have a written qualified program that applies exclusively to their employees C) employers that provide their employees educational assistance benefits may not deduct these costs as a business expense. D) the program must be offered to all employees.

The answer is employers that provide their employees educational assistance benefits may not deduct these costs as a business expense. Employers that provide their employees with educational assistance benefits can deduct these costs as a business expense. LO 8.3.2

All of the following statements regarding the expected family contribution (EFC) as it relates to student financial aid are CORRECT except A) student assets include the value of everything the student owns or that has been saved on his behalf. B) parental assets include almost everything owned by the parents with notable exceptions. C) parental assets and income are assigned a higher rating in the EFC calculation than student assets and income. D) student income includes taxable and nontaxable income from the year preceding the award year.

The answer is parental assets and income are assigned a higher rating in the EFC calculation than student assets and income. Parental assets and income are assigned a lower rating in the EFC calculation than student assets and income. LO 8.1.2

Mark and Macy want to set up a program to fund their daughter's college education. Their daughter has indicated she may want to attend college in another state. As Mark and Macy's financial planner, which of the following funding programs would you advise them to avoid? A) Prepaid tuition plan B) College savings plan C) Coverdell Education Savings Account (CESA) D) Series EE savings bonds

The answer is prepaid tuition plan. In all likelihood, Mark and Macy should avoid a prepaid tuition plan because this type of plan typically requires that the child attend a public college or university within the state that established the plan. The other choices do not involve this type of restriction. LO 8.2.3

After meeting with their new financial planner, the Richard family has decided to invest $1,400 each month into a 529 for their four-year-old daughter Kiera. The Richards expect Kiera to attend Florham College. The current tuition is $55,000 per year, education inflation is expected to be 5.75%, and the anticipated rate of return on their 529 is 7.5%. Kiera will attend school beginning at 18 years old for four years. Using these facts, calculate to determine whether the current investment plan ($1,400 monthly deposits) will meet the education savings goal. A) Fall short of the goal by $55,575 B) Fall short of the goal by $42,252 C) Exceed the goal by $17,542 D) Exceed the goal by $1,554

The Richards will fall short of their goal by $55,575. Step 1: Determine the future cost of college for the first year. END Mode 1, DOWNSHIFT, P/YR C ALL 55,000, +/-, PV 5.75, I/YR 14, DOWNSHIFT, N (14 periods show on display) Solve for FV = 120,306.1847 Step 2: Determine the account balance necessary to fund college education. BEG Mode (money is needed at the beginning of college) 120,306.1847, +/-, PMT [(1.075 ÷ 1.0575) - 1] × 100 = 1.6548, I/YR 4, DOWNSHIFT, N (4 periods show on display) Solve for PV = 469,600.9116, or 469,600.91 rounded (This is the future education need.) Step 3: Calculate Future Value of Current Payments C ALL END Mode 12, DOWNSHIFT, P/YR C ALL 1,400, +/-, PMT 7.5, I/YR 14, DOWNSHIFT, N (168 periods shows on display) Solve for FV = 414,025.6013, or 414,025.60 rounded (This is the future value of the current payments.) Step 4: Subtract future education need from future value of the current payments. $414,025.60 - $469,600.91 = -$55,575.31, or -$55,575 rounded LO 8.2.2

Eugene and Amelia wish to help fund their grandchild Drew's college education. They have a sizable estate and wish to place the money into an account that has growth potential along with tax benefits. Assuming they choose a Section 529 plan, what is the maximum they could place into the account for Drew and meet the following goals: 1) removal of the contribution amount from their estates, and 2) no gift tax implications in 2021? A) $30,000 B) $150,000 C) $0 D) $15,000

The answer is $150,000. In 2021, a contributor is permitted to make one $75,000 contribution (the gift tax annual exclusion of $15,000 × 5) and spread that contribution over five years. In addition, if the contributor splits that gift with his spouse, a one-time contribution (every five years) of $150,000 may be made to any beneficiary, including the account owner, if so desired. These contributions are also correspondingly removed from the contributor's gross estate. Even though the contributor retains control of the 529 account balance at his death, the balance in the plan is not included in his estate for estate tax purposes (thus constituting a significant estate planning technique alternative). LO 8.2.4

Which of the following statements regarding Pell Grants is CORRECT? They are the primary type of grant disbursed directly to students. They are need-based. They are available both to undergraduate and graduate students. These programs provide students attending college with part-time jobs. A) IV only B) I and II C) I, II, and III D) II and III

The answer is I and II. Statement III is incorrect; Pell Grants are available to undergraduates only. Statement IV is incorrect; Federal Work-Study (FWS) programs provide students attending college with part-time jobs. LO 8.2.1

Kayla is interested in learning more about education grants. She made the following statements and asked you to confirm their accuracy. Which of her statements regarding education grants is CORRECT? Supplemental Educational Opportunity Grants (SEOGs) are federal grants for which priority is given to students who also receive Pell Grants. Pell Grants are disbursed to the educational institution for the benefit of the qualifying student. Federal Work-Study programs provide students attending college with part-time jobs. Pell Grants areavailable to undergraduate and graduate students. A) I, III, and IV B) I and III C) II, III, and IV D) II only

The answer is I and III. SEOGs, which are federal grants, give priority to students who also receive Pell Grants. Federal Work-Study programs provide students attending college with part-time jobs. In turn, the institution disburses the earned funds to the students. Pell Grants are dispersed directly to students and are available to undergrads only. LO 8.2.1

Which of the following education funding techniques provide(s) tax advantages, regardless of the contributor's modified adjusted gross income (MAGI)? Section 529 plan Series EE or Series I savings bonds Coverdell Education Savings Account (CESA) A) I only B) II and III C) I, II, and III D) II only

The answer is I only. Section 529 plans offer significant tax advantages regardless of the contributor's modified adjusted gross income. The tax advantages of CESAs and education savings bonds are phased out at higher levels of MAGI. LO 8.2.3

Which of the following characteristics apply to Pell Grants? Available to undergraduate part-time students Available to undergraduate full-time students Available to graduate students Available to all undergraduate students A) I, II, III, and IV B) II and IV C) I, II, and IV D) I, II, and III

The answer is I, II and IV. All undergraduate students who meet the financial need requirements are eligible for Pell Grants. Graduate students are not eligible for Pell Grants. LO 8.1.3

Kaito's son, Ren, turned five years old today. Kaito has plans for Ren to attend a four-year private university at age 18. Currently, tuition is $15,000 per year and is expected to increase at 7% per year. Kaito can earn an annual compound investment return of 10%. Calculate how much he must start saving at the end of each year (beginning this year) to pay for Ren's college education. (Assume Kaito's last payment is made at the beginning of Ren's first year in college.) A) $10,045 B) $5,145 C) $5,659 D) $8,886

Kaito must deposit $5,659 per year to meet the education funding goal. Step 1: Determine the future cost of college for the first year. END Mode 1, DOWNSHIFT, P/YR C ALL 15,000 +/- PV 7 I/YR 13, DOWNSHIFT, N (13 years shows on the display) Solve of FV = 36,147.6750, or $36,147.68 Step 2: Determine the account balance necessary to fund college education: BEG Mode (money is needed at the beginning of college) 1, DOWNSHIFT, P/YR C ALL 36,147.68 +/- PMT [(1.10 ÷ 1.07) - 1] × 100 = 2.8037, I/YR 4, DOWNSHIFT, N (4 periods show on display) Solve for PV = 138,782.4586, or $138,782.46 Step 3: Determine the required savings payments. END Mode 1, DOWNSHIFT, P/YR C ALL 138,782.46 FV 13, DOWNSHIFT, N (payments continue until Eugene reaches 18; 13 periods show on display) 10 I/YR Solve for PMT = $5,659.34, or $5,659 rounded LO 8.1.1

Luciana's daughter, Emilia, turned one year old today. Luciana has plans for Emilia to attend a four-year public university at age 18. Currently, tuition is $18,000 per year and is expected to increase at 5.5% per year. Luciana can earn an annual compound investment return of 8%. Calculate the lump sum that Luciana needs for Emilia's entire college education on her first day of college. A) $148,139 B) $159,990 C) $168,789 D) $172,789

Luciana needs $172,789 for Emilia's entire college education on her first day of college. Step 1: Determine the future cost of college for the first year. END Mode 1, DOWNSHIFT, P/YR C ALL 18,000 +/- PV 5.5 I/YR 17, DOWNSHIFT, N (17 periods shows on display) Solve for FV = 44,726.4387, or $44,726.44 Step 2: Determine the account balance necessary to fund college education: BEG mode (money is needed at the beginning of college) 1, DOWNSHIFT, P/YR C ALL 44,726.4387, +/- PMT [(1.08 ÷ 1.055) - 1] × 100 = 2.3697, I/YR 4 DOWNSHIFT, N (4 periods show on display) Solve for PV = 172,789.06, or $172,789 rounded LO 8.1.1

Maria, a single parent, would like her 13-year-old son, Seth, to attend college at Cascadia State University at age 18 for four years. Your planning firm has determined that the total amount needed to fund Seth's entire college attendance is $225,000. Calculate the amount of the monthly deposits into a 529 with an expected annual return of 8.5%. A) $3,358 B) $3,001 C) $3,335 D) $3,022

Maria must make monthly deposits of $3,022 into a 529 with an expected annual return of 8.5% to reach her goal. END Mode 12, DOWNSHIFT, P/YR C ALL 225,000, FV 8.5, I/YR 5, DOWNSHIFT, N (60 periods shows on display) Solve for PMT = ‒3,022.4695, or $3,022 rounded. LO 8.2.2

Which of the following statements concerning education tax credits and savings opportunities is CORRECT? A) The American Opportunity Tax Credit reduces a family's tax dollar-for-dollar in an amount equal to 100% of the first $2,000 of qualified education expense and 25% of the next $2,000. B) The American Opportunity Tax Credit is only available for the first two years of postsecondary education. C) The Lifetime Learning Credit is equal to 100% of qualified education expenses up to a certain limit. D) The contribution limit for Coverdell Education Savings Accounts (CESAs) is applied per year per donor.

The answer is the American Opportunity Tax Credit reduces a family's tax dollar-for-dollar in an amount equal to 100% of the first $2,000 of qualified education expense and 25% of the next $2,000. A parent who claims a child as a dependent is entitled to take the American Opportunity Tax Credit for the education expenses of the child. The Lifetime Learning Credit is equal to 20% of qualified education expenses up to a certain limit. The American Opportunity Tax Credit is available for the first four years of postsecondary education. The contribution limit for CESAs is applied per year per student (not donor). LO 8.3.1

George and Barbara have three dependent children in college. Cameron is a senior, Lauren is a junior, and Cheryl is a freshman, and each has qualifying education expenses in excess of $10,000 annually. When George and Barbara file their income tax returns for 2021, they want to use the American Opportunity Tax Credit and/or Lifetime Learning Credit to their greatest benefit. They are eligible for both credits. Which of the following statements describing their options is CORRECT? A) They can use only one of the credits and should use whichever credit will provide the greatest benefit. B) They can use the American Opportunity Tax Credit for the qualified education expenses of Cameron, Lauren, and Cheryl. C) They can use the American Opportunity Tax Credit for the qualified education expenses of Cheryl only and the Lifetime Learning Credit for Cameron and Lauren. D) They can use the American Opportunity Tax Credit individually for Cameron, Lauren, and Cheryl and an additional Lifetime Learning Credit for the same expenses as a family tax credit.

The answer is they can use the American Opportunity Tax Credit for the qualified education expenses of Cameron, Lauren, and Cheryl. The American Opportunity Tax Credit may be used for qualifying education expenses for the first four years of college for each student. The Lifetime Learning Credit is allowed once per year per family but cannot be claimed for the same student for which an American Opportunity Tax Credit is claimed. The Lifetime Learning Credit would most likely not be claimed because the American Opportunity Tax Credit provides a larger tax credit for the family. LO 8.3.1

Which of the following is a non-need-based loan for which the borrower-student is responsible for the accrued interest during the life of the loan? A) Supplemental Educational Opportunity Grant (SEOG) B) Unsubsidized Stafford Loan C) Subsidized Stafford Loan D) Pell Grant

The answer is unsubsidized Stafford Loan. An unsubsidized Stafford Loan is a non-need-based loan for which the borrower-student is responsible for the accrued interest during the life of the loan. LO 8.2.1

After meeting with their new financial planner, the Beckham family has decided to invest $800 each month into a 529 for their seven-year-old son, Oliver. The Beckhams expect Oliver to attend Southern State University. The current tuition is $25,000 per year, education inflation is expected to be 6.5%, and the anticipated rate of return on their 529 is 8%. Oliver will attend school beginning at 18 years old for four years. Using these facts, calculate to determine whether the current investment plan ($800 monthly deposits), will meet the education savings goal. A) Exceed the goal by $111,554 B) Fall short of the goal by $42,152 C) Exceed the goal by $107,286 D) Fall short of the goal by $27,324

The current investment plan falls short of the goal by $27,324. Step 1: Determine the future cost of college for the first year. END Mode 1, DOWNSHIFT, P/YR C ALL 25,000, +/- PV 6.5, I/YR 11, DOWNSHIFT, N 11 periods show on display) Solve for FV = 49,978.7850, or $49,978.79 Step 2: Determine the account balance necessary to fund college education. BEG mode (money is needed at the beginning of college) 49,978.7850, +/-, PMT [(1.08 ÷ 1.065) - 1] × 100 = 1.4085, I/YR 4, DOWNSHIFT, N (4 periods show on display) Solve for PV = 195,788.6712, or $195,788.67 rounded (This is the future education need.) Step 3: Calculate future value of current payments. C ALL END Mode 12, DOWNSHIFT, P/YR C ALL 800, +/-, PMT 8, I/YR 11, DOWNSHIFT, N (132 periods show on display) Solve for FV = 168,464.3135, or $168,464.31 rounded (This is the future value of the current payments.) Step 4: Subtract future education need from future value of the current payments. $168,464.31 ‒ $195,788.67 = ‒$27,324.36, or ‒$27,324 rounded LO 8.2.2

Identify the value of the protected amount in 2021-2022 for purposes of calculating student assets in the expected family contribution (EFC) formula. A) $5,000 B) $5,640 C) $6,970 D) $6,800

The protected amount for student assets is $6,970 (2021‒2022); 50% of student income above the protected amount is included in the calculation of EFC. LO 8.1.2