Education Analysis

Question 1

Pell Grants
-Awarded only for vocational school students or undergraduate students.
-Eligibility for families with income up to 60k, most awarded for incomes below 30k.
-Amount can change each year, 2023 max is $6,895

Question 2

FSEOG (Federal Supplemental Educational Opp Grant)
- Exceptional financial need
- Amt between $100 and $4,000 a year

Question 3

TEACH Grants (Teacher Education Assistance for College & Higher Education)
- teach in high-need field
- teach at a school that serves low-income families
- teach for at least 4 yrs within 8 yrs after completing the course of study

Question 4

Direct Plus Loans
- Made by federal gov’t
- For parents of dependent undergrad students
- Interest is set at fixed rate. 7.54% for loans 7/1/22-7/1/23.
- Interest accrues once the pmt is disbursed.
- Repayment of interest may be deferred until 6 months after student no longer enrolled. Repayment term is 10 yrs. If loan is more than 30k, repayment is 25 years.

Question 5

All federal educational loans charge loan origination fees that are deducted from payments. 4.228% for Direct Loans disbursed before 7/1/23.

Question 6

Direct Consolidation Loan
- consolidates outstanding loans into one monthly payment with interest rate based on weighted average of student loans.

Question 7

Private Loans
- not used or backed by federal gov’t.
- issued by school or commercial lender such as Sallie Mae, Navient, or banks

Question 8

Federal Loans
- Direct Loans
- Direct Subsidized Loans (max 8.25% int rate)
- Direct Unsubsidized Loans
- Direct PLUS Loans (max 9% int rate; 4% origination fee; must be repaid in 10yrs)
- Direct Consolidation Loans
- Federal Family Educational Loans (FFEL)
- FFEL Subsidized Loans
- FFEL Unsubsidized Loans
- FFEL PLUS Loans
- Other
- FFEL Consolidation Loans
- Perkins Loans (5% interest, grace period 9months)
- Primary Care Loans (PCL)
- Loans for Disadvantaged Students (LDS)

Question 9

Student Loans
- rule of thumb : borrowing should be limited to the amount that a student expects to earn from their first year salary

Question 10

Repmt of Federal Loans
- repmt of principal and interest begins 6 months after graduation.
- two types of repmt plans:
- balance-based repmt plan and income-driven repmt plan
- default is 10 year balance-based plan with 120 equal pmts. Balance-based plan is best when total monthly debt obligations are less than 10% of pretax pay.
- Income-Driven Repmt Plan based on AGI, a certain amt up to 20k is excluded and income percentage (10-20%) is applied to the remaining amt, further adjusted for family size. Amt may change each year

Question 11

Repmt of Fed Loans, Income-Driven Repmt Plans
- Income-Contingent (ICR)- most expensive. 25 yr term, based on 20% discretionary income
- Income-Based (IBR) - 25 yr term, based on 15% discretionary income; 150% of poverty level is excluded.
- Pay As You Earn (PAYE) - cheapest , 20 yr term, based on 10% of discretionary income.
- Revised Pay As You Go (REPAYE) - 20 yr term for undergraduate loans and 25 yr term for graduate loans

Question 12

Fed Loan Forgiveness
- income-driven repmt plan results in lower pmt
- remaining balance is forgiven at the end of the term
- balance forgiven is taxable income

Question 13

Fed Loan Default after 270 days of delinquency. If the full balance of loan cannot be repaid at that time, it is sent for collection.
- private loans go into collections after only a few missed pmts
- student loans cannot be discharged through bankruptcy
Deferments may be available for federal loans which allow to postpone pmts while borrowers are in school half-time, are unemployed, or because of economic hardship. The interest will freeze on subsidized loans and gov’t will cover the interest. However interest on Unsubsidized loans will continue to accrue.
Forbearance is available for both federal and private loans. It is very costly because the interest is added to the principal balance resulting in interest accruing upon interest.

Question 14

Loan Forgiveness
Direct Loan Forgiveness After 10 years
- Direct Loan
- employment at least 30 hours of full-time work in public service entity, a nonprofit agency, or gov’t
- in Income-Driven repmt plan
- guaranteed death and disability discharge
Other Federal Loans - forgiven after 20 or 25 years.
- Forgiven loan is a taxable income
Perkins Loans can be forgiven based on profession - police, firefighters, nurses, speech pathologists, early intervention, sped teachers on some low-income schools, public defenders, public prosecutors.
- up to 20% of loan is forgiven each year up to 5 yrs.

Question 15

Private Loan borrowers should purchase adequate life insurance and LT Disability insurance in case premature death occurs

Question 16

Education Tax Credits
1. AOYC (American Opp Tax Credit)
2. LLC (Lifetime Learning Credit)
Credits cannot be claimed for the same expenses that were paid for form other tax-preferred education savings accounts such as 529 and Coverdell
- can be claimed during the same year but not for the same child
- not adjusted for inflation

Question 17

AOTC (Amer Opp Tax Credit)
- for parents for each child who is an undergraduate student for 4 years, at least halftime
- applies for tuition, books and fees, doesn’t apply to room and board
- 100% of the first 2k of qualified expenses plus 25% of the next 2k. Maximum credit per child is $2,500
- phaseout limits

Question 18

LLC (Lifetime Learning Tax Credit)
- per taxpayer credit, not per student credit
- up to $2,000 a year per family
- 20% of the first 10k paid for qualified tuition and expenses.
- Parents must claim the child as dependent
- for undergraduate, graduate and professional courses, at least halftime in a degree or certificate program, or to improve job skills.
- income phaseout limits start at 80k for single filers and 160k for MFJ.

Question 19

Interest Deduction for Education Loans
- a taxpayer who is not a dependent and is repaying the loans, can take a deduction up to $2,500 for the interest paid on loans. This deduction reduces taxable income and can be claimed even if the taxpayer does not itemize deductions.
- phaseout limits for single filers 75k-90k; MFJ 155k-185k

Question 20

Transfer Taxes
- gift tax
- estate tax
- state inheritance gift

Question 21

Gift Tax
- Money paid for tuition (not board) directly to a college is exempt from gift tax
- Gift made directly to a child to pay for education may be subject to gift tax
- Assets transferred to custodial acct or 529 may also be subject to a gift tax
- Gift-splitting is permitted between spouses
- Annual exclusion is 17k to offset gift tax on present interest gift

Question 22

Present Interest Gift
- when a donee:
1. Is given unrestricted ownership, control or immediate use of the gifted property, or
2. Is given a lifetime income interest in a trust, or
3. Can receive all of the trust income for a specified nimbler of years.
Examples: cash, assets contributed to UTMA/UGMA; assets contributed to 529 (forward funding allows 5 yrs worth of annual exclusion gifts to be contributed in the first year); assets transferred to trusts when minor benes are given an immediate withdrawal right, such as Crummey power; income interest gifted to a minor bene in a section 2503b trust; assets transferred to a section 2503c trust even though income can accumulate in the trust.

Question 23

Annual gift exclusion is not available for future interest gift because a donee must wait to gain possession or control over the property at a later time.

Question 24

Gifts that exceed 17k or 34k with gift-splitting are considered taxable gifts, but a gift tax is not actually paid until a person’s lifetime gifts exceed $12,920,000. A unified credit of $5,113,800 available to offset the tax on lifetime fists and estate taxes. The tax on the exemption equivalent amount of $12,920,000 is $5,113,800 so a person’s unified credit reduces this tax to zero.

Question 25

GST Tax (Generation-skipping Transfer Tax)
- grandparents who make gifts to grandkids may be subject to additional transfer tax. GST tax applies to lifetime gifts made to persons who are two or more generations below the transferor.
- tuition paid directly to college is exempt from GST tax
- grandparents gifts can be gift-split
- annual exclusion of 17k
- each grandparent can gift up to $12,920,000 to their grandchildren before a gift tax or GST tax is imposed

Question 26

Education Financing
Private loans charge higher interest rates than federal loans. A co-signer is expected to repay the loan of student defaults.
- Loan Alternatives:
- mortgage refinance
- home equity loans allow homeowner to borrow up to 75% of the equity in the home, taken as a lump-sum pmt and repaid monthly for a fixed period of time, 5-15 years.
- Home Equity Lines of Credit are revolving credit lines, money can be withdrawn as needed. Interest is variable that changes whenever the Fed raises or lowers the rate. Interest on home equity loan and HELOC used to pay for education expenses is not tax-deductible after 12/15/17 under the Tax Cut and Jobs Act. Another disadvantage is that the loan is secured by the home and the lender can repossess.
- Cash Value of Life Insurance - whole life and universal life accumulate cash value which can be borrowed tax-free to pay for college expenses and to repay college loans. Repmt of loan is not required but death benefit amount is reduced if the loan is not repaid. LI is not counted as a parent’s asset for fin aid purposes and doesn’t increase family’s expected contribution amount.
- Employee Tuition Reimbursement
Ex US military pays tuition costs for active duty and some reservists.
- Credit Card Reward Programs - repaying student loans with reward points.

Question 27

Education Financing - Retirement Funds
Ret. Funds excluded from parent’s expected family contribution in fin aid formula.
401k plan - a loan of 50% of the funds up to 50k can be taken out, must be repaid with interest within 5 years. A loan used to pay for college expenses does not affect eligibility for need-based fin aid and not subject to penalty.
- Traditional and Roth IRAs - qualified expenses include tuition, room and board, books, fees, supplies, for the benefit of client, spouse, children and grandchildren.
- IRAs - loans not permitted from IRAs and Roth IRAs.
- Distributions of pre-tax contributions and tax-deferred earnings from traditional IRA used to pay for college expenses are taxable to account owner at ordinary income rates. However, these distributions are not subject to 10% early withdrawal penalty if withdrawn before owner reaches age 59 1/2. The distribution is counted as income and affects eligibility for fin aid.

Question 28

Student-funded Roth IRA
- student ma who work can contribute up to $6,500 max annual contribution. Contributions grow tax-free and can be withdrawn without penalty to pay for college.
Parent-funded Roth IRA
- contributions on after-tax basis. Contributions that are withdrawn are not taxed. If the acct is more than 5 years old, contributed funds can withdrawn prior to age 59 1/2 without early withdrawal penalty.
- Distributions that exceed basis before the owner turns 59 1/2 are taxed as ordinary income and subject to 10% early withdrawal penalty.
- Amts converted to Roth may be distributed without tax or penalty if converted more than 5 yrs ago.

Question 29

Education Savings Options
- Qualified Tuition Programs QTP allow to either prepay or contribute, established and maintained by states and eligible educational institutions.
- ** 529 Prepaid Tuition Plan** locks in future tuition costs at todays rates by purchasing units redeemable at US colleges. Prepaid units are guaranteed to pay for tuition and fees for in-state public schools, and the units can be transferred to private colleges or out-of-state universities.
-529 Savings Plans allow to contribute cash, contributors may select plan’s MFs, but owners cannot control plan’s investments. Change in investment strategy or change of bene is generally permitted once a year.
- 529 contributions are not federal income tax-deductible but money invested grows tax-deferred.
- No limits on 529 contributions.
- Many states allow
State income tax deductions for all or part of contribution.
- Withdrawals from 529 under to pay for qualified education expenses are tax-free unless then exceed expenses.
- Contributions to 529 can be forward-funded so that 5 years worth of annual exclusion gifts can be contributed in the first year without incurring a taxable gift.
- 10% penalty may apply to earnings portion of distribution, not principal, if the money is not used for qualified education expenses.
Earnings portion would be taxed as ordinary income to the owner