Education Planning

Question 1

What is Financial Aid?

Answer 1

Financial aid is money given to students in the form of loans, grants, scholarships, and work-study jobs that help students pay for college.

Question 2

Two Forms of Financial Aid

Answer 2

Need-based Financial Aid

Non-need-based Financial Aid

Question 3

Expected Family Contribution (EFC)

Answer 3

The federal government expects parents and students to contribute a percentage of their income and assets toward the cost of college each year. This is known as the Expected Family Contribution (EFC) amount.

Question 4

FASFA (Free Application for Federal Student Aid)

Answer 4

The FAFSA determines a student’s eligibility for federal financial aid which includes Pell grants and Stafford loans.

Question 5

Asset Protection Allowances

Answer 5

The federal methodology grants parents an Asset Protection Allowance. It allows parents to exclude certain portions of their assets from consideration when calculating the Expected Family Contribution (EFC). The parents refer to a table on the EFC worksheet using the age of the oldest parent as of 12/31/2020 to determine the specific allowance amount. Students are not granted an asset protection allowance. If the oldest parent in a married couple will be 45 on 12/31/2020, for example, a $5,500 asset protection allowance is granted.

Question 6

Income Protection Allowance

Answer 6

The Income Protection Allowance is a separate amount that functions to reduce the family’s income that is considered in the EFC calculation. For parents, this amount varies by overall family size and the number of family members currently enrolled in college.

Question 7

Dependent Undergraduate Student Borrowing Guidelines

Answer 7

$5,500 for freshmen students enrolled in a full academic year program

$6,500 for sophomore students enrolled in a full academic year program

$7,500 for students who have completed two years of study and are enrolled in a full academic year program
Maximum total debt upon graduation is $31,000 with no more than $23,000 in subsidized loans

Question 8

Borrowing Guidelines for Independent undergraduate students or dependent students whose parents are unable to get a PLUS Loan can borrow up to:

Answer 8

$9,500 for first-year students enrolled in full academic year program (only $3,500 of this amount may be in subsidized loans).

$10,500 for sophomore students who have completed the first year of study and the remainder of the program is at least a full academic year (only $4,500 of this amount may be in subsidized loans).

$12,500 a year for junior and senior students who have completed two years of study and the remainder of the program is at least a full academic year (only $5,500 of this amount may be in subsidized loans).

Maximum total debt upon graduation is $57,500 with no more than $23,000 in subsidized loans

Question 9

Graduate Students Borrowing Guidelines

Answer 9

$20,500 a year all unsubsidized.

Maximum total debt allowed from Stafford Loans is $138,500 with no more than $65,500 in subsidized loans. This amount includes Stafford Loans received for undergraduate study.

Question 10

Two Forms of Gift to Minors

Answer 10

Uniformed Gift to Minors Act (UGMA),

Uniformed Transfers to Minors Act (UTMA).

Question 11

American Opportunity Tax Credit

Answer 11

Parents get a tax credit for each child’s college expenses for their first four years of postsecondary education in 2020. This tax credit was formerly called the Hope Scholarship tax credit, but is now called the American Opportunity Tax Credit (AOTC). This credit applies to payments made for tuition, books and fees but does not apply to room and board expenses. To qualify, a student must be enrolled at least half-time in an accredited vocational school, college or university.

Question 12

Parents Expected Income Contribution

Answer 12

A parent’s income contribution is based upon their adjusted gross income (AGI) minus an allowance for taxes and basic living expenses. Adjusted income plus assets equal the parents’ contribution amount from adjusted available income, which is the total amount that parents are expected to contribute towards college costs. Parent’s rates of income inclusion increase from 22% to 47% when parents’ adjusted available income rises. Parent’s countable assets are included at 5.00% to 5.64%.

Question 13

Dependent Expected Income Contribution

Answer 13

Dependent students are expected to contribute some of their income and assets towards college expenses as well. The available student income amount is determined by taking 50% of a student’s income after subtracting certain allowances, such as an income protection allowance of $6,840 (2020). A student’s asset inclusion is based upon their net worth multiplied by 20%. Income and assets are then added together to determine the student’s expected contribution amount.

Question 14

Pell Grant

Answer 14

A Federal Pell Grant, unlike a loan, does not have to be repaid. Generally, Pell Grants are awarded only to full-time or part-time vocational school or undergraduate college students who have not earned a bachelor’s or professional degree. (A professional degree is typically earned after earning a bachelor’s degree in a field such as medicine, law, or dentistry.) For many students, Pell Grants provide a foundation of financial aid to which other aid may be added.

You can receive only one Pell Grant in an award year. Most Pell grants are awarded to family with incomes below $31,000. How much you get will depend not only on your EFC but also on your cost of attendance, whether you are a full-time or part-time student, and whether you attend school for a full academic year.

The maximum Federal Pell Grant for 2020–21 (July 1, 2020, through June 30, 2021) is $6,345. You may not receive Pell Grant funds from more than one school at a time.

Question 15

2020 FEDERAL SUPPLEMENTAL EDUCATIONAL OPPORTUNITY GRANT (FSEOG) SUMMARY

Answer 15

Federal Grant Program Program Details Annual Award
Federal

Supplemental

Educational

Opportunity Grant

(FSEOG)

Awarded to undergraduate students who have exceptional financial need and who have not earned a bachelor’s or graduate degree

Federal Pell Grant recipients receive priority

Not all schools participate in this program

Funds depend on availability at the school; check for the school’s

deadline

Up to $4,000 a year

Question 16

Federal Direct PLUS Loans

Answer 16

Federal Direct PLUS Loans have an interest rate of 5.30%. The interest rate could change each year of repayment, but, by law, it will never exceed 9 percent. The interest rate is adjusted each year on July 1st and parents are notified of interest rate changes throughout the life of their loan. Interest is charged on the loan from the date the first disbursement is made until the loan is paid in full.

Question 17

The rates on Stafford loans are capped at what percentage?

A. 3.1%

B. 5.0%

C. 8.0%

D. 8.25%

Answer 17

Correct Answer: D. 8.25%

Explanation: The rates on Stafford loans are capped at 8.25 percent and tend to vary below that ceiling. The government pays your interest while you are a student, and repayment doesn’t begin until 6 months after graduation.

Question 18

What assets does the federal government EXCLUDE when determining the Expected Family Contribution (EFC)?

A. Home equity

B. IRA

C. Cash value life insurance

D. Annuities

E. Child’s savings account

Answer 18

Correct Answers: A., B., C. and D.

Explanation: The government excludes home equity, Retirement plans such as IRAs and 401(k)s, cash valued life insurance, and annuities when determining the expected family contribution.

Question 19

How often can you change the beneficiary on a 529 plan?

A. Once for year

B. Every six months

C. As often as you like

D. Only at account opening

Answer 19

Correct Answer: C. As often as you like

Explanation: You may change beneficiaries as often as you like, but in order to have a non-taxable and penalty-free change, the new beneficiary must be a member of the family of the prior beneficiary.

Question 20

Qualified Tuition Programs (§529 plans) are defined by IRS Publication 970

“A qualified tuition program is a program set up to allow you to either prepay, or contribute to an account established for paying a student’s qualified education expenses at an eligible educational institution. QTPs can be established and maintained by states (or agencies or instrumentalities of a state) and eligible educational institutions.”

All 50 states offer 529 Plans which afford individuals a tax-advantaged way to save for higher education.

There are two types of plans:

529 Prepaid Tuition Plans

529 Savings Plans.

Answer 20

Qualified Tuition Programs (§529 plans) are defined by IRS Publication 970

Question 21

Treatment of 529 Plans

Answer 21

As of July 1, 2006, 529 investment plans held in a dependent child’s name now get the same favorable treatment in the federal-aid calculation, as 529 plans held in a parent’s name. This treatment is advantageous because the federal methodology formula expects a smaller contribution from parental assets, just 5.64%, than from assets owned by a student. For dependent students, a 529 savings account and prepaid tuition plans will not be considered the student’s asset, even if the student is the account owner. However, a recent interpretation is that if the account owner is a nondependent student, the 529 account will be treated as an asset of the student. If the 529 plan is held by a grandparent or a third party, it is not assessed for federal aid purposes at all.

Question 22

Tax Benefits Contributions

Answer 22

Any federal income taxes that may be payable on earnings within a Qualified State Tuition Plan (QTP) (i.e., 529 plans) are deferred. The account could potentially grow at a faster rate when compared with taxable investments because the taxes do not eat away at the account’s earnings each year.

Contributions to 529 accounts are not federal income-tax deductible, but can be “forward-funded.” Forward funding means that five years worth of annual exclusion gifts can be contributed in the first year, without incurring a taxable gift.

Example (Annual Exclusion & Forward-Funding)

Individuals can gift $15,000 (2020) to others each year free from gift taxes, a father could contribute $75,000 into a new 529 plan for his son without making a taxable gift.

Example (Forward-Funding with Gift-Splitting)

The father could also contribute up to $150,000 if his spouse agrees to gift-split. Gift-splitting is a technique that reduces gift taxes, but can only be used when a married couple consent to make gifts to others.

Contributions into 529s will reduce the value of a person’s gross estate, which reduces the amount of estate taxes that may be due. However, the contributor’s estate must include a portion of any contribution made within the five-year averaging period if the contributor does not live past the fourth year.

Question 23

Change of Beneficiary

Answer 23

The beneficiary on the account can be changed as often as desired, but in order to have a non-taxable and penalty-free change, the new beneficiary must be a member of the family of the prior beneficiary (handy if one child decides not to go to college).

To qualify as a “member of the family,” the individual must be one of the following:

Son or Daughter

Stepson or Stepdaughter

Brother or Sister

Stepbrother or Stepsister

Father or Mother

Stepfather or Stepmother

Son, Daughter-in-Law

Father, Mother-in-Law

Brother, Sister-in-Law

Nieces or Nephews

Aunts or Uncles

First Cousins

The spouse of any of the individuals listed above
The plan also allows participants to roll over amounts tax-free from one plan to another as often as once every 12 months, without the need to change beneficiaries.

Question 24

Coverdell Education Savings Account (CESA).

Answer 24

The Taxpayer Relief Act of 1997 (TRA’97) created a tax-advantaged individual retirement account for education savings (Ed-IRA), which was further modified by the Economic Growth And Tax Relief Reconciliation Act of 2001 (EGTRRA). Following the EGTRRA changes, the Ed-IRA was known as a Coverdell Education Savings Account (CESA). This savings account was designed to help taxpayers save for their children’s future educational expenses.

Question 25

CESA Distributions & Contributions

Answer 25

The contributions to the CESA are treated as non-taxable gifts to the beneficiary. Upon distribution, the beneficiary may receive the funds free of federal income tax, as long as the funds are used for “qualified education expenses” at any elementary or secondary school, grades K-12, or at any qualified accredited post-secondary school in the U.S.

Question 26

CESA Stipulations

Answer 26

Contributions to a Coverdell Education Savings Account are limited to $2,000 annually, per beneficiary. Contributions must be in cash and made before the beneficiary reaches the age of 18. Also, contributions may be made up to April 15th of the following the calendar year. Any deposits into a CESA are not tax-deductible.

The assets in the CESA need to be withdrawn by the time the student reaches the age of 30. Any distribution(s) for non-qualified education expenses are considered taxable income to the beneficiary and subject to a 10% penalty. In addition, there are modified adjusted income thresholds that may limit overall contributions. For 2020, single filers are subject to a $95,000 - $110,000 phaseout range, while couples filing MFJ have a $190,000 - $220,000 phaseout. Any potential contributor with MAGI above $110,000 (single) or $220,000 (MFJ) cannot fund a CESA.

Question 27

Funds in a CESA when beneficiary reaches 30

Answer 27

If funds are still available in the CESA when the beneficiary reaches age 30, the remaining funds are subject to income tax and the 10% additional tax. If the beneficiary dies before age 30, the remaining balance must be distributed to the beneficiary’s estate and taxed within 30 days of death.

Question 28

UGMA/UTMA Transfer at time of death

Answer 28

If the custodian dies, the assets in the UGMA or UTMA account will be included in the custodian’s gross estate, for calculating the estate tax liability. The designation of a successor custodian depends greatly on state laws. It also depends on the age of the minor. If the minor is under the age of 14, it is likely that someone else would identify the successor custodian. If the minor is over 14, then he or she may be able to select the successor custodian.

Since gift to minor accounts are limited to one beneficiary, in case of the death of the minor, the assets would be passed on to his or her estate.

Question 29

If you take money out of a Coverdell Education Savings Account to pay educational expenses, it may be possible to claim the Lifetime Learning Credit in the same tax year.

A. True

B. False

Answer 29

Correct Answer: A. True

Explanation: If you are taking money out of a Coverdell Education Savings Account to pay expenses, you can claim the Lifetime Learning Credit. The ESA and the credit can be used in the same year, just not on the same expenses.

Question 30

Contributions to a Coverdell Education Savings Account are limited to what amount per year, before phase-outs?

A. $500
B. $1,000
C. $2,000
D. $2,500

Answer 30

Correct Answer: C. $2,000

Explanation: The law limits contributions to a Coverdell Education Savings Account to $2,000 per beneficiary per year.

Question 31

Student Loan Interest

Answer 31

Student Loan Interest

With the passage of the Taxpayer Relief Act of 1997, individuals can now deduct interest on student loans, regardless of whether they itemize. Under this legislation, individuals can deduct interest payments on student loans of up to $2,500 for 2020. This deduction begins phasing out at $140,000 for those filing as couples and is eliminated for couples with modified AGIs above $170,000. Singles earning less than $70,000 receive the full deduction, and the deduction is eliminated at $85,000. A taxpayer with AGI between the threshold levels receive a partial deduction.

Question 32

Qualified Educational Expense

Answer 32

Qualified Educational Expense

Certain educational expenses may qualify as income tax deductions provided that the education does not meet the minimum requirement of the present business or trade of the taxpayer, or qualifies the taxpayer for a new business or trade. The deduction will be allowed if the education was mandated by legal or employer-imposed requirements for retaining employment status or compensation rate, or if the education was necessary to maintain or improve skills required in the taxpayer’s business or trade.

Educational expenses are considered a business or trade expense if they are ordinary and necessary to carrying on a business or trade. The taxpayer must be carrying on a business or trade at the time the expense is incurred and the expense must have a direct and proximate relationship to the business or trade

Question 33

Qualifying Tests for federal income tax deduction

Answer 33

To qualify as a federal income tax deduction, the expenditures must first meet the trade or business expense requirements. If so, the expenditure is tested against two “disqualifying” tests which prohibit the deduction where the education either:

Meets the minimum requirement of the taxpayer’s present trade or business; or
Qualifies the taxpayer for a new trade or business.

Question 34

If Esaú atinó survives the disqualifying test

Answer 34

If the education survives the disqualifying tests, the next step is to meet one of the “qualifying” tests. Expenditures will pass the qualifying tests if incurred either:

To meet express legal or employer-imposed requirements for the taxpayer to retain employment status or rate of compensation; or
To maintain or improve skills required in the taxpayer’s trade or business.

Question 35

Education expenses may qualify as income tax deductions if the education prepares the taxpayer for a new business or trade?

A. True
B. False

Answer 35

Education expenses may qualify as income tax deductions if the education prepares the taxpayer for a new business or trade?

A. True
B. False

Correct Answer: B. False

Explanation: The deduction will be allowed if the education was mandated by employer requirements for retaining employment status or compensation rate, or if the education was necessary to maintain or improve skills required in the taxpayer’s business or trade.

Question 36

Which of the following conditions should you satisfy to qualify for the American Opportunity Education Credit?

A. The student must be enrolled on at least a half-time basis in an accredited vocational school, college, or university.

B. The student’s tuition must be paid during the tax year.

C. List the student as the taxpayer, as a taxpayer’s spouse, or as a qualified dependent on your tax return.

D. None of the above.

Answer 36

Which of the following conditions should you satisfy to qualify for the American Opportunity Education Credit?

A. The student must be enrolled on at least a half-time basis in an accredited vocational school, college, or university.
B. The student’s tuition must be paid during the tax year.
C. List the student as the taxpayer, as a taxpayer’s spouse, or as a qualified dependent on your tax return.
D. None of the above.

Correct Answers: A., B. and C.

Explanation: To qualify for the American Opportunity Education Credit, the student must be enrolled on at least a half-time basis in an accredited vocational school, college, or university. You must also pay the student’s tuition and list the student as a dependent on your tax return.

Question 37

Up to what amount can individuals deduct for interest payments on their students loans?

A. $500

B. $1,000

C. $2,000

D. $2,500

Answer 37

Up to what amount can individuals deduct for interest payments on their students loans?

A. $500

B. $1,000

C. $2,000

D. $2,500

Correct Answer: D. $2,500

Explanation: With the passage of the Taxpayer Relief Act of 1997, you can now deduct interest on student loans, regardless of whether you itemize. Under this legislation, individuals can now deduct interest payments of up to $2,500.