Educational Planning

Question 1

College Funding Needs Analysis Steps

Answer 1

Step 1: Determine the cost of the first year of college - FV calculation
Step 2: Determine the amount that must be available when the child is beginning college - PV calculation in Begin mode, real rate of return may be used
Step 3: Determine how much parents need to save - PV or PMT in begin or end mode

Question 2

Funding Strategies - Funding Years

Answer 2

• UGMA/ UTMA: Subject to Kiddie Tax for children under 24
• EE Education Bonds: Parents own bonds so wont work in UGMA/ UTMA
• Coverdell Education Savings Plan (ESA): Limited to $2,000/ yr total
• Section 529 Plan (QTP): Two types - College Savings and Prepaid Tuition: $17,000/ yr / child or 5 year $85,000

Question 3

Funding Strategies - College Years: Wealthy Vs Poorish

Answer 3

Wealthy
- Parent Loan
- Undergraduate Students
- Wealthy parents are a PLUS
Poorish (< $60,000 income cap)
- Pell Grants
- Supplemental Education Opportunity
- Grant Subsidized Stafford Student Loans

Question 4

Funding Strategies - College Years: Tax Credits, Distributions, and Withdrawals

Answer 4

• American Opportunity Credit (AOC) : $2,000 + 25% of next $2,000 of expenses (max $2,500 tax credit), MAGI Phase Out, first 4 years of college only
• Lifetime Learning Credit: $2,000 max, any higher learning, MAGI phase out
• Coverdell Withdrawal: must be used before 30, MAGI phase out
• 529 (QTP) Distribution: No MAGI phase out
• Gifts, Earnings, UGMA/ UTMA/ 2503c funds can be used with the four above

Question 5

Funding Strategies - Graduate Years

Answer 5

• Fullbright Scholarship
• Stafford Loan
• 529 Distribution or Coverdell withdrawal

Question 6

Ownership of Assets

Answer 6

Gifts to UGMA, UTMA, Coverdell, and 529 plans are gifts of present interest
EE Education bonds are not a complete gift if the parent owns the bond

Question 7

Qualified Tuition Program (QTP) / 529 Plans

Answer 7

A “qualified State tuition program” is a program maintained by a state or state agency or thereof that meets certain requirements and that allows an individual taxpayer to
1. purchase tuition credits or certificates on behalf of a designated beneficiary or
2. make contributions to an account established to fund the qualified college education expenses of a designated beneficiary.

Question 8

Two types of 529 Plans

Answer 8

• College savings
• Prepaid tuition

Question 9

Differences between College Savings and Prepaid Tuition

Answer 9

College Savings
- Investment return: Market-based performance
- Risk tolerance: Risk tolerant investor
- Effect on Financial Aid: When applying for financial aid,
generally considered parent’s/grandparent’s asset
- Enrollment: Open enrollment
- Type of studies covered: Includes graduate school
- Use restrictions: Not restricted to tuition and fees (includes room and board)
- Coverage by state: Available for out of state education costs without reduction
- Guarantee: Not state guaranteed
- School choice: Choice of school does not impact investment return
- Refunds: Refunds are return of investment, but all earnings are subject to a 10% Penalty. Exceptions apply (e.g., death).

Prepaid Tuition
- Investment return: Tracks tuition inflation
- Risk tolerance: Risk averse investor
- Effect on Financial Aid: When applying for financial aid,
considered parent’s /grandparent’s asset
- Enrollment: Specified enrollment (limited)
- Type of studies covered: May be limited to undergraduate
school
- Use restrictions: Generally restricted to tuition and
mandatory fees (not room and
board)
- Coverage by state: May restrict out-of-state costs and if
less than in-state costs, will not
return difference
- Guarantee: May or may not be state guaranteed
- School choice: Choice of school impacts investment return.
- Refunds: Refunds are investment plus low rate of interest.

Question 10

529 plan ownership

Answer 10

• Parents/Grandparents
• Single people with no dependents (aunts/uncles/friends)
• A trust

Question 11

529 Successor owners

Answer 11

• Most 529 plans permit a
  “successor” owner to be named on the account
• If an individual is named as the successor, that individual will take over the ability to change beneficiaries, request refunds, and make other decisions
  that may not reflect the intent of the original owner.
• By naming a trust as successor owner, the original owner can control disposition of the account.

Question 12

529 Beneficiary changes

Answer 12

• The account owner may change the designated 529 beneficiary as long as the new designated
  beneficiary is a family member of the original designated beneficiary.
• “Family member” includes a
  parent, stepparent, grandparent, child, stepchild, sibling, stepbrother, stepsister, grandchild, niece, nephew, aunt, uncle, brother-in-law, sister-in-law, daughter-in-law, son-in-law, father-in-law, mother-inlaw, first cousin, or spouse.

Question 13

529 Individual Gifting

Answer 13

• Individuals can defer up to $85,000 in a tax-deferred account to pay for a child’s education without
  incurring a federal gift tax.
• An individual can use up to 5 years of annual $17,000 exemptions at once when contributing to a child’s post-secondary education.

Question 14

529 Gifting through a Trust

Answer 14

• If the trust is funded first and the contributions to the 529 plan are then made directly by the trust, the 5-year averaging election is not available.
• it is better to make the contributions to the 529 accounts first and then
  transfer account ownership to a trust.
• Another approach is for the trust to make a small contribution to the 529 plan only for the purpose of establishing the account. The grantor can then make larger contributions directly to the trust-owned 529 account.

Question 15

529 Rollovers to different programs

Answer 15

• A transfer of credits (or other amounts) for the benefit of the same designated beneficiary from one qualified tuition program to another is not considered a distribution
• only one transfer within a 12-month period may receive this rollover treatment.
• Transfers are permitted between the following:
• A prepaid tuition program and a savings program maintained by the same state
• A state-sponsored plan and a prepaid private tuition program
  -If the owner rolls over the value of the prepaid account to another beneficiary in a generation below that of the current beneficiary, the rollover
  will be treated as a taxable gift. If the rollover stays in the same generation, there is no taxable gift

Question 16

529 Impact on Financial Aid

Answer 16

• Investing in a 529 plan
  will generally reduce a student’s eligibility to participate in need-based financial aid.
• Assets held in prepaid tuition plans will be treated as parental assets in the calculation of the expected family contribution toward college costs.

Question 17

Tax Cuts and Jobs Act (TCJA) and Secure Act on 529s

Answer 17

• federal tax-free withdrawals will be available from 529 Plans for tuition in kindergarten through 12th grade up to $10,000 per year
• may allow distributions to pay student loans up to a limit
  of $10,000 (lifetime) for any person(s)

Question 18

Coverdell ESAs

Answer 18

• Individuals may contribute up to $2,000 per year to a Coverdell ESA for the benefit of each child under age 18.
• The contribution is not deductible.
• Earnings accumulate tax deferred.
• When Coverdell ESA
  funds are distributed and used for the payment of qualified education expenses, the amounts are distributed free of taxes and penalties.

Question 19

Coverdell ESAs: Characteristics and limitations

Answer 19

• The Coverdell ESA is set up in a trust or custodial type of account. Contributions for a taxable year can be made up to the due date for filing a tax return (no extensions).
• Contributions are limited to $2,000 per year per student, regardless of the number of donors to the account. Contributions may be made by the child, parents, grandparents, or others. Contributions to a qualified tuition program account and Coverdell ESA in the same year will be allowed.
• The ability of single taxpayers to contribute, phases out between $95,000 and $110,000 of MAGI and between $190,000 and $220,000 of MAGI for married taxpayers filing jointly.
• With an ESA, “qualified elementary and secondary education expenses” may be paid tax-free. Such expenses include tuition, fees, academic tutoring, special needs services, books, supplies, and other equipment incurred in connection with the enrollment or attendance of the designated beneficiary at a public, private, or religious school that provides elementary or secondary education (K-12). In addition, the covered expenses include room and board, uniforms, transportation, supplementary items, and services including extended day programs (after school)
  required or provided by such schools. Also permissible are expenses for any computer
  technology or certain equipment or internet access and related services if such are to be used by
  the beneficiary and the beneficiary’s family during any of the years the beneficiary is in school.
• All funds must be used before the student reaches age 30 (30-day grace period). The unused
  contributions remain in the plan at the conclusion of college. The Coverdell ESAs can be rolled
  over to a beneficiary who is another family member of the original beneficiary.

Question 20

Coverdell ESA Phase out

Answer 20

The ability of single taxpayers to contribute, phases out between $95,000 and $110,000
of MAGI and between $190,000 and $220,000 of MAGI for married taxpayers filing jointly

Question 21

Comparing 529 and Coverdell ESA plans

Answer 21

529s
- Level of education covered: Now eligible for grades K through 12 expenses as well as college
- Income limits: No income limitations for contributions
- Gift revocation: Assets not used for educational expenses can be reclaimed (revocable gift).
- Contribution limits: No contribution limits. Individuals
may contribute $85,000 with 5-
year averaging without incurring
gift tax.
- Beneficiary age limit for
contributions: Contribution may be made for a beneficiary of any age.
- Beneficiary age limit for
distributions: No age limit but named beneficiary must be living.
- Ownership: Generally considered an asset of the donor(s) (normally parents or
grandparents).
- Use for student loan payments: $10,000 lifetime limit per person
for student loans.

Coverdell ESAs
- Level of education covered: Eligible for grades K through 12 expenses as well as college
- Income limits: Contribution limits are phased out for higher-income contributors
- Gift revocation: Assets not used for educational expenses cannot be reclaimed (irrevocable gift).
- Contribution limits: $2,000 per year total limit (not per donor), and no 5-year averaging is available.
- Beneficiary age limit for
contributions: Contributions may not be made after the beneficiary is age 18.
- Beneficiary age limit for
distributions: Account must be distributed upon the beneficiary reaching age 30.
- Ownership: Generally considered an asset of the parent (even if the parent is not the donor).
- Use for student loan payments: Student loan payments not allowed.

Question 22

Financial Aid: qualified education benefits, including 529s and Coverdell ESAs

Answer 22

• treated as parental asset
• However, 529 plan distributions from non-parent sources can be
  considered assets of the child and affect financial aid.

Question 23

529 plan withdrawals versus education Coverdell ESA withdrawals

Answer 23

• If the amount of qualified education expenses is less than the aggregate distributions from a Coverdell ESA and/or the 529 qualified tuition program, then the taxpayer must allocate such expenses among such distributions for purposes of determining the amount of the exclusion.

Question 24

UTMA Vs UGMA accounts

Answer 24

Uniform Gifts to Minors Act (UGMA)
- Investments: Cash-type investments, such as EE
bonds, Stocks, mutual funds, CDs, savings accounts, etc.
- Transferred to child: At age of maturity, either 18 or 21,
depending on state law
- Gift tax: Gift of a present interest ($17,000 exclusion)
- Taxation: Subject to the kiddie tax
- Financial aid: Assets count against / owned by a child

Uniform Transfers to Minors Act (UTMA)
- Investments: Cash-type investments plus real estate or
limited partnerships
- Transferred to child: Can be designated by custodian up to age 25
- Gift tax: Gift of a present interest ($17,000 exclusion)
- Taxation: Subject to the kiddie tax
- Financial aid: Assets count against / owned by a child

Question 25

Kiddie tax

Answer 25

The kiddie tax is intended to discourage the shifting of income to children in a lower-bracket as a tax avoidance technique. Kiddie tax rules apply to the following children with unearned income greater than $2,500 (2023) and who have at least one living parent at the end of the year:

• younger than 18: N/A
• 18: earned income: less than half of support & full time student: N/A
• 19-23: earned income: less than half of support & full time student: yes

Question 26

Kiddie Tax Calculation

Answer 26

If kiddie tax applies, it is calculated as follows:
1. The child gets an $1,250 (2023) standard deduction* (no tax applies to the first $1,250).
2. The next $1,250 is taxed at the child’s income tax rate of 10% ($125 of tax).
3. Amounts greater than $2,500 are taxed at the parents’ marginal tax rate.

*If the child has earned income greater than the standard deduction, the amount of earned income plus$400 is used in step1

Question 27

UGMA or UTMA transfers

Answer 27

• In certain states an UGMA or UTMA account may be transferred to a 529 Savings Plan. - When a UGMA/UTMA account is transferred to a 529 Savings Plan, the child becomes the owner. The beneficiary may not be changed if the account began as an UGMA/UTMA and the state allows the UGMA/UTMA to own a 529 plan. The child is still the beneficial owner.

Question 28

Series EE Saving bonds

Answer 28

Bonds intended to fund eligible education expenses are referred to as Series EE or Series I education bonds. Qualifications include the following:
* Bonds are normally purchased in the parent’s name. The purchaser can be anyone (except the student) age 24+ at the time of issue.
* Bonds cannot be issued in the name of the child or in a custodial account.
* Bonds must be redeemed in a year in which the owner (e.g., parent) pays qualified higher
education expenses, defined as tuition and fees only for education saving bond purposes. Room and board are not a qualified education expense.

Tax exemption
Interest will be fully exempt from federal income tax only. For parents to receive the full benefit of the tax-free status, the parents’ modified adjusted gross income in the redemption year must be below certain thresholds. These thresholds are on the tax tables included on the exam.
2023 Phaseouts
$137,800 – $167,800 MAGI (MFJ)
$91,850 – $106,850 MAGI (Single)

Saving bonds can be held in an UTMA account, but then they cannot qualify for the educational expense exclusion. If redeemed for college, interest is taxable.

Question 29

American Opportunity Credit

Answer 29

• Taxpayers will receive a tax credit (reducing federal income tax liability $1 for $1) based on 100% of the first $2,000 plus 25% of the next $2,000 (for a maximum credit of $2,500) of tuition, fees and course
  material (not room and board).
• The credit may be claimed for the first four years of post-secondary education. The American Opportunity Credit cannot be claimed for the same student expenses in the
  same year as the Lifetime Learning Credit (described below).
• A deduction (not credit) alternative may be available. A $4,000 deduction is available for MAGI up to $65,000 for single filers and $130,000 for joint filers, and then a $2,000 deduction is available for MAGI up to $80,000 for single and $160,000 for joint filers. This is an above the line deduction.

Question 30

American Opportunity Credit: Characteristics and limitations

Answer 30

• The expenses must be for the first 4 years of post-secondary education.
• The student must take at least one-half of the normal full-time student load.
• There is a phaseout associated with the credit (2023): $160,000 − 180,000 MAGI (MFJ) and
  $80,000 − 90,000 MAGI (Single). These phase out amounts are included on the exam tax table.
• Expenses paid with grants or scholarships do not qualify for the credit.
• Expenses paid from loans, gifts, inheritances, or the earnings of the student qualify for the credit.
• Student may NOT have a felony drug conviction.

Question 31

Lifetime Learning Credit

Answer 31

• This credit is a per-period credit rather than a per-student credit. In other words, this credit is based on qualifying expenses paid by the taxpayer for all eligible students. The credit is based on 20% of the first
  $10,000 of qualified tuition and related expenses (for a maximum credit of $2,000).

Question 32

Lifetime Learning Credit: Characteristics and limitations

Answer 32

• No particular student load is required for this credit nor is the student required to be pursuing a degree. It can be for one or more courses to acquire or improve job skills.
• Expenses incurred by the taxpayer, spouse, or a dependent qualify for this credit.
• Expenses for either undergraduate or graduate courses qualify for the credit.
• This credit can be claimed for an unlimited period as long as qualifying expenses are incurred.
• This credit is subject to MAGI phaseouts in 2023 between $160,000-180,000 (MFJ) and
  $80,000-90,000 (single). These phase out amounts are on the exam tax table and the same
  expenses-paid rules as the American Opportunity credit.
• No felony drug conviction restriction applies.

Question 33

Qualifying Expense: AOC and LLC

Answer 33

• Eligible expenses include tuition, fees, supplies, books and equipment but not room and board.
• The same taxpayer may elect both credits in the same year provided credits are not used for the same student expenses.

Question 34

Coordination with a Coverdell ESA: AOC and LLC

Answer 34

• The American Opportunity Credit or the Lifetime Learning Credit cannot currently be claimed (on the same dollars) in a tax year in which distributions from a Coverdell ESA on behalf of the same student are excluded from income.
• The taxpayer may claim an American Opportunity Credit or Lifetime Learning Credit for the same taxable year as amounts distributed from a Coverdell ESA as long as there are sufficient qualified education expenses to cover both. They “coordinate” on the same expense

Question 35

Coordination with qualified tuition programs (529 plans): AOC and LLC

Answer 35

• To the extent that a distribution from a qualified tuition program is used to pay for qualified tuition and related expenses, a beneficiary may claim the American Opportunity Credit or Lifetime Learning Credit
  with respect to such tuition and related expenses.
• A taxpayer can claim an American Opportunity Credit
  or Lifetime Learning Credit for a taxable year and a qualified tuition program but only if the
  distribution is not used for the same expenses for which a credit was claimed. They also
  coordinate for the same expense.

Question 36

Student loan interest deductions

Answer 36

• An above-the-line deduction is available to certain taxpayers for interest paid on “qualified education loans.” The deduction is equal to the amount of interest paid by the taxpayer, subject to a maximum amount and certain income limitations. The maximum allowable annual deduction is $2,500. The
  allowable deduction phaseouts are listed below and are included on the exam tax table.

2023 Phaseouts
$155,000 − $185,000 MAGI (MFJ)
$75,000 − $90,000 MAGI (Single)

Question 37

Pell Grants

Answer 37

• There is a maximum dollar amount for a Pell Grant each year (approximately $6,000).
• They are available only to undergraduate students.
• They are available to full-time students as well as those
  carrying six or more credit hours. - To determine if a person is eligible financially, the U.S. Department of Education uses a standard formula that determines the Expected Family Contribution (EFC): an
  amount the student’s family is expected to contribute toward his or her education. If the EFC is below a certain amount, the student will be eligible for a Pell grant. The following is the formula for financial
  need:

Financial need = Cost of attendance − Expected Family Contribution (EFC)

Question 38

Parent Loan for Undergraduate Students (PLUS)

Answer 38

Parents can borrow the entire cost of college, including tuition and living expenses, minus any financial aid. PLUS loans are non-need based, and anyone can apply. The parent must meet federal standards of credit worthiness.

Question 39

Perkins Loans

Answer 39

Perkins Loans were not renewed by Congress after 2019. Therefore, they are no longer useable

Question 40

Subsidized Stafford Student Loans

Answer 40

These are available to students who show financial need after their Expected Family Contribution (EFC), Pell Grant eligibility, and aid from other sources are subtracted from the cost of attendance. The
amount of the loan is limited.

Question 41

Supplemental Education Opportunity Grants

Answer 41

These are available for Pell Grant recipients (needs based) only and offered up to $4,000 per year

Question 42

Public Service Loan Forgiveness

Answer 42

• Public Service Loan Forgiveness is available to government and qualifying nonprofit employees with federal student loans. Eligible borrowers can have their remaining loan balance forgiven tax-free after making 120 qualifying loan payments.
  Loan forgiveness may be achieved by working for at least 10 years in qualifying fields, such as firefighting, teaching, military, government and nursing.

Question 43

Total and Permanent Disability Discharge

Answer 43

If the borrower cannot work due to total and permanent disability (physically or mental) the remaining student loan balance may be cancelled. The borrower must provide documentation proving disability.
Following discharge of the loan, the government may monitor the borrower’s finances and disability for three years. If the requirements are not met during the monitoring period, the loans may be reinstated.

Question 44

Teacher Loan Forgiveness Program

Answer 44

The Teacher Loan Forgiveness Program motivates teachers to take jobs at elementary schools,
secondary schools and educational service agencies serving low-income families. A borrower who teaches full-time at a qualifying school for five full and consecutive years is generally eligible to have
from $5,000 to up to $17,500 in loans forgiven.
Only Direct subsidized and unsubsidized loans qualify. PLUS loans do not qualify.

Question 45

Income-Driven Repayment Plans

Answer 45

• Generally, a borrower will qualify if their total student loan debt is greater than their annual income.
• Currently, per the 2021 American Rescue Plan Act, loan forgiveness in an income-driven repayment plan is tax-free through 2025. Participants in the plans below must recertify their income annually or face penalties including increased payments which could be added to loan principle and/or removal from
  the loan repayment program.

There are 4 options for income-driven payment plans:
1. Income-Contingent Repayment Plan (ICR)
2. Income-Based Repayment Plan (IBR)
3. Pay-As-You-Earn Repayment Plan (PAYE)
4. Revised Pay-As-You-Earn Repayment Plan (REPAYE)

Question 46

Repayment Plan Comparison

Answer 46

• Review chart in textbook

Question 47

PLUS Loan Forgiveness

Answer 47

• A parent PLUS loan can be discharged if you die, if the parent (not the student on whose behalf the loan was obtained) becomes totally and permanently disabled. A PLUS loan may also be discharged if the
  child for whom the funds had been borrowed dies. Other circumstances may apply.

Question 48

College Financial Aid

Answer 48

• The Free Application for Federal Student Aid (FAFSA) is required to apply for loans from a state or
  federal program.
• In order to determine the expected family contribution (EFC), the student and parents must submit their income tax forms. Under a recent change, FAFSA forms submitted for the upcoming school year will be based on the student’s and family’s income tax return filed two years prior
  -Colleges will expect parents to use 5.64 percent of their “unprotected” assets toward the EFC.
  -Small businesses that are owned or controlled (meaning more than 50 percent of the voting rights owned) by the family are excluded as assets on the FAFSA. The business must not employ more than 100 full-time workers (or the equivalent).
• Individual retirement accounts, whether owned by parents or by the student, are not counted at all in determining EFC for purposes of federal financial aid. - Life insurance cash values are generally not countable assets.
• Colleges will expect families to use up to 20 percent of the assets owned by a dependent student to pay for college. This is true even if the child’s assets are funded by other people’s money.

Question 49

Graduate years

Answer 49

• Unsubsidized Stafford Loans are available to graduate students.
• Fulbright Scholarships provide grants for graduate students, scholars and professionals, and teachers and administrators from the U.S. and other countries. The Fulbright Foundation’s goal is to provide
  participants with the opportunity to observe each other’s political, economic, and cultural institutions; exchange ideas; and embark on joint ventures of importance to the general welfare of the world’s
  inhabitants.
• Section 529 plan—Private qualified tuition program withdrawals are available to graduate students (not
  state sponsored 529s).
• Coverdell ESA—must be distributed by age 30. Coordination with 529 plans still applies.