Fundamentals of Financial Planning CH.8 Education Planning

Education Costs

Increase faster than inflation, include tuition, room and board, books, and fees.

FAFSA

Free Application for Federal Student Aid, opens October 1, uses prior-prior year income.

Expected Family Contribution (EFC)

Determines how much the family is expected to pay based on income, assets, family size, and number in college.

Financial Aid

Assistance provided to students to help cover education costs.

Grants

Do not need to be repaid, based on financial need. Examples include Pell Grant, FSEOG, and TEACH Grant.

Loans

Money borrowed that must be repaid with interest.

Stafford Loans

Subsidized loans have interest paid during school; unsubsidized loans accrue interest immediately.

PLUS Loans

Available to parents, not based on financial need.

529 Plans

Tax-deferred growth, tax-free withdrawals for qualified expenses, no income limits, flexible beneficiary rules.

Qualified expenses

Include tuition, room and board, books, and supplies.

Coverdell ESA

Contribution limit is $2,000 per year, can be used for K-12 and college, has income limits.

EE and I Bonds

Interest may be tax-free for education, only covers tuition and fees.

Tax Credits

Financial benefits that reduce tax liability.

American Opportunity Tax Credit (AOTC)

Up to $2,500 per student, applies to the first four years.

Lifetime Learning Credit

Up to $2,000 per family, available for unlimited years.

Key Rule

The same expense cannot be used for multiple tax benefits.

Education Funding Methods

The uneven cash flow method is commonly used.