Education

Financial Aid Process (1 of 2)

• completed by completing the free application for FASFA

• Financial Need = Cost of attendance - EFC (expected family contribution)

  • EFC assets excluded - home equity & retirement

  • student assets counted more heavily in the EFC

Financial Aid Process (2 of 2)

• FASFA formulas

  • Formula A - dependent student

  • Formula B - independent student without dependents (other than spouse)

  • Formula C - independent student with dependents (other than spouse)

How to file the FASFA

• FAFSA filing begins October 1st of prior year

• Prior-prior year income

• Assets reported as of date of filing

Grants

• No repayment

• Grants for undergraduate studies

• Types:

  • Federal Pell Grant

  • Teacher Education Assistance for College and Higher Education

    (TEACH) Grant

  • Federal Supplemental Educational Opportunity Grant (FSEOG)

Stafford Loans

• administered by the U.S. Department of Education

• funds provided by the federal govt

• Repayment options

  • Students with low incomes and large loan balances are only required to

    repay up to 10% of their income each year.

  • Loan forgiveness after 20 yrs of repayment

  • other loan forgiveness (public service, teacher)

• Subsidized

  • undergraduate only

  • govt. pays int on the loan while the borrow is in school

• Unsubsidized loan

  • undergraduate & graduate

  • borrow responsible for interest from the time the funds are dispersed

• Cosigners

Federal Perkins Loans

• Is for undergraduate & graduate students with exceptional financial need.

• Has a low interest rate loan (5%).

  • authority to make new Federal Perkins Loans ended on Sept. 30, 2017

Parent Plus Loans

• wealthy parents are a PLUS

• Are for parents to borrow to help pay for a dependent’s

  undergraduate education expenses

• based on the parent’s credit history

  • NOT financial need

Graduate PLUS Loans

• Are for student’s seeking graduate & professional degrees.

• Based on the parent’s (or student’s) credit history

  • not based on financial need.

Social secuirty

• SSA benefit may be reduced due to outstanding loans

• 15% of SSA benefit may be withheld

Loan Forgiveness

• Public service loan forgiveness, teacher loan forgiveness, law school loan repayment assistance programs, and the National Health Service Corps Loan Repayment Program

  • are not taxable.

• Forgiveness amounts are considered

  • taxable income.

Tax Deferred Savings

• Qualified Tuition Plans

  • ▪  Prepaid Tuition

  • ▪  College Savings Plans (529 & Front Load)

• Coverdell Education Savings Accounts

• U.S. Government Savings Bonds

Prepaid Tuition

• Allows a parent to purchase college credits today and use those credits when the child attends college

• No income tax consequences to the parents for the difference between the amount paid for the college credits and the current cost of the college credits

• Requires parents to reside in the state (but not always)

• Use those credits to attend a college that is part of the state university system.

• Subject to annual gift limits: $17,000 per person / $85,000 5-year pro-rated gift. (can contribute 85k at once without using lifetime gift tax exemption)

College Savings Plan (529)

• Tax-deferred (pre-tax)

• Distributions for qualified education expenses are federal and state income tax-free

• No federal income tax deduction for contributions

• No phase-outs (income limitations on who can contribute)

• subject to annual gift limits $17,000 per person / $85,000 5-year pro-rated gift.

• investment options

  • includes MF’s and annuities

  • allows grandparents to help

  • is considered asset of parent

College Savings Plan (Front Loading)

• Only plan that allows for front loading

• Gift recognized ratably over five years

• If donor dies before five years have passed, a portion of the gift is included in the gross estate.

Coverdell Education Savings Account (ESA)

• A tax deferred trust or custodial account established to pay for qualified education expenses

• Qualified higher education expenses

• Qualified elementary and secondary expenses

• Contributions limited to $2,000 per beneficiary per year

  • Not deductible for federal or state income taxes

Series EE and I Bonds

• Can be redeemed tax-free to pay for qualified education expenses

  • Bonds must be issued when the owner is at least 24 years old

  • Must be redeemed in the year that qualified education expenses are incurred

• May convert the bonds into a College Savings Plan (529 Plan) or Coverdell Education Savings Account

UGMA and UTMA

• UGMA - minors to own cash or securities.

• UTMA - minors to own cash, securities, and real estate.

• When the child reaches age of majority (18 or 21 depending on the state), the child can access the account without permission of the custodian.

AOTC (American opportunity tax credit)

• Up to $2,500 per student per year for the first 4 years of qualified education expenses for postsecondary education.

• 100% x the first $2,000 of qualified education expenses, plus

  25% x the second $2,000 of qualified education expenses.

• is “per student,” a family with multiple children may qualify for multiple AOTC’s

• Qualified education expenses

  • intuition and fees, student activity fees, books, supplies and equipment as long as those fees are paid directly to an eligible education institution.

Lifetime Learning Credit

• Up to $2,000 per family for an unlimited number of years of qualified education expenses.

• Must be related to a postsecondary degree program or to acquire or improve job skills.

• 20% x Qualified education expenses (up to $10,000)

• Qualified education expenses

  • tuition and fees, student activity fees, books, supplies and equipment as long as those fees are paid directly to an eligible education institution.

Student Loan Interest Deduction

• deduct up to $2,500 interest expense per year

• subject to MAGI limitations

  • 70-85k → single

  • 140-170 → MFJ

• loan proceeds must be used to pay qualified education expenses

  • tuition & feeds

  • books

  • supplies

  • equipment

  • transportation

  • room and board

1 tax benefit per qualified expense

• Cannot claim AOTC and LLC for same student in same year.

• Cannot use same qualified expenses for more than one tax benefit.

• Cannot claim an AOTC or Lifetime Learning Credit if the taxpayer received tax-free education assistance.

  • Unless the student elects to treat the Pell grant or scholarship as taxable income paying for living expenses.

Scholarships and Fellowships

• Tax-free to the recipient if the recipient is:

  • A candidate for a degree at an eligible education institution, and

  • The recipient uses the proceeds to pay for qualified education expenses.

• Qualified education expenses include:

  • Tuition and fees

  • Course-related expenses such as books, supplies, and equipment that are required by the eligible education institution.

IRA Distributions

• Traditional IRA are generally included in taxable income → tax deferred

• Roth IRA are generally excluded from taxable income → tax free

• From an IRA prior to age 59 1⁄2 are subject to a 10 percent penalty

  • Penalty waived if used for qualified education expenses

• Count as income on the FAFSA, even if tax free

Employer provided education assistance

• A program established by an employer to reimburse employees for education expenses

  • Up to $5,250 per year is not taxable to the employee

• To qualify:

  • Education assistance program must be in writing

  • Must be for tuition, fees, books, supplies, and equipment

Conclusion

• Paying for their children’s college education is often one of the top two or three largest financial goals.

• Financial planner should help the client prioritize how to allocate their cash flow and savings.

• Paying off a mortgage, fully funding a retirement, and saving an adequate amount for education may not be possible for some families.

• Tax deferred savings is an ideal way to save for education funding for clients with the means to save for a college education and a time horizon greater than 10 years.