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Chapter 7

Chapter 7. Education Funding. Education Funding—A Primary Financial Goal. One of the largest financial burdens a family will face Over the past 10 years, college tuition has increased at an annual rate of 5.6% Recent trends show students are staying in college longer than the usual four years.

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Chapter 7

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  1. Chapter 7 • Education Funding

  2. Education Funding—A Primary Financial Goal • One of the largest financial burdens a family will face • Over the past 10 years, college tuition has increased at an annual rate of 5.6% • Recent trends show students are staying in college longer than the usual four years

  3. Issues and Goals • Set feasible, realistic goals • Time is crucial • Inflation will continue to drive tuition costs higher • Many kinds of tuition: elementary, secondary, college, graduate, or professional school education

  4. Information Gathering • During the goal-setting process, a financial planner must: • forecast anticipated tuition and related expenses • adjust the expenses to account for inflation until the child enters college • determine the estimated four-year (or more) cost of a college education

  5. Determining Financial Need • FAFSA—Free Application for Federal Student Aid • EFC—Expected family contribution

  6. Financial Aid Programs • US Department of Education • Federal Pell Grant • Stafford loan • PLUS loan • Consolidation loan • Federal Supplemental Educational Opportunity Grant (FSEOG) • Federal work-study program • Federal Perkins Loans Program

  7. Financial Aid Programs (cont.) • Federal Pell Grant • EFC • Undergraduate • Full or part time • Stafford loans • EFC for subsidized loans • Undergraduate • At least half-time status

  8. Financial Aid Programs (cont.) • PLUS loans • Loans to parents • Undergraduate • At least half-time status • Consolidation loans • FSEOG • Low EFC • Undergraduate • Full or part time

  9. Financial Aid Programs (cont.) • Federal work-study program • EFC • Undergraduate or graduate • Full or part time • Perkins Loans • Very low EFC • Undergraduate or graduate • Full or part time

  10. Other Aid Programs • State governmental aid • Aid directly from the institution • Aid from the armed forces • Other grants, scholarships, and fellowships

  11. Tax Advantages From Educational Expenses and Tax Issues • Qualified tuition programs (QTPs) • Tax-deferred growth • Distributions from state-sponsored QTPs are excludable from gross income • QTPs generally charge low commissions • Many states provide tax deductions for some contributions • Contributor controls the assets

  12. Prepaid Tuition Plans • No annual limit on contributions • Undergraduate or graduate education • No AGI phaseout

  13. College Savings Plans • Owner of the account contributes money to the account • Section 529 requires that all contributions to the program be made exclusively in cash. • May be used to pay for any qualified educational expenses. • Owner can change beneficiaries

  14. Other Sources Offering Tax Advantages • Coverdell ESAs • The Roth IRA/Traditional IRA • American Opportunity Tax Credit (formerly the Hope Scholarship Credit) • The Lifetime Learning Credit • Series EE bonds • Uniform Gift to Minors Act • Interest on educational loans • Employer’s educational assistance program

  15. Coverdell ESA • Formerly educational IRAs • $2,000 per year limit • Beneficiary < 18 • Tax-free growth • Tax-free distributions • Distributed before age 30 • Elementary, secondary, undergraduate, or graduate education • AGI limits

  16. Roth IRA • Contributions are limited to $5,000 (2012), plus an additional $1,000 for taxpayers age 50 or older • Tax-free growth • If a distribution is not a qualified distribution and it exceeds contributions (and conversions) to Roth IRAs, the distribution will be subject to income tax and may be subject to the 10% penalty • 10% early withdrawal penalty does not apply if used for qualified higher education costs • AGI limits (Single $110,000-$125,000, Joint $173,000-$183,000 for 2012)

  17. American Opportunity Tax Credit and Lifetime Learning Credit • American Opportunity Tax Credit • First four years of undergraduate education • Per student limit of $2,500 per year (2012) • AGI limits • Lifetime Learning Credit • Undergraduate or graduate education • Per family limit of $2,000 per year • AGI limits

  18. Investment Strategies to Accomplish Education Goals • Develop and implement a savings plan as early as possible • Monitor and update the plan as unknown factors become known

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