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CHAPTER 7

CHAPTER 7. Educational Planning. Saving for: child’s education.

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CHAPTER 7

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  1. CHAPTER 7 Educational Planning Chapter 7: Educational Planning

  2. Saving for: child’s education • Tuition and fees at private 4-year schools rose 4.4% in the current school year to $26,273, according to a survey released by the College Board. Charges at public 4-year universities spiked over 6% for both in-state and out-of state students, to $7,020 and $18,548, respectively.— CNN/Money.com, October 20, 2009 • The average debt for a graduate is now $23,000, that’s up from $13,000 12 years ago. — CBS News, November 5, 2009 Starting early makes a BIG difference. Chapter 7: Educational Planning

  3. COLLEGE COSTS • Educational expenses represent one of family’s biggest costs • College expenses have nearly tripled in last 15 years • Estimates of how much 4-year colleges cost are available from public and private sources • Planners should emphasize that parents: • Who have time can capitalize on magic of compounding • Do not have to save it all because saving is only one of five ways to pay for college Chapter 7: Educational Planning

  4. education needs analysis Chapter 7: Educational Planning

  5. COLLEGE SAVINGS PLANS • UGMA AND UTMA • Custodial Accounts in Child’s Name • Inexpensive Way of Making Gift to a Minor Without Expense of Trust • Drawbacks • Taxable • Irrevocable gift • Minor takes possession at majority Chapter 7: Educational Planning

  6. COLLEGE SAVINGS PLANS • Coverdell Education Savings Account (Coverdell ESA): Features • Represent nontaxable gifts to beneficiary and may be tax-free when distributed • Distributions represent original contributions and earnings • Cover qualified educational expenses • Tuition • Room and board • Books • Any education not just post-secondary Chapter 7: Educational Planning

  7. Coverdell ESAFeatures • Current limits Max $2,000 (based on income) • Only one account permitted per Social security number • If more than one person contributing this can require some coordination • Donor can be anyone • Nothing says that I cannot give a gift of 2K to my parents, and they can contribute to the Ed IRA Chapter 7: Educational Planning

  8. Coverdell ESAFeatures (Contd.) • If not used for qualified educational expenses, it is subject to income tax and 10% penalty • Money can be rolled over into a new ESA for a different beneficiary Chapter 7: Educational Planning

  9. ESA Features (Contd.) • If rolled over within 60 days of distribution and new beneficiary is below 30 and member of original beneficiary’s family, distribution is not taxable • Distribution is tax exempt when taxpayer claims Hope credit (American Opportunity Credit 2012) or Lifetime Learning credit for a beneficiary, if not claimed for the same expense • If beneficiary reaches 30, funds remaining in ESA are assumed distributed and are subject to 10% penalty Chapter 7: Educational Planning

  10. Section 529 Plans • Every plan must meet regulations of Section 529 of IRC to become qualified state tuition program (QSTP) • Regulations describe rules state programs and taxpayers must follow to comply with Section 529 Chapter 7: Educational Planning

  11. Section 529 Plan Benefits • QSTP earnings are tax-deferred • 529 Plans allow for high contribution limits – up to about $300,000 • Distributions are excluded from gross income • Tax-exempt status extended to qualified private institution programs • Contributions to Section 529 treated as completed gift for estate and gift tax purposes Chapter 7: Educational Planning

  12. Section 529 Plans Benefits (Contd.) • The $14,000/$28,000 (2013) exclusion can be leveraged to $70,000/$140,000 (2013) • Replacement of current beneficiary by new beneficiary is permissible • Tuition credits can be transferred tax free from one qualified tuition program to another program for the same beneficiary • Beneficiary can still claim Hope scholarship (American Opportunity credit 2012) or Lifetime Learning credit. Education expenses qualifying for credit can be paid for with 529 plan withdrawals. • Favorable tax treatment has been made permanent – it was scheduled to sunset in Jan. 2011. Chapter 7: Educational Planning

  13. FORMS OF SECTION 529 PLAN • PREPAID TUITION PLAN • Guarantees that money saved today will match growth in tuition inflation at state-run colleges • COLLEGE SAVINGS PLAN • Contribute to a pool of money managed by state treasurer or outside investment advisor. Funds can be used at any accredited school for tuition, board, books and supplies Chapter 7: Educational Planning

  14. SECTION 529 PLAN DRAWBACKS • Needs long time to derive benefits • Treated as income to the child, which can hurt chances for receiving financial aid • Provides limited investment choices and little flexibility in creating special portfolios • Not certain where they got this information • Programs are “sponsored” by many large companies, with many choices. • KY TIAA-CREF • OH Putnam • Do not need to use the “program” sponsored by your state. In fact some state plans are not as good as others Chapter 7: Educational Planning

  15. SECTION 529 PLAN DRAWBACKS • Difficult to get out of a plan • 10% penalty on 529 distributions included in income Chapter 7: Educational Planning

  16. BEST PLACES TO INVEST COLLEGE FUNDS Chapter 7: Educational Planning

  17. INVESTMENT STRATEGIES FOR EDUCATION FUNDING • Develop investment strategy aimed at maximizing returns for preferred risk level • Diversify across three asset classes: stocks, bonds, and money market securities • Match time horizon of the asset and the liability Chapter 7: Educational Planning

  18. INVESTMENT STRATEGIES FOR EDUCATION FUNDING Chapter 7: Educational Planning

  19. INSTRUMENTS OF EDUCATIONAL INVESTMENT ALTERNATIVES • Zero Coupon Option • Savings Bonds for Education • Treasury Inflation-indexed Securities • Low-load Insurance • CollegeSure CD • Section 2503 (c) Minor’s Trust Chapter 7: Educational Planning

  20. COLLEGE FUNDING CALCULATION • Cost of Attendance • Less: Expected Family Contribution • Equals: Student’s Financial Need Chapter 7: Educational Planning

  21. FAMILY’S EXPECTED CONTRIBUTION • Current Federal Direct Student Loan Program has cut in half the fees on all subsidized Stafford Student Loans • In analyzing family’s student loan application, expected family contribution is used by processing firms • Worksheets Available to Calculate Expected Contribution Amount Chapter 7: Educational Planning

  22. FINANCIAL ASSISTANCE • Grants and Scholarships • Student Loans • Work Study Programs Chapter 7: Educational Planning

  23. MAJOR SOURCES OF STUDENT AID Source: College Board’s Trends in Student Aid 2011 http://trends.collegeboard.org/downloads/Student_Aid_2011.pdf Chapter 7: Educational Planning

  24. REPAYMENT OF STUDENT LOANS • Deferment • Forbearance • Graduated Payment • Consolidation Chapter 7: Educational Planning

  25. TAX RELIEF ACT OF 2001 • Employer-Provided Education Assistance • 5250 annually • Student Loan Interest Distribution • Some tax credits available • Deduction for Higher Education Expenses • Expired December 2011 Chapter 7: Educational Planning

  26. EDUCATION TAX INCENTIVES • American Opportunity Credit (2012); Hope Scholarship • Lifelong Learning Credit • Below-the-line Tax Deduction (subject to 2% AGI floor) Chapter 7: Educational Planning

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