Question 1

What are the arguments for saving for college in a child's name?

Accepted Answer

The main reason for setting up a custodial account in a child's name is to save on taxes. For investments held in a child's name, the first $1,050 (2015) in earnings is free of federal income tax, and the second $1,050 is taxed at the child's rate, presumably 10 percent.

Question 2

Are there arguments against saving in a child's name?

Accepted Answer

Here are some compelling arguments: (a) money transferred to a child's custodial account is considered an irrevocable gift and the parents cannot get it back; (b) once the children reach the age stipulated by law - usually 18 or 21 - the money is theirs and they can use it any way they please. When a parent puts money into a custodial account, there is no guarantee the child will use that money for college; (c) parents cannot foresee future events that could upset even the best-laid savings plan; and (d) ownership of assets also has implications for college financial aid.
In calculating estimated family contribution toward college costs, the standard federal aid formula requires 20 percent of net student assets to be considered. Parents, on the other hand, contribute only 12 percent of their assets, after various allowances. The value of certain assets, such as tax-deferred retirement plans, annuities, cash value life insurance and home and farm equity, are excluded from the formula.

Question 3

Comment on the following: "Section 529 plans are the best thing since the slice bread was invented."

Accepted Answer

Section 529 offers significant benefits to qualified tuition programs and to participants. The key benefits are summarized in the text.

Question 4

Steven Portney learned from your seminar that several investment options are available to save for college. He has asked you to identify the best option. What is your advice?

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The answer of Steven Portney learned from your seminar that...

Question 5

Your client, Joan Key, is flabbergasted after learning how educational costs are skyrocketing. In fact, she is turned off and refuses to plan for her children's education. What should you do?

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Question 6

Explain the student loan interest deduction rule

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Question 7

Explain Coverdell ESAs.

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Question 8

Explain the concept of expected family contribution.

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Question 9

Explain the concept of asset allocation strategy as an investment option.

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Question 10

Why is it inappropriate to scare parents with college cost figures?

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Question 11

Bruce Kaplan is confused after reading about the new expected family contribution formula. He is asking you to advise him on what to do. What would your advice be?

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Question 12

Are there major drawbacks to the Section 529 plan?

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Question 13

What steps can be taken to reduce the expected family contribution?

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Question 14

What are some of the other investment options available for saving for college?

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Question 15

List some of the options available for repaying student loans.

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Question 16

Allan Morton has decided to save for education in his son's name, because, as he puts it, "it is tax wise." Do you agree? What is your advice?

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Question 17

What are the estimates for costs for four years of college?

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Question 18

What are the major sources of student aid?

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Question 19

Explain the salient features of Treasury Inflation-Indexed Securities.

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Question 20

After graduating from Wharton School of Finance, Susan Dean has just landed a lucrative position with a Detroit-based large financial firm. However, since Wharton costs ""an arm and a leg" she had taken a massive student loan and is unable to repay such a huge amount at this time. She has contacted you to help her reduce this enormous burden. How would you advise her?

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Quiz 7: Educational Planning