Deck 7: Educational Planning

Question 1

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

Answer 1

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?

Answer 2

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."

Answer 3

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?

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?

Question 6

Explain the student loan interest deduction rule

Question 7

Explain Coverdell ESAs.

Question 8

Explain the concept of expected family contribution.

Question 9

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

Question 10

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

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?

Question 12

Are there major drawbacks to the Section 529 plan?

Question 13

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

Question 14

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

Question 15

List some of the options available for repaying student loans.

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?

Question 17

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

Question 18

What are the major sources of student aid?

Question 19

Explain the salient features of Treasury Inflation-Indexed Securities.

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?

Question 21

Question 18. All of the following grants and loans are awarded based on financial need, except for:

A) Federal Pell Grant
B) Federal Supplemental Education Opportunity Grant
C) Federal Perkins Loans
D) Subsidized Stafford Loan
E) PLUS Loans

Question 22

Question 1. The best way to accumulate funds for college education is to

A) Buy stocks
B) Buy a CD
C) Start investing early
D) Open an account in the child's name

Question 23

Section 529 plans have the following benefits:
I) Education expenses qualifying for the Lifetime Learning Credit can be paid with plan withdrawals
II) The contributor retains ownership rights and the money remains in his/her estate
III) Tuition credits can be transferred to another qualified tuition program for the same beneficiary
The correct answer is:

A) None of the above
B) II only
C) I and III
D) I only

Question 24

Question 5. Coverdell ESAs cover each of the listed items except:

A) Books
B) Computer hardware and software
C) Student's car loan payments
D) Tuition

Question 25

Question 14. Which of the following would be most suitable for funding a college education that commences in three years?

A) Stock mutual fund
B) Bond mutual fund
C) Zero-coupon bond with a maturity that matches the start date
D) Checking account at the local bank

Question 26

Question 16. Treasury Inflation Indexed Securities:

A) Cannot be used for college savings
B) Can be used for college savings
C) Have maturities of 3 to 5 years
D) Are sold in denomination of 1,000 only

Question 27

Donor may change beneficiary for the following plans:
I. Section 529
II. UGMA/UTMA
III. Coverdell ESAs
The correct answer is:

A) I & II
B) I only
C) III only
D) II and III

Question 28

Section 529 plans, UGMA/UTMA and Coverdell ESAs share the following features:
I. There is no age limitation for contributions
II. Funds can be used for child's or parent's educational expenses
III. Investments are tax-deferred
IV. These plans set no income limitations
The correct answer is:

A) I and II
B) III and IV
C) I, II, and III
D) None of the above

Question 29

Question 7. Section 529 plans are:

A) State-sponsored college savings plans
B) Custodial accounts that let parents invest on behalf of the child
C) IRA type plans set up through a financial service firm
D) A governmental student loan program

Question 30

Question 8. A contributor to a Section 529 plan cannot:

A) Replace a plan beneficiary with a new one
B) Contribute to a 529 plan if their adjusted gross income exceeds the threshold cap for the particular year
C) Rollover funds from one state's program to another
D) Claim the Hope Scholarship credit

Question 31

The following steps may be taken to reduce the amount of the family's expected contribution:
I. Increase parents' assets and reduce their after-tax income
II. Save money in child's name
III. Decrease investment in 401k) plans
The correct answer is:

A) I only
B) II only
C) II and III
D) I and III

Question 32

Coverdell ESAs combine the following features:
I. Contribution is allowed up to $2,000 per year
II. Investments are tax-deferred, but withdrawals are taxable
III. They adversely affect financial aid application
IV. Contributions are controlled by parents
The correct answer is:

A) I, II, and III
B) II, III, and IV
C) I, III, and IV
D) I, II, and IV

Question 33

Question 9. All of the following can be designated as a beneficiary for a Section 529 plan except:

A) A father or mother
B) A son- or daughter-in-law
C) an aunt or an uncle
D) Child of a close friend

Question 34

Persons unable to repay student loans can use:
I) Deferment
II) Forbearance
III) Graduated Payment
IV) Consolidation
The correct answer is:

A) I, II, and IV
B) I, III, and IV
C) I and IV
D) I, II, III, and IV

Question 35

Question 2. Compounding works best if you invest

A) Over the short term
B) For the long term
C) In money market accounts
D) In CollegeSure CD

Question 36

Question 3. For UGMA/UTMA accounts, all of the following statements are true except:

A) They are custodial accounts set up in a child's name
B) They are taxed at child's rate
C) They are an irrevocable gift for the child
D) They can be used for any purpose by the child

Question 37

Question 15. To qualify for Education Bond Program one should:

A) Buy Series EE bonds only
B) Buy Series I bonds only
C) Indicate that the bonds will be used for educational purposes
D) Be at least 24 years old

Question 38

Major drawbacks of Section 529 plans are:
I) You must start early to derive significant benefits
II) They could result in a decrease in the amount of the financial aid
III) Once you join a plan, you cannot open an Educational IRA
The correct answer is:

A) I and II
B) II and III
C) I and III
D) I, II, and III

Question 39

Question 4. Which of the following statements about a Coverdell ESA is not correct?

A) Taxpayers may be phased out from contributing to a Coverdell ESA because of their level of modified adjusted gross income
B) Assets in a Coverdell ESA accumulate on a tax-deferred basis and earnings are tax-free is used for qualified educational purposes
C) Coverdell assets can be used for elementary, secondary and higher education
D) Every contributor can make an annual $2,000 contribution to a Coverdell for the same beneficiary

Question 40

Question 20. All of these are true for education tax incentives except the following statement:

A) Employer education is typically a tax write-off for the employer and non-taxable income for the employee
B) Student loan interest subject to some stipulations) can be used to reduce adjusted gross income
C) The Life Long Learning Credit and the American Opportunity Credit Hope Credit) can both be used by the same taxpayer to reduce taxes in the same calendar year.
D) Educational expenses may qualify as an itemized deduction

Question 41

The following debt cutting tools are available to the student's family:
I) Financial Aid
II) Student Loans
III) Tuition at Freshman Rate
IV) Discounts for Teaching Position
The correct answer is:

A) I, II, and III
B) I and III
C) I, III, and IV
D) I, II, III, and IV