Tools & Techniques of Financial PlanningLeimberg, Satinsky, Doyle & Jackson

Education Planning

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Education Funding Calculation

Estimate cost in today’s dollars Public

Tuition/room/board Private Number of years Percent student pays Percent financial aid/scholarships

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Education Funding Calculation

Inflate today’s costs to future dollars Education inflation rate Guess high/low? Inflate sophomore – senior years

Determine lump sum investment Start of college Current savings

Determine periodic savings required

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Education Funding Calculation

Determine periodic savings required Rate of return

Portfolio allocation Number of years

Before start of college?

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Topic 8: Educational Planning

American Opportunity 100% of first $2,000 and 25% of next $2,000

First four years of out of pocket tuition/full time Per student Up to $1,000 refundable

Lifetime Learning Credit 20% of $10,000 out of pocket tuition

Part-time and grad students Per family limitation

Can’t take Hope/Lifetime for same student Phaseout 2010: AGI from $160-180 vs. $96-$116 in 2008

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Coverdell ESA Funds withdrawn not taxed if used for tuition,

cost of attendance room/board Can no longer be used for K-12 private school

after 2010 Anyone (grandparents) can contribute up to

$2,000 per under 18 beneficiary per year Can change beneficiary to other family

members under 30 (pg. 122 liberal definition)

Beneficiary change is gift from old to new Can contribute to both an ESA and 529 Phase out on contributions: $95-$110,000 single;

$190-$220,000 MFJ for 2009

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529 plans Prepaid tuition (not as common); savings plan Funds withdrawn not taxed if used for tuition, cost of

attendance room/board for half-time student Anyone can contribute for any beneficiary

Grandparents: five years at once ($65,000) Not included in estate if live five years Often, state income tax deduction for contribution

Asset of parent; not student for financial aid Can change beneficiary to other family members Plans sponsored by state; investment options vary

Only permitted one change in portfolio allocation during year

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Grants and Loans Pell Grants up to $4,860 in 2010; SEOG:

up to $4,000 No repayment

Loans Perkins

Must have need 5% interest rate $4,000 per year undergrad; $20,000 max $6,000 per year grad; $40,000 max No interest while in school 10 year repayment

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Grants and Loans Loans

Stafford Up to $5,500 fresh; $6,500 soph; $7,500 after that

Independent students – higher limit Also limited to Cost of Attendance - Grants

Grad $20,500 per year (only $8,500 subsidized) Interest rates based on T-bills (as of 2010 4.5%)

Max 8.25% 4% origination fee

No interest while in school and following 6 months 10 year repayment Cancelled due to disability, death of student Forgiveness not income in certain situations: doctor

in rural area

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Grants and Loans Loans

Parents (PLUS) No limit on amount Interest rates based on T-bills (as of 2010

7.9%) Max 9% 4% origination fee

Interest is capitalized while in school 10 year repayment Cancelled due to disability, death of student

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Student Loan Interest ExpenseSavings Bond Interest Income

Student Loan Interest Expense Can deduct up to $2,500 per year Phase out: $60-$75,000 single; $120-

$150,000 MFJ for 2009 Savings Bond Interest Income

Parents can exclude interest income on amounts up to tuition paid during year

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Kids Working

Good idea while in school? For you

Deduct reasonable expense Earned income up to $5,350 generally

not taxed No social security taxes if under 18

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Shifting Income

Gift assets UTMA/UGMA

Under 19 or full-time student dependents under 24; parents rate on income > $1,900

First $950: no tax; second $950: 10% Kid’s assets at 18

Gift appreciated property just prior to college 529 plan losses

Cap gains tax: generally 5% for student Financial aid

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Financial Aid

Expected Family Contribution Student Contribution

35% of assets; 50% of earnings Parent Contribution Generally 6% of assets

Excludes home equity; retirement accounts Based on year before student starts college