Tools & Techniques of Financial PlanningLeimberg, Satinsky, Doyle & Jackson
Education Planning
7-2
Education Funding Calculation
Estimate cost in today’s dollars Public
Tuition/room/board Private Number of years Percent student pays Percent financial aid/scholarships
7-3
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
7-4
Education Funding Calculation
Determine periodic savings required Rate of return
Portfolio allocation Number of years
Before start of college?
7-5
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
7-6
Coverdell ESA Funds withdrawn not taxed if used for tuition,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
7-7
529 plans Prepaid tuition (not as common); savings plan Funds withdrawn not taxed if used for tuition, cost of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
7-8
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
7-9
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
7-10
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
7-11
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
7-12
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
7-13
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
7-14
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