[h] HS300 – Module 8
[q] Taxable Savings Accounts
[a] Accounts in which any income earned within the account is taxable to the account owner in the year the income is earned. Includes savings accounts, checking accounts, and brokerage accounts.
[q] Tax-Deferred Savings Accounts
[a] Accounts that grow tax-deferred until the funds are distributed. Income earned on these accounts is not taxed in the year earned but is taxed in the year distributed to the account owner. Includes 401(k) plans and traditional IRAs.
[q] Tax-Free Savings Accounts
[a] Accounts that offer tax-deferred growth and allow for tax-free withdrawals. Includes Section 529 plans and Roth IRAs.
[q] Stafford Loans
[a] Education loans that are administered by the U.S. Department of Education. Also called Direct loans.
[q] Subsidized Stafford Loans
[a] Needs-based education loans in which no interest accrues while the student is in school.
[q] Unsubsidized Stafford Loans
[a] Education loans that are not needs-based. With these loans, the borrower pays interest from the time the funds are dispersed.
[q] Federal Student Loan – Standard Repayment
[a] The shortest repayment option for a federal student loan. Under this repayment method, the loan must be repaid within 10 years, with a minimum monthly payment of $50.
[q] Federal Student Loan – Extended Repayment
[a] The longest repayment option for a federal student loan. Under this repayment method, the loan must be repaid within 25 years.
[q] Federal Student Loan – Graduated Repayment
[a] A method of repaying a federal student loan in which payments are intially low and increase over time. Loan must be repaid within 10 years.
[q] Federal Student Loan – Income-Driven Repayment (IDR) plans
[a] Methods of repaying student loans that tie monthly payments to the borrower’s ability to pay. Methods include:
Income-Contingent Repayment (IRC).
Income-Based Repayment (IBR).
Pay As You Earn (PAYE).
[q] Federal Student Loan – Income-Contingent Repayment (IRC)
[a] A type of federal student loan income-driven repayment (IDR) plan. Under this repayment plan, the maximum payment required is 20% of the borrower’s discretionary income. If the loan is not repaid after 25 years, the loan is forgiven.
[q] Federal Student Loan – Income-Based Repayment (IBR)
[a] A type of federal student loan income-driven repayment (IDR) plan. Under this repayment plan, the maximum payment required is 10% of the borrower’s discretionary income. If the loan is not repaid after 20 years, the loan is forgiven.
[q] Federal Student Loan – Pay As You Earn (PAYE)
[a] A type of federal student loan income-driven repayment (IDR) plan. This repayment option is available for borrowers with a high debt-to-income ratio.
[q] Parent Loans for Undergraduate Students
[a] Education funding available for both graduate students and parents of undergraduate students. These loans are not based on need and require that the borrower doesn’t have an adverse credit history.
[q] Private Student Loans
[a] Student loans that are not funded by the government. These loans may be available to those needing additional funding over a Stafford loan. Parents must typically be cosigners on these loans.
[q] UTMA/UGMA Account
[a] A type of custodial account that allows a minor to receive gifts, such as money and securities, without the aid of a guardian or trustee. The donor of the funds, or an appointed custodian, manages the minor’s account until the minor is of legal age.
[q] UTMA/UGMA Account Disadvantages
[a] Disadvantages of using these accounts to fund education:
Accounts are considered assets of the student.
Accounts can be used by the student for any reason after reaching age of majority.
Earnings are taxed to the minor each year.
[q] Savings Bonds
[a] Bonds that are issued by the federal government, and include Series EE and Series I bonds. These bonds are considered assets of the owner of the bond for financial aid purposes.
[q] Expected Family Contribution (EFC)
[a] An index number used by college financial aid to determine eligibility for financial aid. It is calculated using the information from the Federal Application for Federal Student Aid.
[q] Free Application for Federal Student Aid (FAFSA)
[a] An application used by virtually all two and four-year colleges, universities, and career schools for awarding Federal, state, and college-funded student aid.
[q] EFC – Simplified Method
[a] A method of determining the Expected Family Contribution that is available only to lower income families. The calculation considers only income and not assets.
[q] Automatic Zero EFC
[a] A method of determining the Expected Family Contribution that can be used if the student’s or parents’ AGI is $26,000 or less. Neither income nor assets of the student or parents are counted in determining EFC (EFC is zero).
[a] A type of award provided by the federal government for education. They are typically awarded based on financial need, and there is no repayment requirement.
[q] Federal Pell Grants
[a] The primary grant program for undergraduate students. Available to full-time and to part-time students based on need.
[q] Supplemental Education Opportunity Grants
[a] Grants that are provided to undergraduate students only in the case of extreme financial need.
[q] Teacher Education Assistance for College and Higher Education (TEACH) Grants
[a] Grants that are provided to students that intend to teach in low-income communities for at least four years. If the student doesn’t teach, the grant becomes a loan.
[q] Campus-based Aid
[a] A type of grant that is administered directly by the financial aid office of a university.
[a] Aid provided to help cover education related expenses. Typically provided as a form of merit-based aid.
[q] Taxation of Scholarships
[a] A scholarship is tax-free if:
The recipient is a candidate for a degree.
The proceeds are used to pay for qualified education expenses.
[q] Assets Excluded From EFC Formula
[a] Assets not counted in the EFC formula:
Qualified plan balance.
Life insurance cash value.
Section 529 plan balance (if owned by a third party, such as a grandparent).
Education Savings Account balance (if owned by a third party, such as a grandparent).
[q] Income Excluded From EFC Formula
[a] Income not counted in the EFC formula:
Qualified distributions from a 529 plan owned by the student or parent.
Qualified distribution from an Education Savings Account owned by the student or parent.
[q] Section 529 plan
[a] An education savings funding vehicle maintained by a state or education institution. Includes prepaid tuition plans and savings plans.
[q] Section 529 plan withdrawals
[a] Withdrawals are tax-free if used for qualified education expenses, which include tuition, fees, books, room and board, and computers. Withdrawals not used for education are subject to income tax, and potentially a 10% penalty, but the penalty is waived if the student receives a scholarship.
[q] Prepaid Tuition Plan
[a] A type of Section 529 plan that allows parents to purchase tuition credits at current college costs.
[q] Savings Plan
[a] A type of Section 529 plan that features an account balance that can be invested.
[q] Front Loading
[a] A benefit available in Section 529 plans that permits donors to contribute up to five times the annual gift tax exclusion in one year.
[q] Coverdell Education Savings Account
[a] An education savings funding vehicle similar to a Section 529 plan. The account owner controls investments and withdrawals. The contribution is limited to $2,000 per year for an individual under age 18.
[q] American Opportunity Tax Credit
[a] A federal income tax credit that is allowed for a portion of qualified higher education expenses paid during the tax year. The credit is only permitted for education expenses incurred in the first four years of post-secondary education.
[q] Lifetime Learning Credit
[a] A federal income tax credit that is allowed for a portion of qualified higher education expenses paid during the tax year. The credit is 20% of the first $10,000 of expenses.
[q] Student Loan Interest Deduction
[a] A federal income tax deduction that is allowed for interest paid on a student loan. The loan must have been used for qualified education expenses for taxpayer, spouse, or dependent. The maximum annual deduction is $2,500.