Almost a year and a half ago, I made the best career decision to date - making the jump from the corporate world of financial planning to starting my own financial planning and investment management firm. The transition from being able to count on a steady salary to being completely reliant on building my own client base has not been an easy one. I have to constantly remind myself of the old adage "slow and steady wins the race every time". I knew going into this leap of faith that things would be different for a while, and they most certainly have!
Well, some of the hard work started to pay off recently when I had lunch with a reporter for one of the local newspapers. We talked about my new venture and all I have been doing to promote myself and my business. I didn't realize it would be made into a large article in this week's edition!
Here is the link to the article on the paper's website: Local Financial Planner Offers Classes, Releases Book
I would welcome any feedback, comments, questions, etc.!
It's been a while since I last blogged......rest assured, the month of April will be another active month here on my blog. Please check back later this week for more details!
Wednesday, March 31, 2010
Thursday, January 7, 2010
Potential Estate Planning Blunder For 2010
I was assisting a client with reviewing their estate planning today, and I came across a potentially devastating clause in each of their wills. This clause is, for the most part, boiler-plate verbiage in all wills so I thought I’d bring it to everyone’s attention. It may or may not apply to you, but I wanted to put the word out regardless. What’s at issue: with the new estate planning laws that went into effect this year, the surviving spouse could end up with none of the deceased spouse’s half of the estate.
The clause in the spotlight is a clause that is normally very effective in transferring wealth to surviving spouses and children/charities. But, as I mentioned above, with the new estate tax laws that went into effect on January 1, 2010 the clause can actually do more harm than good.
Basically, what the clause says is something like this: “When I die, I direct that my surviving spouse is to receive my entire half of the estate, up to the annual exclusion amount. Everything over and above the exclusion amount should go to my children” (or other siblings, charities, etc.). For 2008 and 2009, the annual exclusion amount was $3.5 million. Therefore, in previous years this clause would take the first $3.5 million from the deceased spouse’s half of the estate, give it to the surviving spouse in trust, and everything else goes to the children/relatives/charities, etc. By doing this, couples can theoretically shelter $7 million of their estate ($3.5MM for each spouse) from estate taxes.
HOWEVER, in 2010 the ‘death tax’ (the estate taxes paid upon someone’s death) is repealed meaning there is no estate tax due on someone’s death regardless of how much money they have. Therefore, if Bill Gates or Warren Buffett died tomorrow, they would not have to pay a single dime in estate tax.
Here is where the problem could arise: since there is no estate tax due on a person’s death, there’s no need to have an annual exclusion amount peeled off the top to shelter it from estate taxes. In other words, the annual exclusion just went from $3.5 million to $0 for 2010. With the way the clause is written, the spouse will get $0 and everything else goes to the children. Not good!!
Now, it is highly unlikely that the government will allow this death tax repeal to exist for the rest of the year. From what I’ve read and heard, they will re-instate the $3.5 million exemption and 45% top tax rate later this year and make it retroactive to January 1, 2010. But that still should not preclude you from at least reviewing your estate plan to make sure it is set up to do what you want it to do.
If you have a will and have not reviewed it in the past four or five years, please do yourself a favor and read through it again. If you are not sure what everything means please do not hesitate in contacting me. I will be more than happy to read over it and explain what it is set up to do and make recommendations if I see any shortfalls in your estate plans.
If you don’t have a will…..you need to get one as soon as possible. I’ll be happy to discuss with you how to go about getting this done. I’ve heard of a lot of people who swear by online vendors (e.g. Legal Zoom), but I should stress that not everyone’s situation calls for online forms. More times than not, meeting with an attorney is well worth the added cost.
I’ll be happy to answer anyone’s questions……I simply wanted to make everyone aware of the potential loophole I’m seeing in other people’s estate documents.
The clause in the spotlight is a clause that is normally very effective in transferring wealth to surviving spouses and children/charities. But, as I mentioned above, with the new estate tax laws that went into effect on January 1, 2010 the clause can actually do more harm than good.
Basically, what the clause says is something like this: “When I die, I direct that my surviving spouse is to receive my entire half of the estate, up to the annual exclusion amount. Everything over and above the exclusion amount should go to my children” (or other siblings, charities, etc.). For 2008 and 2009, the annual exclusion amount was $3.5 million. Therefore, in previous years this clause would take the first $3.5 million from the deceased spouse’s half of the estate, give it to the surviving spouse in trust, and everything else goes to the children/relatives/charities, etc. By doing this, couples can theoretically shelter $7 million of their estate ($3.5MM for each spouse) from estate taxes.
HOWEVER, in 2010 the ‘death tax’ (the estate taxes paid upon someone’s death) is repealed meaning there is no estate tax due on someone’s death regardless of how much money they have. Therefore, if Bill Gates or Warren Buffett died tomorrow, they would not have to pay a single dime in estate tax.
Here is where the problem could arise: since there is no estate tax due on a person’s death, there’s no need to have an annual exclusion amount peeled off the top to shelter it from estate taxes. In other words, the annual exclusion just went from $3.5 million to $0 for 2010. With the way the clause is written, the spouse will get $0 and everything else goes to the children. Not good!!
Now, it is highly unlikely that the government will allow this death tax repeal to exist for the rest of the year. From what I’ve read and heard, they will re-instate the $3.5 million exemption and 45% top tax rate later this year and make it retroactive to January 1, 2010. But that still should not preclude you from at least reviewing your estate plan to make sure it is set up to do what you want it to do.
If you have a will and have not reviewed it in the past four or five years, please do yourself a favor and read through it again. If you are not sure what everything means please do not hesitate in contacting me. I will be more than happy to read over it and explain what it is set up to do and make recommendations if I see any shortfalls in your estate plans.
If you don’t have a will…..you need to get one as soon as possible. I’ll be happy to discuss with you how to go about getting this done. I’ve heard of a lot of people who swear by online vendors (e.g. Legal Zoom), but I should stress that not everyone’s situation calls for online forms. More times than not, meeting with an attorney is well worth the added cost.
I’ll be happy to answer anyone’s questions……I simply wanted to make everyone aware of the potential loophole I’m seeing in other people’s estate documents.
Wednesday, January 6, 2010
Tips on Increasing Financial Aid Eligibility
Even if you are still a few years away from the first college tuition bill, there are a few steps you can take, some seemingly counter-intuitive, to increase the chances of receiving some sort of financial aid.
About two years before your child is expected to attend college consider how you might reposition your assets so they are more favorably viewed on the applications for financial assistance. Why start so soon? The amount of aid you’re eligible for in a given year is based on the previous year’s income. Controlling your assets and the receipt of income will have a significant impact on your aid eligibility. For example, capital gains count both as an asset and income and could have a devastating impact on your eligibility. If you are able to defer income at work, consider doing so for the years your child is in college. Another option is to reduce your reportable assets. It may not make sense to pay off that car loan or credit card balance when tuition bills are on the horizon, but it may actually be a wise decision. Why? By paying off that car or credit card you simultaneously lower your reportable assets, such as stocks and cash holdings, and increase your financial need. Parents with $20,000 in the bank and a $10,000 credit card debt will appear to have more resources than parents with $10,000 in the bank and no credit card debt. In the end, the parents have the same amount of money, but to the financial aid people they have less.
Another strategy to increasing your aid eligibility is to pay attention to who owns what assets. Asset ownership is critical in determining how much financial aid a student receives. College-aid officials assess up to 35% of a student’s assets versus only 5.6% of a parent’s holdings. Therefore, make sure your 529 Plans, Coverdell plans, etc. are in the parent’s names. Prior to 2006, prepaid tuition plans, including the Independent 529 Plan, were considered an available resource to students and therefore had a more negative impact on financial aid eligibility than a 529 Savings Plan. However, recent laws passed by Congress treat all 529 plans as parental assets. Now, no more than 5.6% of your 529 college savings will be used to assess need if you apply for financial aid under federal guidelines.
It always pays to save, but just be careful how you do it.
About two years before your child is expected to attend college consider how you might reposition your assets so they are more favorably viewed on the applications for financial assistance. Why start so soon? The amount of aid you’re eligible for in a given year is based on the previous year’s income. Controlling your assets and the receipt of income will have a significant impact on your aid eligibility. For example, capital gains count both as an asset and income and could have a devastating impact on your eligibility. If you are able to defer income at work, consider doing so for the years your child is in college. Another option is to reduce your reportable assets. It may not make sense to pay off that car loan or credit card balance when tuition bills are on the horizon, but it may actually be a wise decision. Why? By paying off that car or credit card you simultaneously lower your reportable assets, such as stocks and cash holdings, and increase your financial need. Parents with $20,000 in the bank and a $10,000 credit card debt will appear to have more resources than parents with $10,000 in the bank and no credit card debt. In the end, the parents have the same amount of money, but to the financial aid people they have less.
Another strategy to increasing your aid eligibility is to pay attention to who owns what assets. Asset ownership is critical in determining how much financial aid a student receives. College-aid officials assess up to 35% of a student’s assets versus only 5.6% of a parent’s holdings. Therefore, make sure your 529 Plans, Coverdell plans, etc. are in the parent’s names. Prior to 2006, prepaid tuition plans, including the Independent 529 Plan, were considered an available resource to students and therefore had a more negative impact on financial aid eligibility than a 529 Savings Plan. However, recent laws passed by Congress treat all 529 plans as parental assets. Now, no more than 5.6% of your 529 college savings will be used to assess need if you apply for financial aid under federal guidelines.
It always pays to save, but just be careful how you do it.
The Costs & Rewards of a College Education
Part 9 - The Basics of Financial Aid: Loans
Unlike grants, financial aid in the form of loans is required to be repaid. However, students can take anywhere from 10 to 30 years to repay the loan depending on which loan is involved.
Federal Perkins Loan
Perkins Loans are another first-come, first-served option. The federal government only guarantees each school a certain amount of Perkins Loan money each year. This program is yet another reason for students to fill out FAFSAs as early as possible.
A Federal Perkins Loan is a low-interest (5 percent) loan for both undergraduate and graduate students with exceptional financial need. Federal Perkins Loans are made through a school's financial aid office. Your school is your lender, and the loan is made with government funds. You must repay this loan to your school. Your school will either pay you directly (usually by check) or apply your loan to your school charges. You'll receive the loan in at least two payments during the academic year.
You can borrow up to $5,500 for each year of undergraduate study (the total you can borrow as an undergraduate is $27,500). For graduate studies, you can borrow up to $8,000 per year (the total you can borrow as a graduate is $60,000 which includes amounts borrowed as an undergraduate). The amount you receive depends on when you apply, your financial need, and the funding level at the school.
If you are attending school at least half time, you have nine months after you graduate, leave school, or drop below half time status before you must begin repayment. This period of time is known as a grace period. At the end of your grace period, you must begin repaying your loan. You may be allowed up to 10 years to repay.
Perkins Loans also can be discharged or cancelled in full or in part for various reasons, including for graduates who are employed in specific teaching positions, certain public or non-profit family services jobs, and law enforcement or in military service in certain hostile areas.
Federal Stafford Loan
In addition to Perkins Loans, the U.S. Department of Education administers the Federal Family Education Loan (FFEL) Program and the William D. Ford Federal Direct Loan (Direct Loan) Program. Both the FFEL and Direct Loan programs consist of what are generally known as Stafford Loans (for students) and PLUS Loans for parents and graduate and professional degree students; PLUS Loans will be explained later.
Schools generally participate in either the FFEL or Direct Loan program but sometimes participate in both. Under the Direct Loan Program, the funds for your loan come directly from the federal government. Funds for your FFEL will come from a bank, credit union, or other lender that participates in the program. Eligibility rules and loan amounts are identical under both programs, but repayment plans differ somewhat.
Federal Stafford Loans are the backbone of the Department of Education's self-help aid program for students. The advantage of Stafford Loans is that their interest rate is lower than what students or parents could get through a private lender. However, it's usually higher than the rate for a Perkins Loan. Stafford Loans are available to students enrolled in an eligible program at least half time and carry variable interest rates that are adjusted each July 1 for the following 12 months.
A Stafford Loan may either be subsidized or unsubsidized. Subsidized loans are based on financial need, and the federal government pays interest on the loans while the student is in school. Students pick up the payments on loan interest and principal six months after they graduate.
Students who do not show financial need, according to the Department of Education's guidelines, but still need more money for school, may qualify for an unsubsidized Stafford Loan. This type of loan does not offer the interest grace period. The borrower is responsible for interest charges beginning the date the loan is disbursed.
Students may take from 10 to 30 years to pay off their Stafford Loans, depending on the amount they owe and the type of repayment plan they choose. Under certain conditions you can receive a deferment or discharge of the loan.
Stafford Loan Interest Rates:
Academic Year Subsidized Rates Unsubsidized/Graduate Rates
2009 – 2010 5.60% 6.80%
2010 – 2011 4.50% 6.80%
2011 – 2012 3.40% 6.80%
2012 – 2013 6.80% 6.80%
New interest rate cap for Military Members
Interest rate on a borrower’s loan may be changed to six percent during the borrower’s active duty military service. This applies to both FFEL and Direct loans. Additionally, this law applies to borrowers in military service as of August 14, 2008.
Borrower must contact the creditor (loan holder) in writing to request the interest rate adjustment and provide a copy of the borrower’s military orders.
Stafford Loan Limits:
Dependent Students Annual Loan Limits
First Year $5,500 ($3,500 subsidized / $2,000 unsubsidized)
Second Year $6,500 ($4,500 subsidized / $2,000 unsubsidized)
Third Year and Beyond $7,500 ($5,500 subsidized / $2,000 unsubsidized)
Independent Students Annual Loan Limits
First Year $9,500 ($3,500 subsidized / $6,000 unsubsidized)
Second Year $10,500 ($4,500 subsidized / $6,000 unsubsidized)
Third Year and Beyond $12,500 ($5,500 subsidized / $7,000 unsubsidized)
Graduate or Professional $20,500 ($8,500 subsidized / $12,000 unsubsidized)
Lifetime Limits
Undergraduate Dependent $31,000 (Up to $23,000 may be subsidized)
Undergraduate Independent $57,500
Graduate or Professional $138,500 (Up to $65,000 may be subsidized) or $224,000 (for Health Professionals)
PLUS Loans
The Federal PLUS Loan is a loan borrowed by a parent on behalf of a child to help pay for tuition and school related expenses at an eligible college or university, or by a graduate student for graduate school. The student must be enrolled at least half time, and the parent or graduate student must pass a credit check in order to receive this loan.
PLUS Loans are non-need based, which means you do not have to demonstrate financial need to qualify. Eligibility for the PLUS Loan depends on a modest credit check that determines whether the parent has adverse credit. An adverse credit history is defined as being more than 90 days late on any debt or having any Title IV debt within the past five years subjected to default determination, bankruptcy discharge, foreclosure, repossession, tax lien, wage garnishment, or write-off.
The primary benefit of the PLUS Loan is that a parent can borrow a federally guaranteed low interest loan to help pay for their child's education. A Federal PLUS Loan allows a parent to borrow the total cost of undergraduate education including tuition, room and board, and any other eligible school expenses, minus any aid the child is receiving in their name.
PLUS Loan interest rates are fixed for all new PLUS Loans at a rate of 8.5%. These loans will not have variable interest rates. You may receive a 0.25% repayment interest rate credit when payments are set up for automatic debit from a bank account. Interest may be tax deductible under the Hope Education Tax Credit. Repayment on a PLUS loan is 10 years; there is no penalty for early repayment, and consolidating your loans after each academic year is easy. It also lowers your monthly payment.
The yearly limit on a PLUS Loan is equal to your cost of attendance minus any other financial aid you receive. For example, if your cost of attendance is $10,000 and you receive $8,000 in other financial aid, parents could borrow up to, but not more than, $2,000.
The Grad PLUS Loan is a low interest, federally backed student loan guaranteed by the U.S. Government, specifically for students enrolled in a degree seeking graduate program. Like the Parent PLUS Loan, the Graduate PLUS Loan can be used to pay for the total cost of education less any aid already awarded. Also, like the Parent PLUS Loan, eligibility for the Graduate PLUS Loan is largely dependent on the borrower's credit rating and history, as opposed to the purely financial need-based Graduate Stafford Loan.
Although many families prefer not to borrow money at all, it's important to remember that federal loans tend to have lower interest rates and more flexible repayment policies than other types of loans. Families who need to borrow money for college should be sure to exhaust all federal loan options before turning to private lenders.
Federal Work-Study
Federal Work-Study (FWS) provides part-time jobs for undergraduate and graduate students with financial need, allowing them to earn money to help pay education expenses. The program encourages community service work and work related to the recipient's course of study.
Participants are paid by the hour if an undergraduate. No FWS student may be paid by commission or fee. The school must pay you directly (unless you direct otherwise) and at least monthly. Wages for the program must equal at least the current federal minimum wage but might be higher, depending on the type of work done and the skills required. The amount earned cannot exceed the total FWS award. When assigning work hours, the employer or financial aid administrator will consider the award amount, the student’s class schedule, and their academic progress.
The school might have agreements with private for-profit employers for Federal Work-Study jobs. This type of job must be relevant to the student’s course of study (to the maximum extent possible). If the student is attending a career school, there might be further restrictions on the jobs you can be assigned.
Unlike grants, financial aid in the form of loans is required to be repaid. However, students can take anywhere from 10 to 30 years to repay the loan depending on which loan is involved.
Federal Perkins Loan
Perkins Loans are another first-come, first-served option. The federal government only guarantees each school a certain amount of Perkins Loan money each year. This program is yet another reason for students to fill out FAFSAs as early as possible.
A Federal Perkins Loan is a low-interest (5 percent) loan for both undergraduate and graduate students with exceptional financial need. Federal Perkins Loans are made through a school's financial aid office. Your school is your lender, and the loan is made with government funds. You must repay this loan to your school. Your school will either pay you directly (usually by check) or apply your loan to your school charges. You'll receive the loan in at least two payments during the academic year.
You can borrow up to $5,500 for each year of undergraduate study (the total you can borrow as an undergraduate is $27,500). For graduate studies, you can borrow up to $8,000 per year (the total you can borrow as a graduate is $60,000 which includes amounts borrowed as an undergraduate). The amount you receive depends on when you apply, your financial need, and the funding level at the school.
If you are attending school at least half time, you have nine months after you graduate, leave school, or drop below half time status before you must begin repayment. This period of time is known as a grace period. At the end of your grace period, you must begin repaying your loan. You may be allowed up to 10 years to repay.
Perkins Loans also can be discharged or cancelled in full or in part for various reasons, including for graduates who are employed in specific teaching positions, certain public or non-profit family services jobs, and law enforcement or in military service in certain hostile areas.
Federal Stafford Loan
In addition to Perkins Loans, the U.S. Department of Education administers the Federal Family Education Loan (FFEL) Program and the William D. Ford Federal Direct Loan (Direct Loan) Program. Both the FFEL and Direct Loan programs consist of what are generally known as Stafford Loans (for students) and PLUS Loans for parents and graduate and professional degree students; PLUS Loans will be explained later.
Schools generally participate in either the FFEL or Direct Loan program but sometimes participate in both. Under the Direct Loan Program, the funds for your loan come directly from the federal government. Funds for your FFEL will come from a bank, credit union, or other lender that participates in the program. Eligibility rules and loan amounts are identical under both programs, but repayment plans differ somewhat.
Federal Stafford Loans are the backbone of the Department of Education's self-help aid program for students. The advantage of Stafford Loans is that their interest rate is lower than what students or parents could get through a private lender. However, it's usually higher than the rate for a Perkins Loan. Stafford Loans are available to students enrolled in an eligible program at least half time and carry variable interest rates that are adjusted each July 1 for the following 12 months.
A Stafford Loan may either be subsidized or unsubsidized. Subsidized loans are based on financial need, and the federal government pays interest on the loans while the student is in school. Students pick up the payments on loan interest and principal six months after they graduate.
Students who do not show financial need, according to the Department of Education's guidelines, but still need more money for school, may qualify for an unsubsidized Stafford Loan. This type of loan does not offer the interest grace period. The borrower is responsible for interest charges beginning the date the loan is disbursed.
Students may take from 10 to 30 years to pay off their Stafford Loans, depending on the amount they owe and the type of repayment plan they choose. Under certain conditions you can receive a deferment or discharge of the loan.
Stafford Loan Interest Rates:
Academic Year Subsidized Rates Unsubsidized/Graduate Rates
2009 – 2010 5.60% 6.80%
2010 – 2011 4.50% 6.80%
2011 – 2012 3.40% 6.80%
2012 – 2013 6.80% 6.80%
New interest rate cap for Military Members
Interest rate on a borrower’s loan may be changed to six percent during the borrower’s active duty military service. This applies to both FFEL and Direct loans. Additionally, this law applies to borrowers in military service as of August 14, 2008.
Borrower must contact the creditor (loan holder) in writing to request the interest rate adjustment and provide a copy of the borrower’s military orders.
Stafford Loan Limits:
Dependent Students Annual Loan Limits
First Year $5,500 ($3,500 subsidized / $2,000 unsubsidized)
Second Year $6,500 ($4,500 subsidized / $2,000 unsubsidized)
Third Year and Beyond $7,500 ($5,500 subsidized / $2,000 unsubsidized)
Independent Students Annual Loan Limits
First Year $9,500 ($3,500 subsidized / $6,000 unsubsidized)
Second Year $10,500 ($4,500 subsidized / $6,000 unsubsidized)
Third Year and Beyond $12,500 ($5,500 subsidized / $7,000 unsubsidized)
Graduate or Professional $20,500 ($8,500 subsidized / $12,000 unsubsidized)
Lifetime Limits
Undergraduate Dependent $31,000 (Up to $23,000 may be subsidized)
Undergraduate Independent $57,500
Graduate or Professional $138,500 (Up to $65,000 may be subsidized) or $224,000 (for Health Professionals)
PLUS Loans
The Federal PLUS Loan is a loan borrowed by a parent on behalf of a child to help pay for tuition and school related expenses at an eligible college or university, or by a graduate student for graduate school. The student must be enrolled at least half time, and the parent or graduate student must pass a credit check in order to receive this loan.
PLUS Loans are non-need based, which means you do not have to demonstrate financial need to qualify. Eligibility for the PLUS Loan depends on a modest credit check that determines whether the parent has adverse credit. An adverse credit history is defined as being more than 90 days late on any debt or having any Title IV debt within the past five years subjected to default determination, bankruptcy discharge, foreclosure, repossession, tax lien, wage garnishment, or write-off.
The primary benefit of the PLUS Loan is that a parent can borrow a federally guaranteed low interest loan to help pay for their child's education. A Federal PLUS Loan allows a parent to borrow the total cost of undergraduate education including tuition, room and board, and any other eligible school expenses, minus any aid the child is receiving in their name.
PLUS Loan interest rates are fixed for all new PLUS Loans at a rate of 8.5%. These loans will not have variable interest rates. You may receive a 0.25% repayment interest rate credit when payments are set up for automatic debit from a bank account. Interest may be tax deductible under the Hope Education Tax Credit. Repayment on a PLUS loan is 10 years; there is no penalty for early repayment, and consolidating your loans after each academic year is easy. It also lowers your monthly payment.
The yearly limit on a PLUS Loan is equal to your cost of attendance minus any other financial aid you receive. For example, if your cost of attendance is $10,000 and you receive $8,000 in other financial aid, parents could borrow up to, but not more than, $2,000.
The Grad PLUS Loan is a low interest, federally backed student loan guaranteed by the U.S. Government, specifically for students enrolled in a degree seeking graduate program. Like the Parent PLUS Loan, the Graduate PLUS Loan can be used to pay for the total cost of education less any aid already awarded. Also, like the Parent PLUS Loan, eligibility for the Graduate PLUS Loan is largely dependent on the borrower's credit rating and history, as opposed to the purely financial need-based Graduate Stafford Loan.
Although many families prefer not to borrow money at all, it's important to remember that federal loans tend to have lower interest rates and more flexible repayment policies than other types of loans. Families who need to borrow money for college should be sure to exhaust all federal loan options before turning to private lenders.
Federal Work-Study
Federal Work-Study (FWS) provides part-time jobs for undergraduate and graduate students with financial need, allowing them to earn money to help pay education expenses. The program encourages community service work and work related to the recipient's course of study.
Participants are paid by the hour if an undergraduate. No FWS student may be paid by commission or fee. The school must pay you directly (unless you direct otherwise) and at least monthly. Wages for the program must equal at least the current federal minimum wage but might be higher, depending on the type of work done and the skills required. The amount earned cannot exceed the total FWS award. When assigning work hours, the employer or financial aid administrator will consider the award amount, the student’s class schedule, and their academic progress.
The school might have agreements with private for-profit employers for Federal Work-Study jobs. This type of job must be relevant to the student’s course of study (to the maximum extent possible). If the student is attending a career school, there might be further restrictions on the jobs you can be assigned.
Tuesday, December 29, 2009
The Costs & Rewards of a College Education
Part 8 - The Basics of Financial Aid: Grants
As nervous as college freshmen may be, their cash-strapped parents are probably trembling more. Disciplined savings using any or a combination of the options mentioned above may not cover the full expense of a college education. As they have for the last ten years, college costs rose faster than inflation this year. For the 2009-10 school year, a college freshman can expect to pay anywhere between $15,000 and $60,000 for a full year of tuition, room and board, books, etc.
But many college students don’t pay full sticker price. 63% of students receive some form of aid, either loans, grants, or both, according to the National Association of Student Financial Aid Administrators.
This year's College Board data on financial aid show that almost $143 billion in student aid was distributed in academic year 2007-08—almost $10 billion more than the previous year. In addition, students borrowed almost $19 billion dollars from nonfederal sources to help finance their education. On average, undergraduate students received an average of $8,896 in aid in the form of grants and tax benefits. Graduate students received an average of $20,320 in aid.
College financial aid departments will require the Department of Education's Free Application for Federal Student Aid (FAFSA) form, available at www.fafsa.ed.gov, which provides financial details of the parents and student. It is important to file the FAFSA form early as some grants are given on a first-come-first-serve basis.
Financial aid is intended to make up the difference between what a family can afford and what college costs. The federal government and all public college financial aid offices use a “need formula” that analyzes a family’s financial circumstances and compares them with other families. The results will vary by college and by state, but the Expected Family Contribution (EFC) formula assumes family contributions are met with savings, income and borrowing. If a shortfall of college funds does exist, financial aid is awarded. This aid can be in the form of grants, loans, and work-study programs.
Grants
Gift-aid programs include the Federal Pell Grant Program and the Federal Supplemental Educational Opportunity Grant (FSEOG) Program. These grants are generally available only to students who do not yet have bachelor's degrees. In some cases they might be awarded to students enrolled in post-baccalaureate teacher certification programs.
Pell Grants
A Federal Pell Grant, unlike a loan, does not have to be repaid. Pell Grants are awarded usually only to undergraduate students who have not earned a bachelor's or a professional degree. (In some cases, however, a student enrolled in a post-baccalaureate teacher certification program might receive a Pell Grant.) Pell Grants are considered a foundation of federal financial aid, to which aid from other federal and nonfederal sources might be added.
Starting July 1, 2009, the maximum Pell grant annual allowance will increase from $4,731 to $5,350 for the 2009-10 school year, the largest increase since the program began. It will increase again to $5,550 for the 2010-11 school year. The increased grant will cover approximately one-third of the total annual cost of attendance, room and board included, at the average public, four-year in-state school, or about 15 percent of one year at the average private college or university, according to the College Board. The increased Pell grant doesn't just sweeten the pot for those who already qualify for the award; it also means a greater number of students are now eligible for the grant.
The maximum amount can change each award year and depends on program funding. The amount you get, though, will depend not only on your financial need, but also on your costs to attend school, your status as a full-time or part-time student, and your plans to attend school for a full academic year or less.
The school the student is attending can apply Pell Grant funds to your school costs, pay you directly (usually by check), or combine these methods. The school must tell you in writing how much your award will be and how and when you'll be paid. Schools must disburse funds at least once per term (semester, trimester, or quarter). Schools that do not use semesters, trimesters, or quarters must disburse funds at least twice per academic year.
Federal Supplemental Educational Opportunity Grants (FSEOG)
The Federal Supplemental Educational Opportunity Grant (FSEOG) program is for undergraduates with exceptional financial need. Pell Grant recipients with the lowest expected family contributions (EFCs) will be considered first for a FSEOG. Just like Pell Grants, the FSEOG does not have to be repaid.
You can receive between $100 and $4,000 a year, depending on when you apply, your financial need, the funding at the school you're attending, and the policies of the financial aid office at your school.
If you're eligible, your school will credit your account, pay you directly (usually by check), or combine these methods. Your school must pay you at least once per term (semester, trimester, or quarter). Schools that do not use semesters, trimesters, or quarters must disburse funds at least twice per academic year.
FSEOGs have a few limitations that Pell Grants don't. For one, the amount of your FSEOG can be reduced if you receive other forms of student aid. Also, each school receives a limited amount of FSEOG money; when it's gone, it's gone. That's why it's very important to apply for financial aid as early as you can. You'll have a better chance of obtaining FSEOG money if you're eligible for it.
Next week I will discuss the other two options of financial aid - loans and work-study programs.
As nervous as college freshmen may be, their cash-strapped parents are probably trembling more. Disciplined savings using any or a combination of the options mentioned above may not cover the full expense of a college education. As they have for the last ten years, college costs rose faster than inflation this year. For the 2009-10 school year, a college freshman can expect to pay anywhere between $15,000 and $60,000 for a full year of tuition, room and board, books, etc.
But many college students don’t pay full sticker price. 63% of students receive some form of aid, either loans, grants, or both, according to the National Association of Student Financial Aid Administrators.
This year's College Board data on financial aid show that almost $143 billion in student aid was distributed in academic year 2007-08—almost $10 billion more than the previous year. In addition, students borrowed almost $19 billion dollars from nonfederal sources to help finance their education. On average, undergraduate students received an average of $8,896 in aid in the form of grants and tax benefits. Graduate students received an average of $20,320 in aid.
College financial aid departments will require the Department of Education's Free Application for Federal Student Aid (FAFSA) form, available at www.fafsa.ed.gov, which provides financial details of the parents and student. It is important to file the FAFSA form early as some grants are given on a first-come-first-serve basis.
Financial aid is intended to make up the difference between what a family can afford and what college costs. The federal government and all public college financial aid offices use a “need formula” that analyzes a family’s financial circumstances and compares them with other families. The results will vary by college and by state, but the Expected Family Contribution (EFC) formula assumes family contributions are met with savings, income and borrowing. If a shortfall of college funds does exist, financial aid is awarded. This aid can be in the form of grants, loans, and work-study programs.
Grants
Gift-aid programs include the Federal Pell Grant Program and the Federal Supplemental Educational Opportunity Grant (FSEOG) Program. These grants are generally available only to students who do not yet have bachelor's degrees. In some cases they might be awarded to students enrolled in post-baccalaureate teacher certification programs.
Pell Grants
A Federal Pell Grant, unlike a loan, does not have to be repaid. Pell Grants are awarded usually only to undergraduate students who have not earned a bachelor's or a professional degree. (In some cases, however, a student enrolled in a post-baccalaureate teacher certification program might receive a Pell Grant.) Pell Grants are considered a foundation of federal financial aid, to which aid from other federal and nonfederal sources might be added.
Starting July 1, 2009, the maximum Pell grant annual allowance will increase from $4,731 to $5,350 for the 2009-10 school year, the largest increase since the program began. It will increase again to $5,550 for the 2010-11 school year. The increased grant will cover approximately one-third of the total annual cost of attendance, room and board included, at the average public, four-year in-state school, or about 15 percent of one year at the average private college or university, according to the College Board. The increased Pell grant doesn't just sweeten the pot for those who already qualify for the award; it also means a greater number of students are now eligible for the grant.
The maximum amount can change each award year and depends on program funding. The amount you get, though, will depend not only on your financial need, but also on your costs to attend school, your status as a full-time or part-time student, and your plans to attend school for a full academic year or less.
The school the student is attending can apply Pell Grant funds to your school costs, pay you directly (usually by check), or combine these methods. The school must tell you in writing how much your award will be and how and when you'll be paid. Schools must disburse funds at least once per term (semester, trimester, or quarter). Schools that do not use semesters, trimesters, or quarters must disburse funds at least twice per academic year.
Federal Supplemental Educational Opportunity Grants (FSEOG)
The Federal Supplemental Educational Opportunity Grant (FSEOG) program is for undergraduates with exceptional financial need. Pell Grant recipients with the lowest expected family contributions (EFCs) will be considered first for a FSEOG. Just like Pell Grants, the FSEOG does not have to be repaid.
You can receive between $100 and $4,000 a year, depending on when you apply, your financial need, the funding at the school you're attending, and the policies of the financial aid office at your school.
If you're eligible, your school will credit your account, pay you directly (usually by check), or combine these methods. Your school must pay you at least once per term (semester, trimester, or quarter). Schools that do not use semesters, trimesters, or quarters must disburse funds at least twice per academic year.
FSEOGs have a few limitations that Pell Grants don't. For one, the amount of your FSEOG can be reduced if you receive other forms of student aid. Also, each school receives a limited amount of FSEOG money; when it's gone, it's gone. That's why it's very important to apply for financial aid as early as you can. You'll have a better chance of obtaining FSEOG money if you're eligible for it.
Next week I will discuss the other two options of financial aid - loans and work-study programs.
Tuesday, December 22, 2009
The Costs & Rewards of a College Education
Part 7 - Tax Incentives for Higher Education Expenses: The Lifetime Learning Credit
The lifetime learning credit provides a tax credit of 20% of up to $10,000, or up to $2,000, of qualified expenses per taxpayer per year. It is available for all years of post-secondary education and for courses taken to acquire or improve job skills. This credit is available even if the student is enrolled in just one course at an eligible institution. There is no limit on the number of years the lifetime learning credit can be claimed for each student.
Generally, the same expenses that either qualify or do not qualify for the Hope credit apply to the lifetime learning credit. See the summary of these expenses in the Hope credit summary above. Additionally, the same prohibited actions for the Hope credit applies to the lifetime learning credit.
You cannot claim the Hope and the lifetime learning credit for the same student in the same year. To claim the Hope Credit or Lifetime Learning Credit, complete IRS Form 8863.
Comparison of Education Credits
Amount of Credit
Hope Credit - Up to $1,800 credit per eligible student 1
Lifetime Learning Credit - Up to $2,000 credit per return
When Available
Hope Credit - Available ONLY until the first 2 years of post- secondary education are completed.1
Lifetime Learning Credit - Available for all years of post-secondary education and for courses to acquire or improve job skills.
Educational Pursuit
Hope Credit - Student must be pursuing an undergraduate degree or other recognized education credential.
Lifetime Learning Credit - Student does not need to be pursuing a degree or other recognized education credential
Enrollment Requirements
Hope Credit - Student must be enrolled at least half time for at least one academic period beginning during the year.
Lifetime Learning Credit - Available for one or more courses
Prior Legal Issues
Hope Credit - No felony drug conviction on student’s record.
Lifetime Learning Credit - Felony drug conviction rule does not apply
1 For 2009 and 2010, these features fall under the provisions of the American Opportunity Tax Credit. Please refer to these features as described in the Hope Credit section of this report.
Next week I will begin discussing the basics of financial aid, including discussions on grants, loans, and steps to take now to increase your chances of obtaining financial aid for yourself or your child.
The lifetime learning credit provides a tax credit of 20% of up to $10,000, or up to $2,000, of qualified expenses per taxpayer per year. It is available for all years of post-secondary education and for courses taken to acquire or improve job skills. This credit is available even if the student is enrolled in just one course at an eligible institution. There is no limit on the number of years the lifetime learning credit can be claimed for each student.
Generally, the same expenses that either qualify or do not qualify for the Hope credit apply to the lifetime learning credit. See the summary of these expenses in the Hope credit summary above. Additionally, the same prohibited actions for the Hope credit applies to the lifetime learning credit.
You cannot claim the Hope and the lifetime learning credit for the same student in the same year. To claim the Hope Credit or Lifetime Learning Credit, complete IRS Form 8863.
Comparison of Education Credits
Amount of Credit
Hope Credit - Up to $1,800 credit per eligible student 1
Lifetime Learning Credit - Up to $2,000 credit per return
When Available
Hope Credit - Available ONLY until the first 2 years of post- secondary education are completed.1
Lifetime Learning Credit - Available for all years of post-secondary education and for courses to acquire or improve job skills.
Educational Pursuit
Hope Credit - Student must be pursuing an undergraduate degree or other recognized education credential.
Lifetime Learning Credit - Student does not need to be pursuing a degree or other recognized education credential
Enrollment Requirements
Hope Credit - Student must be enrolled at least half time for at least one academic period beginning during the year.
Lifetime Learning Credit - Available for one or more courses
Prior Legal Issues
Hope Credit - No felony drug conviction on student’s record.
Lifetime Learning Credit - Felony drug conviction rule does not apply
1 For 2009 and 2010, these features fall under the provisions of the American Opportunity Tax Credit. Please refer to these features as described in the Hope Credit section of this report.
Next week I will begin discussing the basics of financial aid, including discussions on grants, loans, and steps to take now to increase your chances of obtaining financial aid for yourself or your child.
Tuesday, December 15, 2009
The Costs & Rewards of a College Education
Part 6 - Tax Incentives for Higher Education Expenses: The Hope Tax Credit
There are two tax credits available to help you offset the costs of higher education by reducing the amount of your income tax. They are the Hope Credit and the Lifetime Learning Credit, also referred to as education credits. A tax credit reduces the amount of income tax you may have to pay. Unlike a deduction, which reduces the amount of income subject to tax, a credit directly reduces the tax itself. This week, I will be focusing on the Hope Tax Credit
Hope Tax Credit
Traditionally, the Hope credit provides a tax credit of up to 100% of the first $1,200 of qualified education expenses plus 50% of the next $1,200, per student per year. However, in February, 2009 the American Recovery and Reinvestment Act of 2009 was passed which modified the provisions of the Hope credit. These new provisions are explained in greater detail below and are applicable for 2009 and 2010 only.
The credit is based on qualified education expenses you pay for yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. Further, the Hope credit is only available for full-time students in the first two years of post-secondary education at an eligible institution.
For purposes of the Hope credit, qualified education expenses include tuition and certain related expenses required for enrollment or attendance at an eligible educational institution. Student-activity fees and expenses for course-related books, supplies, and equipment are included in qualified education expenses only if the fees and expenses must be paid to the institution as a condition of enrollment or attendance. Expenses such as room and board, insurance, and medical expenses (including student health fees) do not qualify for the Hope credit.
Generally, the credit is allowed for qualified education expenses paid in a calendar year for an academic period beginning in that year or in the first 3 months of the following year. For example, if you paid $2,000 in December 2008 for qualified tuition for the Spring 2009 semester beginning in January 2009, you may be able to use that $2,000 in figuring your 2008 credit.
The amount of your Hope credit for 2008 is gradually reduced (phased out) if you are filing single and your modified adjusted gross income (MAGI) is between $48,000 and $58,000 ($96,000 and $116,000 if you file a joint return). You cannot claim a credit if your MAGI is $58,000 or more ($116,000 or more if you file a joint return). For most tax-payers, MAGI is simply their adjusted gross income (AGI) as figured on their federal income tax return.
To claim the Hope tax credit, the student for whom you pay qualified education expenses must be an eligible student. This is a student who meets all of the following requirements:
As mentioned earlier in this section, the American Recovery and Reinvestment Act of 2009 temporarily modified some of the provisions of the Hope credit. For 2009 and 2010 the American Opportunity Tax Credit is the new name of the Hope credit program. The new law temporarily enhances the existing Hope education credit for 2009 and 2010 only in:
Under the new credit, the maximum $2,500 per year would be allowed on $4,000 in qualifying payments (100 percent of the first $2,000 and 25 percent of the next $2,000). Although this credit would be made retroactive to January 1, 2009, it does not automatically apply to a college semester that begins in 2009. Tuition paid late in 2008 for an upcoming 2009 semester qualifies only for a 2008 credit under existing rules. Further, forty percent (.40) of the Hope Credit is now a refundable credit, which means that you can receive up to $1,000 even if you owe no taxes.
Next week, I will focus on the Lifetime Learning Credit and how it can be an additional benefit for college expenses.
There are two tax credits available to help you offset the costs of higher education by reducing the amount of your income tax. They are the Hope Credit and the Lifetime Learning Credit, also referred to as education credits. A tax credit reduces the amount of income tax you may have to pay. Unlike a deduction, which reduces the amount of income subject to tax, a credit directly reduces the tax itself. This week, I will be focusing on the Hope Tax Credit
Hope Tax Credit
Traditionally, the Hope credit provides a tax credit of up to 100% of the first $1,200 of qualified education expenses plus 50% of the next $1,200, per student per year. However, in February, 2009 the American Recovery and Reinvestment Act of 2009 was passed which modified the provisions of the Hope credit. These new provisions are explained in greater detail below and are applicable for 2009 and 2010 only.
The credit is based on qualified education expenses you pay for yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. Further, the Hope credit is only available for full-time students in the first two years of post-secondary education at an eligible institution.
For purposes of the Hope credit, qualified education expenses include tuition and certain related expenses required for enrollment or attendance at an eligible educational institution. Student-activity fees and expenses for course-related books, supplies, and equipment are included in qualified education expenses only if the fees and expenses must be paid to the institution as a condition of enrollment or attendance. Expenses such as room and board, insurance, and medical expenses (including student health fees) do not qualify for the Hope credit.
Generally, the credit is allowed for qualified education expenses paid in a calendar year for an academic period beginning in that year or in the first 3 months of the following year. For example, if you paid $2,000 in December 2008 for qualified tuition for the Spring 2009 semester beginning in January 2009, you may be able to use that $2,000 in figuring your 2008 credit.
The amount of your Hope credit for 2008 is gradually reduced (phased out) if you are filing single and your modified adjusted gross income (MAGI) is between $48,000 and $58,000 ($96,000 and $116,000 if you file a joint return). You cannot claim a credit if your MAGI is $58,000 or more ($116,000 or more if you file a joint return). For most tax-payers, MAGI is simply their adjusted gross income (AGI) as figured on their federal income tax return.
To claim the Hope tax credit, the student for whom you pay qualified education expenses must be an eligible student. This is a student who meets all of the following requirements:
- The student did not have expenses that were used to figure a Hope credit in any 2 earlier tax years.
- The student had not completed the first 2 years of postsecondary education (generally, the freshman and sophomore years of college) before the current calendar year.
- For at least one academic period beginning in the current calendar year, the student was enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential.
- The student has not been convicted of any federal or state felony for possessing or distributing a controlled substance as of the end of the current calendar year.
- Deduct higher education expenses on your income tax return (as, for example, a business expense) and also claim a Hope credit based on those same expenses.
- Claim a Hope credit in the same year that you are claiming a tuition and fees deduction for the same student.
- Claim a Hope credit and a lifetime learning credit based on the same qualified education expenses.
- Claim a Hope credit based on the same expenses used to figure the tax-free portion of a distribution from a Coverdell education savings account (ESA) or qualified tuition program (QTP), such as a 529 plan.
- Claim a credit based on qualified education expenses paid with a tax-free scholarship, grant, or employer-provided educational assistance.
As mentioned earlier in this section, the American Recovery and Reinvestment Act of 2009 temporarily modified some of the provisions of the Hope credit. For 2009 and 2010 the American Opportunity Tax Credit is the new name of the Hope credit program. The new law temporarily enhances the existing Hope education credit for 2009 and 2010 only in:
- Amount – The maximum amount of the Hope Credit increases from $1,800 to $2,500 per student.
- Availability – The Hope Credit can now be claimed for the first four years of post-secondary education, and
- Phase-out level – The credit is phased out (gradually reduced) if your modified adjusted gross income (AGI) is between $80,000 and $90,000 ($160,000 and $180,000 if you file a joint return).
Under the new credit, the maximum $2,500 per year would be allowed on $4,000 in qualifying payments (100 percent of the first $2,000 and 25 percent of the next $2,000). Although this credit would be made retroactive to January 1, 2009, it does not automatically apply to a college semester that begins in 2009. Tuition paid late in 2008 for an upcoming 2009 semester qualifies only for a 2008 credit under existing rules. Further, forty percent (.40) of the Hope Credit is now a refundable credit, which means that you can receive up to $1,000 even if you owe no taxes.
Next week, I will focus on the Lifetime Learning Credit and how it can be an additional benefit for college expenses.
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