In this video, we walk through 5 TCP practice questions teaching about planning for funding post-secondary education. These questions are from TCP content area 1 on the AICPA CPA exam blueprints: Tax Compliance and Planning for Individuals and Personal Financial Planning.
The best way to use this video is to pause each time we get to a new question in the video, and then make your own attempt at the question before watching us go through it.
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Funding Post-Secondary Education
Planning for funding post-secondary education requires understanding the various options available to students and families, each offering unique benefits. These main options include federal student loans, qualified tuition programs (often referred to as 529 plans), grants, and scholarships. By considering these sources comprehensively, students can create a financial plan that minimizes debt while maximizing educational opportunities.
Federal Student Loans
Federal student loans are a critical component of many students’ educational funding strategies. These loans are backed by the federal government and typically offer lower interest rates and more flexible repayment terms than private student loans.
For example, Direct Subsidized Loans are available to undergraduate students with financial need, and the government pays the interest on these loans while the student is in school at least half-time, for the first six months after graduating, and during deferment periods. Additionally, federal loans come with benefits such as income-driven repayment plans, which adjust your monthly payments based on your income and family size. There’s also the potential for loan forgiveness programs for those who work in public service or teaching. These features make federal student loans a preferable option for many students, as they provide significant safety nets during both school and post-graduation periods.
Qualified Tuition Programs (529 Plans)
529 plans are tax-advantaged savings plans designed to encourage saving for future college costs. Legislated under Section 529 of the Internal Revenue Code, these plans are sponsored by states and educational institutions. Contributions to 529 plans are not federally tax-deductible, but they can grow tax-free, and withdrawals used for qualified education expenses are exempt from federal tax. Some states also offer deductions or credits for contributions, enhancing the tax benefits.
An example of using a 529 plan could include a family starting to save for a child’s education right from birth, allowing the investment to potentially grow significantly over time. These funds can then be used for a variety of expenses, including tuition, room and board, and textbooks at any accredited university, college, or vocational school.
Grants
Grants are essentially free money provided to students to help cover the costs of education and do not require repayment. They are often need-based, meaning they are awarded based on the student’s or family’s financial situation. The federal government offers several types of grants, such as the Pell Grant, which is available to undergraduate students who display exceptional financial need and have not earned a bachelor’s, graduate, or professional degree. Institutions and states also offer grants that might be merit-based, need-based, or a combination of both. Grants can cover a wide range of educational expenses and are particularly beneficial for reducing out-of-pocket costs without increasing student debt.
Scholarships
Scholarships are another form of financial aid that does not require repayment. They can be merit-based, need-based, or criterion-based (such as specific scholarships for students who participate in certain activities or who meet demographic criteria). Scholarships are offered by a plethora of providers, including schools, religious groups, private companies, nonprofits, communities, and professional and social organizations.
An example is the National Merit Scholarship, which is awarded based on standardized test scores as well as secondary school records. Scholarships can significantly decrease the cost of education and are often seen as prestigious awards that can enhance a student’s resume.
In practice, most students use a combination of these funding sources. For instance, a student might use a scholarship to cover tuition fees, a grant to pay for books, a 529 plan to manage room and board, and a federal student loan to cover additional expenses or unexpected costs.
Conclusion
Each funding option requires different processes and criteria for eligibility. Early planning is essential, and it can be beneficial to consult with a financial advisor or school financial aid officer to explore the best strategies for funding education based on individual circumstances. Proper planning enables students to maximize their funding options with minimal debt, setting them up for financial stability post-graduation.
