Title: HS 300 Financial Planning: Process and Environment
1HS 300 Financial PlanningProcess and Environment
- Chapter 8
- Financial Planning Applications
2Learning Objectives
3Learning Objectives
- 1. Identify the two funding requirements
associated with financing a college education. - 2. Describe the process for calculating the
resources required to fund a college education
including the types of investments typically
considered for this purpose. - 3. Describe the various tax deductions, tax
credits, and penalty waivers that are available
to encourage saving for a college education.
4Learning Objectives (Continued)
- 4. Explain how a college students financial need
is determined for purposes of obtaining federal
student aid, and describe the various types of
federal student aid available. - 5. Explain why emergency fund planning is an
indispensable part of financial planning. - 6. Explain how an adequate amount of funding for
emergencies is estimated and what types of
investments are most appropriate for this purpose.
5Learning Objectives (Continued)
- 7. Identify the key types of household debt.
- 8. Explain the difference between secured and
unsecured debt. - 9. Describe the activities involved in credit and
debt management and explain how they relate to
the steps in the financial planning process.
6Learning Objectives (Continued)
- 10. Explain the uses of the financial position
statement and the cash flow statement in
carrying out credit and debt management
activities. - 11. Explain the ways in which leasing an
automobile differs from purchasing it, and
identify the key characteristics of people who
are particularly suited for leasing rather than
buying an automobile. - 12. Explain how a leases monthly payment is
calculated.
7Learning Objectives (Continued)
- 13. Explain the differences between a home
equity loan and a home equity line of credit,
and calculate the maximum amount a consumer
can borrow under each. - 14. Calculate the amount of home equity debt on
which interest is deductible for federal income
tax purposes. - 15. Describe the key features and principal uses
of the three types of bankruptcy available to
consumers in the United States.
8Discussion Break
- Should Sec. 529 plan assets be included as
student assets, parental assets, or excluded from
the financial aid calculation?
9Discussion Follow-up Sec. 529 Plan Assets
10Sec. 529 PlansTreatment for Financial Aid
- College savings account in parents name with
student as beneficiary - Considered parents assets for Federal Financial
Aid (FFA)
11Sec. 529 PlansTreatment for Financial Aid
- College savings account in students name, or a
trust or custodian for the student with student
as beneficiary - Not considered students assets for FFA
12Sec. 529 PlansTreatment for Financial Aid
- College savings account in third partys name
(grandparents) with student as beneficiary - Has no effect on FFA
13Sec. 529 PlansTreatment for Financial Aid
- College savings account in parents name, with
students siblings as beneficiaries - Has no effect on FFA
14Sec. 529 PlansTreatment for Financial Aid
- Prepaid tuition plan
- Legislation enacted in 2006 makes the tax
treatment consistent with the Section 529 Savings
Plans
15College Savings
16College Savings
- Education inflation
- Calculating the funding requirement
- Lump sum
17College Savings
- Calculating the funding requirement
- Monthly savings
- Current cost
- Education inflation rate
- Number of years until matriculation
- Investment returns (tax status)
18Selecting a Portfolio
- Taxable account
- Tax advantaged
- Coverdell Education Savings Account
- Sec. 529 Qualified Tuition Plans
- Savings bonds for education
- Roth and traditional IRAs
19Selecting a Portfolio
- CDs
- Savings bonds
- Baccalaureate bonds
- Stocks/bonds/cash
- Mutual funds investing in stocks/bonds/cash
- CollegeSure CDs
20Whose Money?
21Titling Accounts in Childs Name
- Uniform Gift to Minors (UGMA)
- Uniform Transfers to Minors (UTMA)
- Tax code changes in 2007 to kiddie tax make these
approaches unattractive as a repository for
college savings
22Trusts
- Sec. 2503(b) trust
- Income paid annually to beneficiaries
- Trust can retain funds past age of majority
- Annual gift tax exclusion for income rights
- Delayed payment of principal until funds are
needed for college
23Trusts
- Section 2503(c) trust
- Income can accumulate
- Delay payment of principal
- Trust payable at age of majority
24Trusts
- Irrevocable trust with Crummey provision
- Allows income and principal distribution/accumulat
ion as needed - Trust can last as long as the income
beneficiaries live
25Trusts
- Disadvantages
- FAFSA counts trusts as asset of child (35 percent
expected contribution) - Trust expenses
- Set-up
- Taxation
- Administration
26Sec. 2503(e)
- Exclusion from taxable gifts if grandparents pay
college costs directly to the college
27Ownership Issues
- Kiddie tax impact
- Age of majority issues
- FAFSA implications
28Tax Incentives
29Tax Credits
- Hope Scholarship Tax Credit
- 1,500/student/year first 2 years of
postsecondary education - Phaseout based on modified adjusted gross income
(MAGI) - Must be at least half-time student for at least
one academic period
30Tax Credits
- Lifetime Learning Tax Credit
- 2,000 calculated as 20 first 10,000 qualified
expenses - Available for an unlimited number of years
- Student does not have to be pursuing degree
- Phaseout based on MAGI
31Tax Deduction
- Deductibility of higher education expenses
- 4,000 maximum deduction
- Started in 2004
- Phaseout based on MAGI
- Use of tax credits and other tax- advantaged
programs limits deduction
32Interest Exclusion
- Savings bonds for education
- Phaseout subject to MAGI
- Bonds cannot be held in childs name
33Alternative Strategies
34Alternative Strategies
- Investing in college housing
- Family partnerships
- 401(k) plan loans
- Cash value life insurance policy loans
- Roth traditional IRA distributions
35Applying for Financial Aid
36Free Application for Federal Student Aid (FAFSA)
- Expected student contribution 35 percent
- Spend kids money first
- Expected parent contribution 5.6 percent
- Exemptions and exclusions drive down asset base
and expected contributions
37Free Application for Federal Student Aid (FAFSA)
- Terminology
- Expected family contribution (EFC)
- Cost of attendance (COA)
- Student aid report (SAR)
38Student Aid
- Federal Pell Grant
- Need-based
- Up to 4,050/year
39Student Aid
- Federal Supplemental Education Opportunity Grant
(FSEOG) - Need-based
- Up to 4,000/year
40Student Aid
- Federal Perkins loans
- Need-based
- 4,000/year
- 20,000 cumulative
41Student Aid
- Stafford loans
- Available from Direct Loans or FFEL
- Subsidized (need based) interest deferred
- Unsubsidized interest accrues
- Variable interest rate set annually
42Student Aid
- PLUS loans
- Available from Direct Loans or FFEL
- Interest accrues from disbursement
- College resources
- Scholarships
- Grants
43Emergency Fund Planning
44Emergency Fund
- Keeps the financial ship afloat in fiscal storms
- 3 to 6 months worth of living expenses
- Cash or liquid investments
45Emergency Fund
- Keeps the financial ship afloat in fiscal storms
- Amount influenced by
- Job security
- Wages/salary/commission/bonus
- Characteristics of investment portfolio
- Other available sources of cash
46Credit and Debt Management
47Credit and Debt Management
- Mortgage debt (secured)
- First mortgage
- Second mortgage
- Home equity loan
- Home equity line of credit (HELOC)
48Credit and Debt Management
- Consumer debt
- Personal loans
- Auto loans (secured)
- Credit card debt
49Credit and Debt Management
- Client financial statements
- Credit report
- Credit score
50Credit and Debt Management
- Five C(s) of credit
- Character
- Capacity
- Collateral
- Capital
- Conditions
51Ratio Analysis
- Debt service ratio
- Total loan payments/gross income
- Front ratio (28)
- Housing costs (PITI)/gross income
- Back ratio (36)
- Total debt/gross income
52Financing Alternatives
53Leasing Versus Buying a Car
- Open versus closed-end lease
- Capitalized cost
- Money factor interest rate/24
54Leasing Versus Buying a Car
- Residual value
- Monthly depreciation
- Monthly lease rate
- Monthly sales tax
55First Mortgages
- First mortgage
- 80 percent LTV is the cutoff for PMI
- FHA and VA have government guarantees
- Fixed 30/15
56First Mortgages
- First mortgage
- Adjustable (ARM)
- Hybrid
- Interest only
57Discussion Break
- When should a client prepay his or her mortgage
either from the perspective of paying it off or
making additional principal payments each month?
- Would your answer change if you had an
assets-under-management agreement with the client?
58Financing Alternatives (Continued)
59Second Mortgages
- Status as second means LTV is critical to lender
- Home equity loan
- Fixed rate
- Fixed term
- Fixed payment
60Second Mortgages
- Home equity line of credit (HELOC)
- Variable rate
- Pricing index plus spread
- Caps/floors/collars
- Interest only payments in early years
- Hybrids available
61Bankruptcy After the 2005 Bankruptcy Reform Act
- There is now a means-based test to determine who
can qualify for a Chapter 7 filing. Mandatory
credit counseling and financial education became
part of the bankruptcy process. You cannot file
a Chapter 7 bankruptcy if you obtained a
discharge of your debts in a Chapter 7 case
within the last 8 years, or a Chapter 13 case
within the last 6 years.
62Chapter 7 Bankruptcy
- Chapter 7 liquidation
- Formation of bankruptcy estate from petitioners
eligible assets used to pay creditors - Court discharges all eligible debts
- Stays on credit report for 10 years
63Chapter 13 Bankruptcy
- Petitioner must have income that exceeds
reasonable living expenses - Three-year repayment plan
- Eligible debts remaining after completion of
repayment plan are discharged by the bankruptcy
court - Debtor retains property whether exempt or
non-exempt - Filing remains on credit report for 7 years
64Chapter 11 Reorganization
- Less common for individuals
- Plan must be approved by a majority of creditors
in each class and by enough creditors in each
class to equal 2/3 of the indebtedness in that
class - Debtor retains possession of assets and continues
to operate business
65Chapter Eight Review
66Chapter Eight Review
- Three main applications
- College funding
- Emergency fund planning
- Debt management
- Know your client and make appropriate
recommendations