1. Answers to Questions from the Paying for Post-Secondary Expenses- Part 1 Webinar
Dr. Barbara O’Neill, Rutgers Cooperative Extension
oneill@aesop.rutgers.edu
1. Is there a way to refinance already-consolidated student loan debt?
It depends upon the type of student loan debt (e.g., private versus government loans) and, obviously, you would
only want to do this if it makes economic sense because interest rates have fallen. In the case of federal (Direct)
student loans, refinancing opportunities are limited because you can only refinance if you are adding new
money (i.e., a new federal Direct student loan) to the existing federal loan mix. This would not be the case if
you have graduated and have not incurred additional educational expenses. Two other exceptions where
refinancing may be allowed on federal loans are default status and when someone intends to apply for the
Public Service Loan Forgiveness program. Private loans, on the other hand, can be refinanced after they have
been consolidated. Costs for loan application and other associated fees will vary from lender to lender.
For more information, refer to: http://business.time.com/2013/02/20/why-cant-people-with-student-loans-
refinance-at-better-rates/ and http://www.bankrate.com/finance/student-loans/refinance-student-loans-
consolidated.aspx and http://www.ehow.com/how_5504976_refinance-consolidated-student-loan.html.
2. For the Public Service Loan Forgiveness program, can two [partial] payments to one account in one
month count toward the required 120 payments or does it have to be one [full payment] per month?
You must make 120 separate, on-time payments. Each of the monthly payments must be for the full scheduled
installment amount within 15 days of the payment due date. The payments do not have to be consecutive,
however, but borrowers must be employed by a qualifying public service organization. For more information,
refer to http://studentaid.ed.gov/sites/default/files/public-service-loan-forgiveness-common-questions.pdf.
3. Can 529 college savings plans be used to save money for vocational training as well as college?
Yes. 529 plans provide tax advantages for saving for “other post-secondary training” as well as for college.
Students must attend an eligible educational institution. This includes any college, university, vocational school,
or other post-secondary educational institution eligible to participate in a student aid program administered by
the U.S. Department of Education. Check to ensure that a specific vocational or technical training school is
accredited. For more information, refer to: http://www.irs.gov/uac/529-Plans:-Questions-and-Answers and
http://www.savingforcollege.com/articles/20091016-10-top-misconceptions-about-529-plans.
4. What is the effect on financial aid of having a grandparent control a 529 savings plan?
Typically, a grandparent opens the account and names a grandchild as the beneficiary. Unlike a custodial
(UGMA) account that eventually transfers account ownership to a minor child, with a 529 college savings plan,
the account owner (grandparent) decides how and when to spend the money. 529 savings by a grandparent are
not reported as a student asset on the Free Application for Federal Student Aid (FAFSA) form. However, any
distribution from a 529 plan is reported as income to the beneficiary, potentially reducing eligibility for need-
based aid the following year. For more information about grandparent-owned 529 savings plans, refer to:
https://www.fidelity.com/viewpoints/abcs-of-529-college-savings and http://www.fastweb.com/financial-
aid/articles/3486-how-do-grandparent-owned-529-college-savings-plans-affect-financial-aid-eligibility.

2. 5. What happens if a child gets scholarships, grants, or other financial aid and doesn’t use funds saved
in a 529 plan and there are no siblings to pass it on to?
If parents put money in a 529 college savings plan and later find that their children no longer want to go to
college, or the money isn’t needed because there are other sources of college funding, then they would have
to pay a tax penalty to take the money out for other uses. The earnings portion of non-qualified withdrawals is
taxed as ordinary income at the account owner's marginal income tax rate, plus a 10% tax penalty. For a list of
marginal tax rates, see http://njaes.rutgers.edu/money/taxinfo/. With respect to this question, if the beneficiary
receives a scholarship, the 10% tax penalty is waived on distributions up to the amount of the scholarship. Note
that states may also assess penalties in addition to income tax on the earnings portion of a non-qualified
distribution (e.g., recapture of previously-deducted amounts for state tax write-offs for 529 plan savings).
For more information, refer to http://money.msn.com/saving-money-tips/post.aspx?post=72106ec9-b32c-4fec-
8155-e7d0045cba0d and http://www.finaid.org/savings/529plans.phtml.
6. Is there a gift created by a donor putting money into a 529 plan to cover a beneficiary’s college costs?
Gifts to a 529 savings account qualify for the annual exclusion from gift tax, which is $14,000 per donee per
year in 2013 (this amount is indexed periodically for inflation). In addition, donors are allowed to make up to
five years’ worth of annual exclusion gifts ($70,000 in 2014) at once, the so-called front-loading strategy, by
making a special election on their gift tax return. Couples can make a tax-free gift to a donee of up to $140,000.
It should also be noted there is no limit to what donors can give and no gift tax liability if they pay the donee’s
tuition bill directly. For more information, refer to http://www.thoits.com/resources/gfx/taen3_0410.pdf.
7. Is there a gift created by a donor putting money into a trust to cover a beneficiary’s college costs?
This is a question that may be best answered by an attorney because there are different types of trusts (e.g.,
revocable, irrevocable, Crummey, 2503(c) trusts) that can be created, each with unique rules and gift and estate
tax implications. For example, donors who set up an irrevocable trust cannot get their money back as they could
if they put their gift into a revocable trust or a 529 college savings plan. Also, keep in mind that set up and
ongoing administrative fees for trusts are expensive and ongoing. For more information about using trusts for
college savings, see http://www.education.com/reference/article/college-saving-types-working-of-trusts/ and
http://atyourlibrary.org/connectwithyourkids/college-and-careers/how-pay-college-educational-tax-credits-
trusts-and-other-financial-vehicles.
With respect to gift taxes in general, lifetime limits apply. In 2013, the amount that people can gift over their
lifetime without having to pay gift and estate taxes is $5,250,000. For more information about annual limits
relating to financial planning, see http://www.cffpinfo.com/pdfs/2013_Annual_Limits.pdf.
8. Can you use a Coverdell Education Savings Account (ESA) and a 529 savings plan at the same time?
If, by the word “use,” you mean, can you make deposits into both college savings plans simultaneously, the
answer is yes, up to the maximum annual limit for each plan (e.g., $2,000 for a Coverdell ESA). By doing so,
someone can maximize both savings and tax benefits. Also, some people earmark an ESA to cover grade K-12
expenses and a 529 plan for college. For more information, refer to http://www.fool.com/college/college05.htm
and http://www.wisegeek.com/what-is-a-coverdell-esa.htm#didyouknowout.

3. If, by the word “use,” you mean taking withdrawals from these plans simultaneously when a child is ready for
college, this can be done also but care must be taken to create a “paper trail” indicating that separate
withdrawals from each type of savings plan paid for different qualified educational expenses. In other words, no
“double-dipping” is allowed. Rather, qualified educational expenses must be allocated between the two
accounts. For more information, refer to: http://www.360financialliteracy.org/Topics/Paying-for-
Education/College-Savings-Options/529-Plans-vs.-Coverdell-Education-Savings-Accounts.
9. How can financial counselors and educators motivate parents to save for education expenses?
As with savings for any type of financial goal (e.g., vacations and retirement), automation helps. Encourage
parents to automate their college savings with monthly deposits to a 529 plan, mutual fund, credit union, or any
other taxable or tax-advantaged account. Many mutual funds and 529 education savings plans have automatic
investment options that allow deposits as low as $15 to $25 per month. Any amount of savings is better than
nothing. For a list of state 529 plan minimum contribution amounts, refer to:
http://www.savingforcollege.com/compare_529_plans/?plan_question_ids%5B%5D=387&page=compare_plan
_questions.
Calculators can also be persuasive. An example is a simple seven-step calculator from the FINRA Investor
Education Foundation: http://apps.finra.org/Calcs/1/CollegeSavings. Seeing the actual dollar amount of savings
that is possible, even from small savings deposits, can encourage people to save. Another motivational strategy
is to show parents the benefits of post-secondary education in terms of a child’s future earnings and an
enhanced lifestyle. A good resource to describe the benefits of a college education is the video Five Ways Ed
Pays: http://www.youtube.com/watch?v=spNDLD2KRuA
10. What educational expenses are considered qualified educational expenses for tax benefits?
It depends on what tax benefit you are claiming or savings program you are using.
Qualified education expenses under the American Opportunity Credit are:
• Tuition and student-activity fees are included only if the fees are paid to the institution as a condition of
enrollment and attendance.
• Expenses for books, supplies, and equipment needed for a course of study whether they are purchased from the
educational institution or not.
Qualified education expenses under the Lifetime Learning Credit are:
• Tuition, student-activity fees, and expenses for course-related books, supplies, and equipment only if the fees
and expenses must be paid to the institution as a condition of enrollment or attendance.
Qualified higher education expenses for Coverdell Education Savings Accounts (ESAs) and 529 plans
include tuition and fees, required books, supplies, and equipment, special needs services, and room and board
paid directly to educational institutions for students who are enrolled at least half time.
For more information, refer to: http://turbotax.intuit.com/support/iq/Education/What-are-Qualified-Education-
Expenses-/GEN80422.html. and http://www.irs.gov/publications/p970/ and http://www.dummies.com/how-
to/content/higher-education-expenses-that-qualify-for-529-col.html and http://www.dummies.com/how-
to/content/qualified-education-expenses-in-coverdell-college-.html.