CFP - General Principles of Financial Planning (15% of the exam) - Section B.15

Education funding

Federal financial aid through the FAFSA and the Student Aid Index, grants, federal and private loans, work-study, scholarships and the American Opportunity and Lifetime Learning credits, and how to combine vehicles and aid so a family funds education at the lowest after-tax cost.

FAFSAAmerican Opportunity Tax CreditLifetime Learning Credit

Practice question for this objective

Free sampleGeneral Principles of Financial Planningmedium

Priya and Tom are about to file the FAFSA for their dependent son and hold 20,000 dollars earmarked for his education. They are deciding whether to keep the money in an account they own or move it into an account he owns. Assume reportable parental assets are assessed at 5.64 percent, reportable student assets are assessed at 20 percent, no asset protection allowance applies, and income assessment is unchanged. By how much would the assessed contribution from this 20,000 dollars rise if the money were held in the son's name rather than the parents'?

A2,872 dollars Correct
B4,000 dollars
C1,128 dollars
D5,128 dollars

Quantify the aid cost of titling education savings in a dependent student's name rather than a parent's under the two FAFSA asset assessment rates. The assessed contribution from an asset is the balance multiplied by the rate applied to its owner. At 20 percent, 20,000 dollars in the son's name produces 4,000 dollars; at 5.64 percent, the same balance in the parents' names produces 1,128 dollars. The question asks for the rise, so the answer is 4,000 minus 1,128, or 2,872 dollars. The comparison, not either figure alone, is what drives the titling decision.

Why A is correct: Correct: 20,000 dollars assessed at 20 percent is 4,000 dollars in the son's name against 1,128 dollars at 5.64 percent in the parents' names, and the increase is the difference of 2,872 dollars.

Why B is wrong: This is the student-owned figure on its own and treats the parent-owned alternative as producing nothing, but parental assets are still assessed at 5.64 percent, so only the difference between the two is the increase.

Why C is wrong: This is the assessed contribution while the money stays with the parents, which is the starting point rather than the rise, so it answers a question the stem did not ask.

Why D is wrong: This adds the two assessed amounts instead of subtracting them, which would double count the same 20,000 dollars as both a parental and a student asset in the same year.

See more CFP practice questions, answers explained.

Exam traps in General Principles of Financial Planning

Answers that look right on this material and are not. Each one is a distractor from a different question in the CFP bank for this domain.

Apply for the Parent PLUS Loan first because it is available to the parent without a need test, then draw the Direct Subsidized Loan only if a gap remains.
Why it is wrong: Tempting because a PLUS Loan needs no demonstration of need, but it carries a higher interest rate, accrues interest from disbursement, and shifts the debt to the father, so using it before the subsidised loan wastes the cheapest money available.
Pay the whole 12,000 dollars from the 529 plan and claim the Lifetime Learning Credit, which carries no limit on the number of years of study.
Why it is wrong: The description of the Lifetime Learning Credit is accurate, but expenses paid with a tax-free 529 distribution cannot also support a credit, so no expenses remain to claim; even with expenses available, the credit is worth less per dollar than the American Opportunity Tax Credit.
The lender must honour a cancellation request now, because the 341,000 dollar balance is already below 344,000 dollars, which is 80 percent of the 430,000 dollar appraised value
Why it is wrong: Using the fresh appraisal is tempting because a rising market really does improve the lender's collateral position. The federal cancellation right is measured against the original value of the property, not a later appraisal, so an appreciation based request depends on the lender's own policy rather than on a statutory obligation.

Examworthy is not affiliated with or endorsed by CFP Board. Original, blueprint-aligned practice material only.