Author: Adrienne Ross, CFP®, AFC®

Categories
Financial Planning

Special Needs Planning Considerations

Mom and Dad with Special Needs son

Special Needs Planning Considerations:

ABLE Accounts, Special Needs Trusts and the Survivor Benefit Plan

Military retiree benefits provide additional planning opportunities and considerations for families of special needs children and adults. In every instance, I recommend working with both an estate planning attorney with experience in special needs planning and an experienced military financial advisor. Navigating Tricare coverage and survivor benefits plan options available for special needs beneficiaries make the planning process more important and more complex. Additionally, each state will have different public benefits that may be available, so where you live or plan to live adds an additional element to consider. 

One of the major goals of special needs planning is to avoid disruption of eligibility for certain means-tested government benefits for the special needs individual. This is particularly important as the parents age and when they pass away. Two different tools that can be used to preserve eligibility for means-tested benefits include Special Needs Trusts and ABLE accounts. 

Special Needs Trusts (SNTs) and Achieving a Better Life Experience (ABLE) accounts are financial management tools designed to assist individuals with disabilities and their families in managing resources and securing their financial future. Here’s an overview of each:

Special Needs Trusts (SNTs):

    • Purpose: SNTs are legal arrangements created to hold and manage assets for the benefit of a person with a disability. The trust is designed to supplement government assistance programs like Medicaid and Supplemental Security Income (SSI) without jeopardizing eligibility.
    • Types:
    • Management: A trustee is appointed to manage the trust and make decisions about the use of funds for the benefit of the individual with special needs.

I cannot stress the importance of choosing an appropriate trustee enough. Often a family member is chosen to serve as the trustee of the SNT. While this can be a good thing, it is important to make sure that the trustee is fully aware of their responsibilities and equipped to handle them. Trustees have a fiduciary obligation to the beneficiary of the trust. This means they are legally obligated to act on behalf of the beneficiary’s interest. This includes understanding the coordination of benefits and how best to meet the needs of the beneficiary, filing an annual tax return and providing an annual accounting report. Placing someone in that position who is not aware of or equipped to fulfill these obligations leads to negative outcomes for everyone involved. If you aren’t sure who to name as the trustee, there are many organizations around the country who will serve as professional trustees on special needs trusts. 

Once a first-party special needs trust is established, the beneficiary may not be changed. However, beneficiaries of third-party special needs trusts may be subject to change depending on the language in the trust document.

While beneficiaries are living, the funds within a first-party trust protect the beneficiary’s ability to qualify for means tested public benefits. Once the beneficiary passes away, the funds within the trust are subject to state Medicaid reimbursement. A key element to remember while developing your planning is that third-party special needs trusts are not subject to state Medicaid reimbursement. 

  • Benefits: SNTs provide additional options for providing for the future needs of a family with disabilities that will protect their eligibility for certain means tested government benefits, provide a pool of money to supplement those benefits and allow military retirees to incorporate SBP into their planning. 
    • Protects eligibility for government benefits.
    • Provides for supplemental needs not covered by public assistance.
    • Enables family members to contribute to the individual’s financial well-being. Military members and retirees may elect Survivor Benefit Plan (SBP) benefits for their children with disabilities. This may be done under the spouse-child option when the child has a long-term disability or as a child only option. The coverage applies even when the beneficiary has aged into adulthood. A self-funded special needs trust can be used to ensure the money doesn’t put other government benefits that the child may be using at risk. However, SBP payments would need to be irrevocably assigned to the self-funded special needs trust. You will need to coordinate between your attorney and DFAS to make sure the benefits are correctly assigned.
    • First-party special needs trusts and third-party special needs trusts are not subject to annual contribution limits. There are no limits on the total amount of money that can be held in either type of account.

Achieving a Better Life Experience (ABLE) Accounts:

      • Purpose: ABLE accounts are tax-advantaged savings accounts for individuals with disabilities. They allow eligible individuals to save and invest money without affecting their eligibility for certain means-tested benefits. Each state operates an ABLE account for beneficiaries in their state. However, much like 529 plans, you are not limited to investing only in the plan sponsored by your state.
      • Eligibility: Individuals must have a significant disability that occurred before the age of 26. Eligibility is not limited to those receiving SSI or SSDI.
      • Contributions: Contributions to ABLE accounts can be made by the account beneficiary, family members, or friends. Contributions are not tax-deductible, but earnings in the account grow tax-free. While there are some tax benefits to contributing to an ABLE account, the real benefit lies in the ability to set aside funds without disrupting eligibility for public benefits that may be needed now or in the future.

Many families with special needs children are unsure of how much assistance their children will need in the future. This is particularly true when their children are young. One great benefit of ABLE accounts is that you can rollover a 529 Plan account into an ABLE account. This allows families to save for their children’s future while keeping the flexibility to roll the money into an ABLE account if needed.

  • Use of Funds: ABLE account funds can be used for qualified disability expenses, including education, housing, transportation, healthcare, and other living expenses.
  • Benefits:
    • Allows individuals with disabilities to accumulate savings without losing government benefits.
    • ABLE accounts provide the beneficiary with a degree of financial independence and flexibility. This is particularly true for those who may have physical disabilities, who need public benefits assistance, and who also want to have direct control over their money. ABLE accounts can be used in conjunction with a special needs trust.
    • Offers a tax-advantaged way to save for disability-related expenses.

The rules and regulations for both SNTs and ABLE accounts can be complex, and it is always recommended to consult with an experienced special needs estate planning attorney. Coordinating with your financial advisor who is experienced in disability planning and military and federal benefits can help you consider all the options when it comes to utilizing your benefits to help provide for your loved ones.

The financial planners at the Military Financial Advisors Association are here to help you consider your options when it comes to planning for children and adult children with disabilities. Reach out to one of us today!

Categories
Financial Planning

Credit Reports and Scores Are More Important Than Ever!

Graphic of front and back of a credit card with half circle above with 5 sections green to yellow to red.

Credit Reports and Scores are more important than ever! 

In July, the Federal Reserve raised interest rates one more time to reach a 20 year high. Higher rates have meant savers are finally seeing their cash grow. Higher rates also mean that borrowing costs are the highest they have been in decades. Your credit score, which is driven by the data in your credit report, plays the largest role in determining the interest rate that lenders will offer you.

Consider this, auto loans for a new car through USAA start at 5.54% and 8.89% for a used car. When starting rates are over 5%, your credit report matters more than ever. Nothing illustrates this more than the cost of a Toyota Tacoma in 2003 vs 2023.  In 2003, you would have been paying 5.54% on a $12,610 loan. In 2023, you would pay 5.54% on a $30,415 loan for a new Toyota Tacoma, if you have the best credit report and score. Deliberately building your credit history saves you money and opens many more opportunities.

Credit Reports vs Credit Scores

One misconception that I see a lot is an outsized emphasis on credit scores without understanding the underlying credit report. This makes sense as credit scores get all the media attention. Credit scores are a quick summary of the complex financial data that is your financial life. Your credit report is a detailed compilation of your financial history. Lenders use that data to evaluate the risk of issuing a loan to a borrower. Lenders assess that risk by assessing the three Cs of credit reports: Character, Capacity, and Collateral. That assessment translates into your credit score. Build and manage your financial history and raising or maintaining your score will naturally follow.

High-Interest Rates

When rates rise, borrowing costs increase. You don’t need me to tell you about what you experience directly as a consumer. Rising rates also drive an increased risk of default. That rising default risk affects how lenders assess the three Cs. Default risk skews toward borrowers whose underlying financial data, captured in the credit report, reflect challenges to character, capacity, and capital. Those borrowers, whose increased risk of default is represented by a lower credit score, are the first to face the highest borrowing cost. They are also the first to lose access (get denied) to new credit as lending tightens. 

For borrowers with higher credit scores, those with positive character, capacity, and capital reflected in their credit report, also experience increased borrowing costs. However, lenders reserve the best rates for borrowers with more positive credit reports (and therefore higher credit scores). Borrowers with the best credit reports and scores typically maintain access to credit, even when lending tightens.

Building and managing your credit history is always important. Rising interest rates and tightening credit markets amplify the impact of negative credit reports on borrowers. 

Build a Better Credit Report- Your Score Will Follow

When it comes to building or rebuilding your credit report there are no quick fixes. This is because your credit report is your history of managing your financial life. Don’t get scammed by a pop-up ad promising to fix your credit history for a one-time payment. You already have the power to fix incorrect information, add statements to your file, and take steps to build positive history.

Start by checking your credit report

You can access your credit report for free at www.annualcreditreport.com. During the pandemic consumers were allowed to access free credit reports through Transunion, Experian, and Equifax weekly. This was a big change from the free credit report offered annually in the past. Annualcreditreport.com  continues to offer free credit reports weekly. So, check your credit report. Check your report even if you have good credit.

Review your credit report for inaccurate information

Read through all the pages of your credit report and make note of any inaccurate information, including things that you don’t remember. Use the dispute process offered by the credit reporting agency that manages the report to dispute incorrect information. These may be things like addresses you never lived at, phone numbers that aren’t yours, birthdates that are incorrect, aliases that aren’t yours, or credit items that you did not open. Review the inquiries on your credit report. If you have a lot of soft inquiries, or credit inquiries that were initiated by companies wanting to offer you credit, put yourself on the opt out list. Visit OptOutPrescreen.com and put yourself on the list to opt out of these offers. 

This is especially important for active duty military who move frequently. Imagine all those pre-screened offers for credit cards being sent to your old address and whoever lives there now. 

Review negative information

Your payment history is one way lenders assess your character, by reviewing your history of making payments on time. Reviewing your credit report can be emotionally difficult. Missed payments and defaults usually coincide with difficult times in peoples’ lives—a deployment, a really bad PCS, a spouse’s lost job, a divorce, a loss in the family. Reviewing your credit report can be a painful reminder of those times. If you have negative information on your credit report, look for a professional who understands credit and your situation as a military family. Accredited Financial Counselors (AFC®) and some Certified Financial Planner™ Professionals (CFP®) offer these services. Depending on your location, you may have access to a Personal Financial Counselor assigned to your base. If not, Military OneSource may be able to connect you to someone in your area or online.

Negative and accurate information can remain on your credit report for up to 7 years. Agencies treat negative medical payment information differently from other types of collections. If you find negative inaccurate information, file a dispute. If you find outdated information, negative payment history that is more than 7 years old, file a dispute and request removal. 

Mind your capacity

Your capacity reflects your ability to repay a loan. When you are reviewing your credit report, consider the total amount of debt that you have relative to your income. This is often referred to as your debt-to-income ratio. Look at each of your credit items to ensure that the details are correct. If you have a high debt to income ratio, paying down debt will result in an improved credit score. As your debt is paid down, your capacity to repay remaining debts increases.

Track your collateral

Having assets that can be used to repay a loan if you are no longer able to make monthly payments decreases the risk to the lender. Collateral can be short term savings, long term investments, equity in real estate, the market value of car or other items of value that you borrow against. While you may not use your savings to secure a loan, having cash savings in combination with a good payment history and a low debt to income ration can help you get the best rates when borrowing.

Military service members know that credit reports are used for more than just lending. Credit reports are used for security clearance reviews, by landlords, by insurance companies, and even by mobile phone carriers. Lenders routinely review credit reports on existing revolving credit to determine rates and eligibility.  As interest rates rise, building and maintaining your credit report will be important, even if you do not intend to apply for a new loan. Credit reports will continue to shape what you pay for cell phones and insurance. A positive credit report may be the key for future employment. 

Additional Resources

Consumer Finance tool for military

FDIC Consumer Resources

Service Member’s Civil Relief Act

Disputing Military Debt

Do you need help understanding your credit report or building a solid financial plan?  The MFAA advisors can help.  Consider setting up a call with one today.  You can see all our advisors here.

Categories
College

Student Loan Update- Where are we now?

Young Woman sitting at a desk with her hands on her face staring at her computer

For many student loan borrowers, the CARES Act, which paused student loan repayment and drove interest rates to 0.0%, was an extraordinary gift. Since that time, student loan borrowers have been on a wild rollercoaster ride. From expanded forgiveness under the Limited PSLF Waiver program that ended in October of 2022, to the IDR Account adjustment, to the promise of one-time forgiveness. It’s enough to make your head spin. So, what’s the status of loan forgiveness now? Unfortunately, we are still waiting to find out.

  • Many borrowers are still waiting for forgiveness under the PSLF waiver program as applications continue to be processed.
  • Many borrowers are still waiting for forgiveness or a payment count adjustment under the IDR Account Adjustment.
  • And I think all of us are waiting to learn the fate of student loan forgiveness under Biden’s one-time forgiveness plan.

The Limited Public Service Loan Forgiveness Waiver- Ended October 31, 2022

The application period for the Public Service Loan Forgiveness (PSLF) Waiver closed October 31, 2022. The waiver expanded what was counted as a “qualifying payment” making many borrowers suddenly eligible for forgiveness. The purpose was to correct many of the management errors that plagued the Public Service Loan Forgiveness program. Unfortunately, many borrowers are still wondering when they will see their payment count updated or receive confirmation that they qualify for forgiveness.

Public Service Loan Forgiveness is a federal program that forgives the remaining balance on Direct Loans for borrowers who are employed in certain public service jobs and make 120 qualifying payments on their loans. This program is designed to encourage individuals to pursue careers in public service.

As mentioned, the Limited PSLF Waiver expanded eligibility for forgiveness under PSLF. While borrowers still had to make 120 qualifying payments and work full-time for a qualifying employer, the program allowed for the following changes:

  • Borrowers could consolidate non-qualifying loans into a Direct Consolidation Loan and thereby qualify all their loans for forgiveness
  • Past periods of repayment while you were employed for a qualifying employer were counted even if you were not in a qualifying repayment plan
  • Periods of forbearance of greater than 12 months or 36 months cumulative were counted
  • COVID-19 forbearance periods count towards the 120 required payments

Below is a great chart summarizing the changes from StudentAid.gov:

Normal PSLF Requirements Limited PSLF Waiver
·       Receive credit only on Direct Loans ·       Receive credit for periods of repayment on Direct, FFEL, or Perkins Loans
·       Repay under the 10-year Standard Plan or an income-driven repayment plan ·       Periods of repayment under any plan count
·       Make on-time payments ·       Periods of repayment on loans before consolidation count, even if on the wrong repayment plan
·       Work full time for a qualifying employer to receive credit ·       Periods of repayment where payments were late or for less than the amount due also count
·       Must work for a qualifying employer at the time of application and forgiveness ·       Periods of repayment on loans before consolidation count, even if paid late or for less than the amount due
·       If you got Teacher Loan Forgiveness, the period of service that led to your eligibility cannot count toward PSL ·       Can get forgiveness even if not employed or not employed by a qualifying employer at the time of application and forgiveness
·       If you got Teacher Loan Forgiveness, the period of service that led to your eligibility can count toward PSLF if you certify PSLF employment during that period

If you submitted your application for PSLF prior to October 31, 2022, the Department of Education will review your loan history and application under the expanded rules.

If you missed the October 31, 2022 deadline (and meet all the other qualifications) does that mean you are out of luck? Not exactly…

The Income Driven Repayment Count Adjustment- A One-Time Fix

Income-Driven Repayment (IDR) is a type of student loan repayment plan that bases your monthly payment amount on your income and family size. While there are benefits to these repayment plans, they also increase the total interest paid and can ultimately leave you owing more. Income Driven Repayment Plans are designed for the remaining balance to be forgiven after 20-25 years of repayment. Unfortunately, many borrowers did not understand the rules of qualifying repayments and ended up not receiving forgiveness even after paying on their loans for decades.

To address these issues, the Department of Education announced the Income Drive Repayment Count Adjustment. This lesser-known account adjustment allows the Department of Education to make a retroactive credit to payment counts for borrowers in Income Driven Repayment plans. Under the program, time in repayment that is counted towards forgiveness will include:

  • Any months in a repayment status, regardless of the payments made, the type of federal loan, or the specific repayment plan;
  • 12 or more months of consecutive forbearance, or 36 or more months of total forbearance;
  • Any months spent in economic hardship or military deferments after 2013;
  • Any months spent in any deferment (except for in-school deferments) prior to 2013;
  • Any time in repayment on earlier loans prior to consolidation of those loans into a consolidation loan.

While the changes above apply to Direct Loans, borrowers with non-Direct Loans or FFELP loans can still benefit from the program. Borrowers have until May 31, 2023, to consolidate from non-Direct Loans or FFELP loans into a Direct Consolidation Loan.

Can the Income Drive Repayment Count Adjustment help borrowers pursuing Public Service Loan forgiveness, even if they missed the PSLF Waiver deadline?

The short answer is yes. This one-time adjustment counts towards time-based forgiveness and Public Service Loan Forgiveness. The Department of Education will review borrower accounts and automatically update payment counts to include payments eligible under the expanded rules. If you are pursuing PSLF, and have questions, reach out to an advisor as soon as possible. It’s not too late.

Repaying student loans and navigating repayment plans gets complicated. If you have student loans and aren’t sure what you may qualify for, reach out for assistance. The best thing you can do is talk to an experienced professional.

One Time Forgiveness

Judge's GavelAfter a lot of waiting, media announcements, and more waiting, the application for one-time student loan forgiveness opened in October 2022. The legality of blanket forgiveness was promptly challenged in court. Currently, the fate of receiving between $10,000-$20,000 of forgiveness on student loan debt rests with the Supreme Court.

The Supreme Court began hearing arguments February 28, 2023. A verdict is expected by June of 2023. For now, we will wait.

Repayment and Interest Rate Pause

In the meantime, remember that pause on federal student loan interest and payments that started back in March of 2020? The pause on repayment and reduction of interest rates to 0.00% has been extended multiple times.  It’s been extended again and the latest extension reads like this:

“The student loan payment pause is extended until the U.S. Department of Education is permitted to implement the debt relief program or the litigation is resolved. Payments will restart 60 days later. If the debt relief program has not been implemented and the litigation has not been resolved by June 30, 2023 — payments will resume 60 days after that. We will notify borrowers before payments restart.”

Where Things Stand

We are all still waiting—waiting for payment counts to update, waiting for PSLF forgiveness applications to process, waiting for payments to resume, and waiting for the Supreme Court decision on forgiveness. For now, start planning for payments to resume. You can check your income certification dates by logging into your loan servicer website. You can calculate your payments under different repayment plans by logging into StudentAid.gov. As always, if you have questions, don’t hesitate to contact one of our advisors.

 

Categories
Estate Planning Financial Planning

5 Estate Plan Documents Everyone Needs

Estate planning document - Last Will and Testament

Five Estate Plan Documents Everyone Needs 

As a financial advisor, I often talk with clients about their need for an estate plan. Far too often, clients reach out for advice because a family member has become seriously ill or passed away without any documents in place.  Caring.com ran a survey this year and found that only 33% of Americans have a will or living trust. In 2019 the US had 54.1 million people over the age of 65. That means that about 36.3 million people over the age of 65 don’t have a will, powers of attorney, or trusts. And that means many of our parents and grandparents don’t have their documents in place.

The problem is many people don’t think of themselves as wealthy. They don’t think of themselves as having an estate. As a financial planner, I have found many people underestimate the monetary value of their lives. I can’t tell you how many times I have heard the following sentence:

“I don’t have anything. I don’t need a will.”

But you do. We all do.

The Need For An Estate Plan

It’s hard to truly understand what estate planning is about until we lose someone close to us. And even then, we may find ourselves on the sidelines, with information filtered through extended family members and rarely responsible for making decisions. Complex tax law, health care law, and state probate laws, combined with family dynamics leave estate planning shrouded in mystery.  Talking about estate planning also plays into our natural aversion to talking about life, end of life, and death. The technical jargon and legalese make it that much harder to have tough conversations with loved ones. And they are tough conversations. Estate planning covers everything from how much money we have, to how we engage or don’t engage with various family members. Like most areas of personal finance, it is about so much more than money.

We typically talk about this highly emotional topic in non-specific ways using complicated and specialized language. It’s no wonder that so many people don’t have any legal documents in place. Below is a list of the five primary documents that make up your “estate plan.” There are some documents that help you while you are alive and some documents that help your family after you pass away. This is not a comprehensive list. Your unique situation may require additional documents. It is best to consult with an attorney to get help drafting your documents. If you are active-duty military or a Veteran, you may be able to get help through the base Legal Office. Many law schools will also provide estate planning clinics where members of the public can get their documents drafted for free.

Four Documents That Protect You While You Are Alive

Think about all the things you manage over the course of a month. For example, I run a business.  I pay personal and business bills. I purchase groceries and I make sure all the little things that keep our life running happen. Now imagine, I walk outside and because it is Spokane in the winter, I slip and fall and hit my head. I can’t make any decisions. Who can make all the necessary things happen? Who can manage the money and make financial decisions for me?

If you are like my husband and me, somewhere during your active-duty years, there was a deployment. You may have gathered with all the other military families getting deployed and drafted, signed, and notarized powers of attorney for each other.

You’re good to go. Right?

Maybe.

Depending on your state, and depending on the power of attorney, maybe those documents had you covered and maybe they didn’t. However, most financial power of attorney documents are only in effect  while you can make decisions for yourself. In the example above, since I just slipped on the ice, I can’t. In Washington, that general power attorney doesn’t help my husband one bit. We needed a durable power of attorney. A durable power of attorney will be in effect when you can’t make decisions for yourself. A durable power of attorney will allow your personal representative to make decisions for you when you aren’t able to make decisions for yourself. When it comes to being unable to care for yourself or passing away, you need someone who can legally manage your financial life.

Document #1: Durable Power of Attorney

I will keep using my fall on the ice as an example. Who do I want to make decisions for my health care? In my case, I want my husband. The last thing I want is to add additional stress and worry to his burden at that moment. I don’t want him to have to fight with the hospital or anyone about my care. I want him to have everything he needs to help me.  The health care power of attorney allows him to make decisions for me without having to argue, fight, or justify why he can. We also have kids over the age of 18. They are adults. No more parental rights. Young adult children need to have a health care power of attorney as well. Imagine fighting to be able to help your kids in an emergency. The thought of it makes my heart race.

Document #2: A Healthcare Power of Attorney

Do you have strong feelings about how you would want to be cared for in a medical emergency? You need a way to communicate and document those feelings and preferences for your care. A living will, sometimes called an advance directive, tells your personal representative how you want to be cared for in certain circumstances. The Healthcare Power of Attorney grants your trusted person the power to make decisions for you. The living will tell your trusted person and the world what you want. Having this document ensures that your trusted person and your health care providers know your wishes. Living wills help family members make difficult decisions with greater peace of mind knowing they are choosing what you wanted.

Document #3: A living will

HIPAA authorizations complete the list of documents that help you while you are still alive. With the Healthcare Power of Attorney, you picked a trusted person to make decisions for you. With the living will, you told them your wishes. HIPAA authorizations grant your trusted person access to all the information they need to help you and make health care decisions for you.

Document #4: HIPAA authorizations

As military families, we often live in multiple states throughout our lives. Spouses may have different states of residency. We may own homes in multiple states. I cannot stress the importance of understanding the probate, estate, and inheritance laws in your state of residency. State laws vary tremendously. If you own property in multiple states work with an attorney who is licensed to practice in your state of residency. It is wise to consult with a CPA who can help you understand how your state of residency may tax the property you own in other states.

Documents that help your loved ones after you pass away

Everyone needs a will. If you don’t have a will, your state has a plan for you. You don’t want it. Your will does more than just direct your assets to your beneficiaries. Your will helps your beneficiaries save time, money, and frustration after you pass away. Wills are often paired with various trust documents. Even when you have a trust, you still need a will. A will communicates your wishes after you pass away. A will is a gift that you give to your loved ones.

Document #5: Last Will and Testament

These 5 documents make up your “estate planning” documents. Think of them as your legal planning documents for life and death. Having these documents helps you and your beneficiaries. Estate planning works across generations. For most adults, we will end up talking to our parents and our kids about estate planning, wills, and powers of attorney. Having these documents in order helps you and it helps them.

Losing someone you love hurts. Engaging with the medical system, insurance companies, hospice, and the funeral home can be difficult. It’s harder when you don’t have any legal authority. It’s harder in countless unforeseen ways when you must navigate it all without a complete estate plan and the five key documents.  MFAA advisors are knowledgeable about estate planning and can help you establish your plan and required documents.  Check out their profiles here.

 

Categories
GI Bill Goals Paying for College

New Law Changes Handling of VA GI Bill Program Debts

Johnny Isakson and David P Roe, M.D. Veterans Health Care and Benefits Improvement Act of 2020

New VA Management of Education Debts

The Johnny Isakson and David P Roe, M.D. Veterans Health Care and Benefits Improvement Act of 2020 passed into law January 5, 2021. While the law is full of changes and expansions to the variety of GI Bill programs, this post will focus on changes VA management of education debts.

Students and schools can receive overpayments of benefits through withdrawing from classes, withdrawing from school, or from failing to pass classes. Prior to the passage of the most recent Veterans Health Care and Benefits Improvement Act, students that received the overpayment were typically assigned financial responsibility for the debt. The Department of Veteran’s Affairs would then collect directly from the students. That has changed, although, the VA is still working to implement changes to comply with the new law.

What you need to know

If you are using VA GI Bill Benefits to pay for college, changes to your enrollment impact your benefits. If you drop classes on or prior to the first day of classes and the VA has already paid the school, the school is responsible for repaying the VA. If you drop classes after the first day of school, the student is financially responsible for repaying the VA. If you drop below full time and have already received benefits, you will be responsible for repaying any over payment amounts.

The Big Change

The VA will no longer collect tuition and fee debts from students. Moving forward, the VA will collect debts from the school and the school will be responsible for collecting from the students. Schools will be the holder of the tuition and fee debt. Students will have to work directly with the school to repay tuition and fee debts.  Students who owe money to the school need to be aware of how tuition and fee collections work in their state.

 Books and Stipend Debts

The Post 9-11 GI bill generously includes a housing allowance and books and supplies stipend. Changes to enrollment, such as dropping below full-time status or withdrawing from enrollment result in debts owed to the VA. Don’t forget that changes made to enrollment, such as moving from full-time to half-time status, are applied retroactively to the start of the semester. There are exceptions to repayment for specific mitigating circumstances. There is also a 6 Credit Hour Exclusion to repayment. If you don’t have a mitigating circumstances exception and you have used your OTE, be prepared to repay benefit overpayments.  It makes sense that as the benefits are paid directly from the VA to the student, the VA will still own the repayment debt. The VA will still collect the repayment debt directly from the student.

The Bottom Line

First, read those emails you get from the VA. They help you stay up to date on changes that directly affect your benefits. Secondly, if you have to withdraw from classes after the first day, be prepared to repay tuition and fees to the school. Third, if you fall below full time or withdraw from enrollment, be prepared to repay housing allowance and stipends directly to the VA.

Categories
GI Bill Paying for College

Getting Your Free Application for Student Aid (FAFSA) Squared Away

getting your student financial aid (FAFSA) squared away

Get Your Student Financial Aid Squared Away

What is the Free Application for Federal Student Aid?

The Free Application for Federal Student Aid, or FAFSA, opens on October 1, 2020. Student borrowers use the FAFSA to apply for federal financial aid to help pay for college. When it comes to paying for college, there are three key factors that determine each student’s cost. Out of pocket costs for college are based on:

  • Your family’s unique financial situation,
  • The student’s academic record, and
  • The school’s financial aid policies.

Completing the FAFSA is the first step in accessing financial aid from both the U.S. Department of Education and the school you plan to attend.

Filling out the FAFSA communicates family financial information to the school’s financial aid office. The U.S. Department of Education uses the FAFSA to determine who receives federal financial aid. Federal financial aid includes work-study programs, grants, subsidized loans, and unsubsidized loans. Colleges and Universities use the FAFSA along with the Expected Family Contribution (EFC) to calculate a student’s financial need. Each school has their own unique combination of need-based aid and merit-based aid. Students should contact the school’s financial aid office for more specific information.

In just a few days on October 1, 2020, the FAFSA for the 2021-2022 school year will be available. Students and parents can complete the FAFSA even if they are not sure which college they will attend. Applying for financial aid early gives college students the best chance to receive financial help paying for college. Most colleges will set a priority filing date, which can be as early as 1 December.

Missing the priority filing date could mean missing out on grants and other limited aid. Students can send FAFSA information to colleges and universities throughout the year. The sooner you submit your financial aid package to the school, the better.

For most students, completing the FAFSA takes about 45-55 minutes. Before you sit down to fill out the application, gather your personal and financial information. First, determine whether the student an independent student or a dependent student.

Who is a dependent student?

Before you start filling out the FAFSA, you will need to understand who qualifies as a dependent student. Your status as a dependent or independent student determines whose information is included in the FAFSA. Dependent students receive family support, so parental information is required. Independent students support themselves. Therefore, only the student household information is included. Dependent status is determined by your tax household. To be considered a dependent student you have to meet all of the following requirements:

  • You are under the age of 24.
  • You are not married.
  • You are not active-duty military.
  • You are not a veteran.
  • You are not a grad student.
  • You are not a parent.
  • You are not an emancipated minor.
  • You haven’t been a dependent/ward of the court, been orphaned, or have been in foster care at all since you turned 13.
  • There are special considerations for homeless students or at-risk students as well.

If you do not meet all the above requirements, you are considered an independent student.

Why does it matter if you are a dependent or independent student for financial aid?

This distinction between dependent and independent students matters a lot. For dependent students, any financial aid awards will consider parental income and assets. For independent students, any financial aid awards only consider their income and assets. Dependent students need to coordinate with parents to access their tax return and other financial information to complete the FAFSA.

Active duty service members under the age of 24 are independent students.

Military spouses under the age of 24 are still considered independent students.

For service members and spouses, parental financial information is not needed to complete the FAFSA. All you need is your household financial information. This means that only the student’s financial information is considered when schools calculate the Expected Family Contribution. And while the military refers to spouses as dependents, spouses are not dependent students. Military spouses are independent students, even if they are under age 24. Even if Mom and Dad still pay the cell phone bill.

For military families with teenagers heading off to college, those teenagers will most likely be considered dependent students. Review the list above if you aren’t sure. Parents will need to gather their financial information and tax returns to prepare for filling out the FAFSA.

As a service member or family member using the Post 9-11 GI Bill, will I need to fill out the FAFSA?

Yes!

Check out this great overview of the Post 9-11 GI Bill, written by MFAA member Andrea Clark. Remember the FAFSA is your doorway to state and school-based aid, as well as federal student aid. Many schools offer additional benefits for students using the Post 9-11 GI Bill. These extra benefits are only available once you have completed the FAFSA and shared the Student Aid Report with the school.

Utilizing your Post 9-11 GI Bill benefits does not disqualify you from other federal student aid, such as grants, work-study, subsidized and unsubsidized student aid. Nor does it disqualify you from other state or school-based scholarships and aid.

Take these steps before you start filling out the FAFSA

Take some time to gather your financial records before sitting down to fill out the FAFSA. It is the responsibility of the student to fill out the FAFSA. And while parents may be tempted to handle this task for their student, student involvement is required. Dependent students and parents must each create their own unique FSA IDs and passwords.

Parents cannot create an FSA ID for their child. The FSA ID and password allows you to log in to StudentAid.Gov and complete the FAFSA. It also allows you to sign the FAFSA electronically.

What information do I need complete the FAFSA?

To complete the FAFSA you will need the following information. You will need your parent’s information if you are a dependent student.

  • Name, date of birth, social security number (This includes for parents as well as dependent students.)
  • Tax returns from 2 years prior (The FAFSA considers your tax return from the prior-prior year. That means if you are filing the FAFSA this October 1, 2020, you will need your 2018 Tax Return.)
  • Students and parents will need all their W-2s for the past 2 tax years. The FAFSA form contains a tool to link your application directly to the IRS. This is your best option. If you cannot link your accounts, you can enter the information using the data from your tax return.
  • Financial account information: checking, savings, retirement accounts, 529 plans, investment accounts.
  • Information about your real estate assets: mortgage information, tax assessed value (not Zillow)

Filing the FAFSA gets complicated for blended households. For more information, check out the U.S. Department of Education’s Parent’s Guide to Completing the FAFSA Form. They even have a handy graphic. Be sure you read the questions on dependency carefully. Keep in mind, dependent status is defined according to the IRS rules.

Tips for filling out the FAFSA

  • When you fill out the FAFSA, ‘you’ and ‘your’ mean the student. If the FAFSA requires parent’s information, it will be specifically stated. Read carefully and pay close attention to whose information is needed.
  • Be prepared to list each school’s Federal School Code when you complete the FAFSA. If you are considering more than 10 schools, list the first 10. Log out. Log back into your application and select ‘Make FAFSA Corrections’. Update your school list with the remaining schools. You can also call the Federal Student Aid information line to add schools to your list. Finally, you can add schools to your paper Student Aid Report and mail it back to Federal Student Aid.
  • In order to receive student aid, you will need to file the FAFSA for each year you are in college.
  • Keep student FSA IDs and parent FSA IDs separate. Don’t log in at the same time and only log in under your own FSA ID.

Choosing your college, paying for school, and understanding your financial aid award gets more complicated each year. Rely on trusted resources. For more information visit Studentaid.gov, the U.S. Department of Education’s blog, or contact one of the MFAA advisors as we would love to be able to help!

The Bottom Line

Paying for college is typically the second-largest purchase most of us will make in our lifetimes. Sometimes, we will even do it twice, paying for our own education as well as our children’s education. It is so important that you maximize your purchasing power and financial strategy.

As financial advisors, members of the MFAA help people just like you navigate the questions, challenges, and planning opportunities related to playing for college. We would love to be of help and have a free consultation.

Find an advisor here!

Categories
Taxes

Military Payroll Tax Deferral

military payroll tax deferral

Military Payroll Tax Deferral Explained

On August 8, 2020, President Donald Trump issued a memorandum allowing the military payroll tax deferral for any employee earning less than $4000 every two weeks. The $4000 limit refers to gross, or pre-tax earnings. It is important to notice the memorandum defers the taxes, it does not eliminate, revoke, or waive these taxes.  In essence, the government could collect any non-paid taxes at a future date.  Right now, the repayment date is scheduled for early 2021.  But before we tackle that issue, let’s cover some of the important information surrounding payroll taxes.

Understand Your Military Payroll Taxes

Payroll taxes, also referred to as FICA (Federal Insurance Contributions Act) pay for Social Security and Medicare. These taxes are listed as FICA Social security and FICA Medicare on military Leave and Earnings Statements (LES) and are also often abbreviated on employee paystubs. FICA taxes are split between the employer and the employee. These taxes are levied at 15.3% of earnings up to $137,700. Read more about the Social Security wage base here. There is no wage base for Medicare taxes. In fact, if you are a high-income household, there is an Additional Medicare Tax rate of .90% to wages, salaries, and tips.  Employees pay 6.2% for Social Security and 1.45% for Medicare, with matching amounts paid by employers. For military service members, Social Security and Medicare taxes are paid on all entitlements earned.

Employers are already eligible to defer payroll taxes under the CARES Act.

The Presidential memorandum defers payroll taxes (just the Social Security portion of 6.2%) from September 1, 2020 through December 31, 2020 for all federal employees. Under the CARES Act employers are already eligible to defer payroll taxes through December 31, 2020. Some self-employed individuals are also eligible to defer their SECA (Self-Employed Contributions Act) taxes. For now, the memorandum does not address employee options for participation if the employer does not choose to participate. There may be further clarifications to come. You can read more about IRS guidance on payroll tax deferral here.

Per the official memorandum, there will be no penalties or interest charges to deferred taxes. The Secretary of the Treasury has been directed to explore options for forgiving the deferred taxes. This means there is a potential that the deferred amounts will not have to be repaid. At this time there is no guarantee that forgiveness of deferred amounts will happen. Deferred taxes owed may have to be repaid in 2021. Currently, deferred taxes must be repaid in full between January 1, 2021 and April 30, 2021. Essentially, your payroll tax deductions would double for the first 4 months of 2021.

Military members have no choice

For civilian employers the program is voluntary. For federal employees, including the military, information published by DFAS indicated that deferral of employee taxes (6.2% of earnings) will not be optional. Currently, there is no way to opt-out of the deferral and no indication that an opt-out option is being considered. For now, federal employees and military service members will see more money in their mid-month pay.  But they may be forced to pay back the increase over the first four months of 2021.

If you are a civilian employee, check with your employer to see if they are participating in the payroll tax deferral. Many are not.  Many employers are concerned about the ramifications of payroll tax deferral.

If you are a military service member or federal employee, there is an easy way to calculate the increase in pay due to the payroll tax deferral. Let’s work through a quick example for a hypothetical September paycheck. The calculation would look like this:

Military Payroll Tax Half-Month Example

Earnings from 9/1-9/15: $4000.00
Monthly payroll tax 6.2%: X .062
Taxes deferred: $248

 

Military Payroll Tax Full Month Example

Earnings from 9/1-9/30: $8000.00
Monthly payroll tax 6.2%: X .062
Taxes deferred: $496

What do you do if you see your calculated increase in pay in your next paycheck? Set the money aside and don’t spend it!
Right now, there is no guarantee of any legislation to forgive the deferred taxes. Repeat for each paycheck through the end of 2021 or until there is more clarification on this issue.

For employees, whether you are civilian, federal, or military, save the payroll taxes for now. If you are military, you have likely experienced being over-paid only to have DFAS reach back months (or years) later with large extra deductions from your paycheck. Consider the payroll deferral like another DFAS error. Save the overpayment. You know they will come for it eventually.

The Bottom Line

As financial advisors, members of the MFAA help people just like you navigate the questions, challenges, and planning opportunities related to your taxes. We would love to be of help and have a free consultation.

Find an advisor here!