PFS Student Learning & Development 2 — Questions and Answers
Question 1: A parent wants to transfer a 529 plan balance to a different beneficiary without penalty. Which relationship between the old and new beneficiary qualifies?
- Neighbor
- Family member (Correct answer)
- Employer
- Business partner
Correct answer: Family member
529 plan rollovers to a different beneficiary are penalty-free only if the new beneficiary is a family member of the original beneficiary.
Question 2: Which federal loan type requires the borrower to demonstrate financial need and does NOT accrue interest while the student is enrolled at least half-time?
- Unsubsidized Direct Loan
- PLUS Loan
- Subsidized Direct Loan (Correct answer)
- Perkins Loan (post-2017)
Correct answer: Subsidized Direct Loan
Subsidized Direct Loans are need-based and the federal government pays interest during in-school, grace, and deferment periods.
Question 3: A student received a $3,000 scholarship that covers tuition and fees. How is the scholarship treated for federal income tax purposes?
- Fully taxable as ordinary income
- Excluded from gross income entirely (Correct answer)
- Taxable only above $2,500
- Subject to self-employment tax
Correct answer: Excluded from gross income entirely
Scholarship amounts used for qualified tuition and required fees are excluded from gross income under IRC §117.
Question 4: What is the maximum annual contribution limit to a Coverdell Education Savings Account (ESA) per beneficiary?
- $500
- $1,000
- $2,000 (Correct answer)
- $5,000
Correct answer: $2,000
The annual contribution limit for a Coverdell ESA is $2,000 per beneficiary, regardless of how many accounts exist.
Question 5: Under the American Opportunity Tax Credit (AOTC), what is the maximum credit available per eligible student per year?
- $1,500
- $2,000
- $2,500 (Correct answer)
- $4,000
Correct answer: $2,500
The AOTC provides a maximum annual credit of $2,500 per student for the first four years of post-secondary education.
Question 6: Which income-driven repayment plan caps monthly federal student loan payments at 10% of discretionary income and forgives remaining balances after 20 years?
- Income-Based Repayment (IBR)
- Pay As You Earn (PAYE) (Correct answer)
- Income-Contingent Repayment (ICR)
- Graduated Repayment
Correct answer: Pay As You Earn (PAYE)
The PAYE plan limits payments to 10% of discretionary income and provides forgiveness after 20 years for borrowers who qualify.
Question 7: A student plans to use IRA funds early to pay college expenses without the 10% early withdrawal penalty. Which exception applies?
- First-time homebuyer exception
- Higher education expense exception (Correct answer)
- Medical expense exception
- Disability exception
Correct answer: Higher education expense exception
IRC §72(t)(2)(E) allows penalty-free early IRA distributions for qualified higher education expenses.
PFS Student Learning & Development 2
A parent wants to transfer a 529 plan balance to a different beneficiary without penalty.
Which relationship between the old and new beneficiary qualifies?