Financial Solutions For Families

Transcription

1 COLLEGE LITERACY ACADEMY Understanding How The Kentucky Educational Excellence Scholarship (KEES) Works A Family Guide On Paying For College Financial Solutions For Families

2 Understanding How To Pay For College Copyright 2011 By: Educational Literacy Center All Rights Reserved No part of this publication may be used or reproduced in any manner whatsoever without written permission except in the case of brief quotations embodied in critical articles and reviews. For More Information Contact: Chuck Moore, CCFC, CAMC, CAFC Louisville, Ky Ph This publication is general in nature and is not intended to give legal, accounting or investment advice. Before incorporating any ideas in this publication the reader should consult with their financial advisor, guidance counselor, or tax professional. Some of the information provide in this publication is from IRS Publication 970, Federal Financial Aid System, Kentucky Higher Education Assistance Authority and other resource material

3 Understanding How The Kentucky Educational Excellence Scholarship (KEES) Works This publication is mainly for Kentucky and other states that have scholarship funds available that student can earn while in high school. However, it also pertain to any student that may receive an unrestrictive scholarship regardless the state they live in. The Tax Reform Act of 1986 fundamentally changed IRS policy regarding the taxation of scholarships and grants. Before passage of this landmark legislation (Public Law ) many scholarships were not taxable at all, but now many are fully taxable and some are at least partially subject to taxation. Before, I get into explaining how the KEES scholarship works, you need to know a few facts about scholarships and grants. Scholarships and Grants What is a scholarship or grant? According to the IRS A scholarship/grant is generally an amount of money paid or allowed to, or for the benefit of a student at an educational institution to aid in the pursuit of studies. The student may be either an undergraduate or a graduate student. Are Scholarships Or Grants Tax-Free Many individuals feel scholarships and grants are always tax-free. But this is not true, according to the IRS and Congress. Here is what is IRS says a tax-free scholarship or grant is:

4 According to the IRS A scholarship or grant is tax free only if: You are a candidate for a degree at an eligible education institution, and You use the scholarship or grant to pay qualified educational expenses Now this sounds pretty straightforward. Reading the definition, it is clear that most students will be attending a state or private college or other form of post-secondary educational institution in order to get a degree and whatever the institutions bills for its services are qualified expenses. Most individuals reading this explanation would come to the conclusion that the above statement is true. However, the statement is not totally true. You have to look into the IRS s definition a little further to find the correct answer. For example: What Is A Qualified Educational Institution: According to the IRS An eligible educational institution is one that maintains a regular faculty and curriculum and normally has a regular enrolled body of students in attendance at the place where it carries on its educational activities. This definition covers almost all institutions that provide a course of study above high school. But what the definition is not telling you is the institution that is giving the education must also be qualified institution. A qualified institution is a place of learning that participates in the federal financial aid system. So if you attend a place of learning that does not provide or make available financial aid from the federal government it is NOT a qualified institution. Many schools could fall in this category. Most are specialized schools such as computer training, car repair, hairdressers, real estate programs, insurance/security training etc. Now What Is Meant By Qualified Educational Expenses: Here is what the IRS says are Qualified Educational Expenses:

5 According to the IRS For the purposes of tax-free scholarships and grants, these are expenses for: Tuition and fees required to enroll at or attend an eligible educational institution and Course-related expenses, such as fees, books, supplies, and equipment that are required for the course at the eligible educational institution. These items must be required of all students in the course of instruction. If the scholarship or grant is used for the items we just went over, the scholarship or grant is TAX-FREE. Tax-Free scholarships or grants are normally call QUALIFIED scholarships or grants. However, if the scholarship or grant dictates the funds cannot be used for tuition/fees and course related expenses the scholarship or grant is now reclassified as a NON-QUALIFIED scholarship or grant and 100% taxable to the student. What Are Non-Qualified College Expenses: According to the IRS Expenses that are not qualified are as follows: Room and Board Travel Research Clerical Help, or Equipment and other expenses that are not required for enrollment in or attendance at an eligible education institution This is true even if the college or university requires you to pay for these items as a condition for enrollment or attendance and you pay the institution directly. Now the IRS says the above items are not qualified expenses for the tax-free treatment of scholarships or grants, but how is the student able to get a degree WITHOUT living somewhere, traveling to the institution, and purchasing needed equipment (computer, calculators, etc.)? Well, the IRS and Congress has come to the conclusion, that the student can live with a relative or parents and not on campus. They also believe the travel to the institution is a personnel expense. They also have come to the conclusion that computers, calculators, etc. are not necessary equipment that needs to be bought, even if the professor tells the student they need the computer or calculator to take the class.

6 The IRS and Congress has concluded, the student can get access to these items at the library or borrow them from a classmate. Now here is where it really gets ridiculous. If the college or institution REQUIRES ALL students that are taking a course of study MUST purchase special equipment (computers, calculators, etc.), then the purchase of these items now have been reclassified as Qualified Educational Expenses and scholarships or grants can be used to purchase these items and will be Tax-Free to the student. Taxable Scholarships Or Grants As I have mentioned earlier, if the student were to use scholarship or grant to pay for Non-Qualified expenses, the funds are taxable to the student in the year they are received. Let s look at the definition that is given in Publication 970 on the taxation of scholarships and grants. According to the IRS Amounts used to pay expenses that do not qualify as necessary expenses Payments for services Scholarship Prizes If the scholarship or grant does not meet the qualification requirements described earlier, the funds are taxable to the student. Amounts used to pay for non-qualified expenses is taxable to the student, even if the expenses are fees that must be paid to the college or university as a condition of enrollment or attendance. An example of these fees are: Student Activity Fees Parking Fees Library Fees, etc. Scholarships and grants that are used to pay for educational expenses that represents payments for PAST, PRESENT, or FUTURE teaching, research, or other services is taxable compensation to the student in the year it is received. Here is an example from Publication 970.

7 Example From Publication 970 You are a candidate for a degree at a medical school. You received a scholarship for your medical education and training. The terms of the scholarship require you to perform future services from the donor of the funds. A substantial penalty applies if you do not comply with the arrangement. The amount of the scholarship/grant is taxable to the student in the year it is received. The above explanation applies to ALL occupations. One of the best explanations I can give, is in the field or occupation of nursing. Many hospital give nursing scholarships to student in order to fill the nursing shortage that many hospital are encountering. Normally these scholarships are given to the student with the understanding, upon graduating, the student will work several years for the hospital in exchange for the educational assistance. If the student does not complete their education, the hospital will require the student to repay the scholarship money in a lump sum or repay the money (with interest) over a negotiated time period. In order to see if the scholarship or grant is taxable or tax-free complete the worksheet on the next page that is provided by the IRS.

8 Worksheet 1-1. Taxable Scholarship and Fellowship Income 1. Enter your scholarship or fellowship income for If you are a degree candidate at an eligible educational institution, go to line 2. If you are not a degree candidate at an eligible educational institution, stop here. The entire amount is taxable. For information on how to report this amount on you tax return, see Reporting Scholarships and Fellowships. 2. Enter the amount from line 1 that was for teaching, research, or any other services. (Do not include amounts received for these items under the National Health Service Corps Scholarship Program or the Armed Forces Health Professions Scholarship and Financial Assistance Program.) Subtract line 2 from line Enter the amount from line 3 that your scholarship or fellowship required you to use for other than qualified education expenses Subtract line 4 from line Enter the amount from line 5 that was used for qualified education expenses required for study at an eligible educational institution. This amount is the tax-free part of your scholarship or fellowship income Subtract line 6 from line Taxable part. Add lines 2, 4, and 7. See Reporting Scholarships and Fellowships for how to report this amount on your tax return.. 8. Reporting Scholarships Or Grants After completing the worksheet above and you find all or part of your scholarship or grant is taxable, how do you report this additional income on the student s tax return? From Publication 970 Whether you must report the scholarship or grant depends on whether you must file a return and whether any part of the scholarship or grant is taxable.

9 Here is an overview of how to report scholarships or grants income: Generally, the student will only receive what is called a 1098-T from the college or university. Families should use this form to calculate the taxable portion of the student s scholarship or grant. The 1098-T will show the student the amount of the scholarships or grants the student received during the academic year and will also list the amount of Qualified Expenses that was incurred. For more information on how to use IRS form 1098-T, refer to our e-book Understanding How The 1098-T Works Below is an explanation on how to report the scholarship or grant income. How To Report From Publication 970 Form 1040EZ. Report the taxable amount on line 1. Enter SCH and the taxable amount in the space to the left of line 1 Form 1040A. Report the taxable amount on line 7. Enter SCH and the taxable amount in the space to the left of line 7 Form Report the taxable amount on line 7. Enter SCH and the taxable amount on the dotted line next to line 7 If you file Schedule SE (Form 1040), Form 1040NR, or FormNR-EZ check with your tax preparer or CPA for further instructions.

10 UNDERSTANDING THE KEES SCHOLARSHIP Now that you understand how scholarships and grants work. Let s review the Kentucky Educational Excellence Scholarship. According to the KHEAA website, the KEES scholarship was incorporated in 1998 by the General Assembly for the benefit of school students, home school students, and GED graduates. The Kentucky Educational Excellence Scholarship (KEES) is administered by the Kentucky Higher Education Assistance Authority (KHEAA), and is funded by Kentucky Lottery proceeds. Students who earn a minimum of 2.5 GPA each year in high school can earn scholarships for college or technical school. The better students do in high school, the more they will earn toward college scholarships. Home school and GED graduates may earn awards based on their ACT scores only. If the student elects to go to college out-of-state, the KEES monies will NOT transfer unless the college is a member of the Academic Common Market (ACM). Students must be enrolled at a public university in a state that participates in the ACM and be pursuing an approved ACM program of study to use their KEES outside Kentucky. For more information about the ACM and the current list of programs and schools eligible for the program, visit the Council on Postsecondary Education website. According to the KHEAA website, Indiana, Ohio, and Illinois are not in the ACM. Therefore the KEES cannot be used at a college in one of those states. HOW TO BECOME KEES ELIGIBLE Below and the next few pages are the eligibility overview from the KHEAA website. To be eligible for a KEES yearly GPA award, a high school student must: Be a U.S. citizen, national or permanent resident. Be a Kentucky resident. You are eligible if you maintain your legal residence in Kentucky while attending the U.S. Congressional Page School or participating in an approved foreign educational exchange program. You are eligible if your parent or guardian maintains legal residence in Kentucky while serving in the U.S. armed forces. Have earned at least a 2.5 GPA in any year of high school while meeting the KEES curriculum requirements. Attend and graduate from a certified Kentucky high school or other approved high school. Not be a convicted felon.

11 To be eligible for a KEES ACT bonus award, a high school graduate must: Have a least a 15 composite ACT score on an ACT taken at a national test site or a score of 710 or better (critical reading and math) on the SAT. The highest score achieved by the date of your high school graduation will be used for calculating the bonus award amount. Have earned at least a 2.5 GPA in any year of high school while meeting the KEES curriculum requirements. To be eligible for a KEES AP/IB supplemental award, a high school graduate must: Be eligible for free or reduced-price lunch during any year of high school. Earn a qualifying score on an Advanced Placement (AP) or International Baccalaureate (IB) exam taken during or after the academic year. Have earned at least a 2.5 GPA during any year of high school while meeting the KEES curriculum requirements. NOTE: There is no limit to the amount of supplemental awards a student can receive. To be eligible for a KEES ACT award, a home school graduate must: Have an ACT composite score of 15 or better (SAT score of 710 or better) on a national exam. Be a U.S. citizen, national or permanent resident. Be a Kentucky resident. You are eligible if you maintain your legal residence in Kentucky while attending the U.S. Congressional Page School or participating in an approved foreign educational exchange program. You are eligible if your parent or guardian maintains legal residence in Kentucky while serving in the U.S. armed forces. Be enrolled in a participating college. Not be a convicted felon. To be eligible for a KEES ACT award, a GED graduate must: Have an ACT composite score of 15 or better (SAT score of 710 or better) on a national exam.

12 Have had your 18th birthday occur on or after January 1, Have earned a GED in Kentucky within five years of turning 18 years old. Be a U.S. citizen, national or permanent resident. Be a Kentucky resident. Be enrolled in a participating college within five years of receiving a GED. Not be a convicted felon. HOW TO BECOME KEES ELIGIBLE BASED ON KEES AUTHORIZED CURRICULUM Below and the next few pages are the eligibility overview from the KHEAA website on high school course studies that are required. High School Graduation Requirements (22 units) Language Arts 4 units Mathematics 3 units Science 3 units Social Studies 3 units Health 1/2 unit Physical Education 1/2 unit Arts Appreciation 1 unit Electives 7 units KEES Authorized Electives Any course whose academic content (not additional credit) is as rigorous or more rigorous than the courses required by the appropriate Minimum High School Graduation Requirements in the following subject areas: Social Studies Science Mathematics English/Language Arts Arts and Humanities

13 Any course whose academic content (not additional credit) is as rigorous or more rigorous than the courses required by the appropriate Minimum High School Graduation Requirements in the following subject areas and limited to one academic credit per area: Physical Education Health Any course whose academic content (not additional credit) includes teaching the spoken and written aspects of: Foreign Languages Any course whose academic content (not additional credit) is beyond the introductory level in the following vocational education areas of study: Agriculture Industrial Technology Education Business Education Marketing Education Family and Consumer Sciences Health Sciences Technology Education Career Pathways KEES Authorized Substitution High schools are allowed to substitute an integrated, applied, interdisciplinary and/or higher level course if the alternative course provides the same or greater academic rigor and covers or exceeds the minimum required content areas (applicable components of 703 KAR 4:060 [Academic Expectations]). Authorized substitutions include, but are not limited to, honors courses, advanced placement courses, dual credit (high school/college) courses, and courses taken at postsecondary education institutions. On the next few page you will find a list of college and universities that will except the KEES funds. This list is from the KHEAA website.

14 Participating Schools Kentucky campuses of these schools are eligible to participate in Kentucky Educational Excellence Scholarship. Alice Lloyd College Asbury University Ashland Community and Technical College ATA College Beckfield College Bellarmine University Berea College Big Sandy Community and Technical College Bluegrass Community and Technical College Bowling Green Technical College Brescia University Brown Mackie College Campbellsville University Centre College Daymar College Eastern Kentucky University Elizabethtown Community and Technical College Embry-Riddle Aeronautical University Galen College of Nursing

15 Participating Schools Continued: Gateway Community and Technical College Georgetown College Hazard Community and Technical College Henderson Community College Hopkinsville Community College Indiana Wesleyan University ITT Technical Institute Jefferson Community and Technical College Kentucky Christian University Kentucky State University Kentucky Wesleyan College Lincoln College of Technology Lincoln Memorial University Lindsey Wilson College Madisonville Community College Maysville Community and Technical College McKendree University MedTech College Mid-Continent University Midway College

16 Participating Schools Continued: Morehead State University Murray State University National College Northern Kentucky University Northwood University Owensboro Community and Technical College Somerset Community College Southeast Kentucky Community and Technical College Spalding University Spencerian College St. Catharine College Sullivan University Thomas More College Transylvania University Union College University of Kentucky University of Louisville University of Pikeville University of the Cumberlands Western Kentucky University West Kentucky Community and Technical College

17 Below and on the next few page you will find KEES Base Award Amounts. This information can be checked on the KHEAA website. For each year you earn a 2.5 or better GPA, you can earn the base amount listed below. For instance, a high school freshman who earns a 3.5 GPA would have a $375 scholarship for each year of college. Amounts may change based on available funds: GPA Amount 2.50 $

18 ACT Bonus Award Amounts You can earn a bonus award for an ACT score of 15 or above. For example, a KEES-eligible student who has a score of 25 would earn an additional $393 for each year of college: ACT Score Bonus 15 $ AP/IB Supplement Award Amounts If you have been eligible for free or reduced-price lunch during any year of high school and have earned a qualifying score on an Advanced Placement (AP) or International Baccalaureate (IB) exam taken during or after the academic year, you can earn a supplemental award. For example, a KEES eligible student who receives a score of 3 on an AP exam and is eligible for free or reduced-price lunch would earn an additional $200 for each year of college. Advanced Placement Exam Score Supplemental Amount 3 $200 4 $250 5 $300 International Baccalaureate Exam Score Supplemental Amount 5 $200 6 $250 7 $300

19 Below and on the next page you will find ACT and SAT conversion tables. This information can be checked on the KHEAA website. SAT to ACT Conversion SAT I V+M ACT Composite SAT I V+M ACT Composite

20 SAT to ACT Conversion Continued: Conclusion Remember, there are four types of scholarships Qualified, Non-Qualified, Restrictive, and Non-restrictive scholarships. All are treated differently according to the IRS when it comes to the taxation of the scholarship funds. The KEES scholarship could be classified as any of the four types of scholarships list above. The classification of the type of scholarship depends on how the student and their parents decide how to use the scholarship funds when pay higher educational costs. If the family decides to use the scholarship funds to pay for college expenses that are qualified, the scholarship would be tax-free, however it could eliminate the family from receiving educational tax credits from the federal and state governments. If the family decides to use the scholarship funds to pay for college expenses that are non-qualified, the scholarship would be taxable to the student and depending on the student s other income, could off-set or eliminate the educational tax benefits that the family could receive from the federal and state governments. In order to maintain KEES eligibility while in college the student must maintain a 2.5

21 GPA the freshman year and a 3.0 thereafter. If the student falls below a 3.0 after the freshman year in college they could cause the KEES funds to be reduced by 50%, (between 3.0 to 2.5 GPA) or could lose the funds altogether if the student s GPA falls below a 2.5%. Using the KEES scholarship as a Qualified scholarship, could cause distributions from EE Bonds, 529 Savings, 529 Prepaid Tuition Plans and Coverdell IRAs to be taxable to the owner of the plan if distributions are used to pay for certain higher educational expenses. It could also cause the distributions from the 529 plans and Coverdell IRAs to incur a 10% penalty as well. Receiving and using scholarships and grants are NOT as simple or straightforward as many individuals may believe. Knowing how to use the KEES or other scholarships and grants could cause families to spend more for a college education than what is necessary or it could cause the family to reduce educational expenses due to qualifying for other tax-free benefits and tax credits. If you want to learn more about scholarships or grants and ideas on how to pay for the cost of a college education without going into massive debt, go to our website and sign up as an annual subscriber.