Which education-related accounts can and cannot have their beneficiary changed to a sibling?
✅ CAN change beneficiary:
- 529 Plans (family member = OK)
- Coverdell ESAs
❌ CANNOT change beneficiary:
- UTMA accounts (the money legally belongs to the minor)
- Individual Trusts (beneficiary designation is fixed unless document allows flexibility)
What type of mortgage is best for a client who is risk averse, wants lower payments, and has 15 years left on their current loan?
✅ Choose a 15-year fixed-rate mortgage
- Matches loan duration
- Offers rate stability
- Avoids long-term debt stretch
❌ Do not recommend:
- 3-year ARMs → Too volatile for risk-averse clients
- 30-year fixed → Unnecessarily long payoff timeline
What are the key features of Federal PLUS Loans (for parents)?
- ✅ Not need-based (based on credit)
- ✅ Can borrow up to cost of attendance minus other aid
- ❌ Student must be enrolled at least half-time, not full-time
- Borrower is the parent, not the student
What assets should and should not be included in a net worth statement?
✅ Include:
- All assets at fair market value
- Cash value of life insurance
- Personal use assets (cars, residence, personal property)
❌ Do not include:
- Face value of life insurance
- Purchase price of investments (use FMV)
- Items with no current market value (e.g., expected inheritance)
What should a CFP® professional recommend if clients are cash flow negative and want to refinance into a higher-payment loan?
✅ Refinance into a longer-term, lower-payment mortgage (e.g., 30-year)
✅ Use savings from lower payment to fund emergency reserves
❌ Do not recommend a 15-year mortgage if it worsens cash flow
CFP advice must always consider cash flow first, even if total interest paid is higher
Who is eligible to claim education tax credits for a student’s expenses?
The person who claims the student as a dependent on their tax return.
A student cannot claim education credits if they are claimed as a dependent — even if they paid the expenses or have their own income.
What is the key rule regarding education tax credits?
Education credits follow the dependency exemption, not who paid.
How is the Emergency Fund Ratio (EFR) calculated, and what is the recommended range?
✅ EFR = Liquid Current Assets ÷ Monthly Nondiscretionary Expenses
✅ Recommended range: 3–6 months
❌ Do not include discretionary expenses or debt payments
❌ A low EFR = liquidity risk in emergencies
What happens when the Federal Reserve buys government securities in open market operations?
✅ Money supply increases
✅ Interest rates decrease
✅ Bond prices rise (lower yields = higher prices)
✅ Stock prices rise (more liquidity & economic stimulus)
Mnemonic: Buy = Boost (boosts economy, asset prices)
What is an annuity due?
An annuity due has payments made at the beginning of each period.
What is an ordinary annuity?
An ordinary annuity has payments made at the end of each period.
Which has a higher future value, an annuity due or an ordinary annuity?
An annuity due always has a higher future value than an ordinary annuity.
Why does an annuity due have a higher future value?
Annuity due payments earn interest for one extra period.
What Fed actions represent an expansionary monetary policy?
Reduce reserve requirements, Lower the discount rate, Buy government securities (repo), Decrease margin rates
What Fed actions represent a contractionary monetary policy?
Increase reserve requirements, Raise the discount rate, Sell government securities (reverse repo), Increase margin rates
What is the maximum housing cost ratio (front-end ratio) that should not be exceeded?
28% of gross monthly income. This includes principal, interest, taxes, and insurance (PITI).
What can’t be determined from a client’s personal balance sheet?
The size of the client’s net cash flow — this comes from the cash flow statement, not the balance sheet.
Can a dependent student claim the American Opportunity or Lifetime Learning Credit on their own tax return if they pay qualifying education expenses themselves?
❌ No. A student claimed as a dependent on someone else’s return cannot claim the American Opportunity Credit (AOC) or Lifetime Learning Credit (LLC), even if they personally pay qualified education expenses.
✅ The parent (or taxpayer claiming them) is the only one eligible to claim the credit.
Can you assume a client’s risk tolerance based on their goals?
No. A CFP® professional must assess risk tolerance directly — never assume it based on goals.
How do you calculate the amount of the payment in a specific year in a serial payment TVM problem?
First, solve for the initial payment using the real rate of return. Then, multiply the payment by (1 + inflation rate) for each year until the target year.
What is the main purpose of an S&L?
To accept savings and provide home loans. Not trust companies, no true checking, regulated by OCC.
Why is a Roth IRA often better for parents concerned about financial aid than 529s, Coverdells, or custodial accounts?
Because Roth IRA assets are not counted on FAFSA (treated as retirement), while education/custodial accounts reduce aid eligibility. Withdrawals, though, count as income and should be timed carefully (later years).
After presenting recommendations to a client, what is the next step in the CFP® financial planning process?
Step 6 — Implementation: identify, analyze, and select actions, products, and services. Monitoring is Step 7.
Which of these belong on a client’s statement of financial position: stock options (not yet exercisable), estimated bonus, dividend declared/recorded, consulting fees receivable?
Only dividend receivable and consulting fees receivable (3 and 4). Stock options not exercisable + contingent bonus are excluded.
