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Posts Tagged ‘College Planning’

Recently, a blog visitor was searching on the term “EE Savings Bonds,” “Tax Free” and “parochial school.”

Evidently, this visitor has a child in a private elementary or secondary school.  With good planning and generous help from family and friends, he has a number of EE series savings bonds in the child’s name.

Given the tax breaks available for certain higher-education expenses and the increasing costs of private elementary and high schools, it’s a very valid question.

The answer:  No.

Unfortunately, there is no tax advantage for cashing in EE Savings Bonds to pay for private or parochial school tuition and expenses.

The Internal Revenue Code does provide a tax-free incentive to cash in Savings Bonds for qualified higher education expenses subject to certain adjusted gross income limits.  These qualified education expenses are broadly defined and include tuition, fees and certain equipment incurred in pursuing a post-secondary school degree or vocational program. Theses expenses must be incurred at an eligible institution of higher learning which includes virtually all accredited public and private colleges and vocational programs in the US as well as certain participating programs overseas.

Education Savings Bond Programs are described in IRS Publication 970 and can generally be found on page 60 and also on Form 8815 “Exclusion of Interest From Series EE and I US Savings Bonds Issued After 1989.”

The better bet for this parent will be to hold onto the Savings Bonds until after the child is enrolled in college.  Because of certain financial aid requirements it may actually be best not to sell them during the student’s high school senior year because of the base year calculation of the Expected Family Contribution.

For more specific help in developing a tax and financial aid plan, consider my exclusive College Planning Services.

Call the College Planning Helpline at 978-388-0020.

Exclusive College Planning Service Helps Parents with Costs

Need Help Financing College? Don't Just Get a Loan. Get a Plan

 

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For most families, paying for college for their kids rivals buying a home as the largest investment that they will ever make.

College is viewed – and rightfully so – as a key to a better future.  Even as the cost of college continues to escalate at a pace almost double the inflation rate (nearly 5% per year compared to the historic average of nearly 3% for CPI), there is still a high and growing demand for higher education services.  The proportion of high school graduates who enroll in a degree program within one year of graduating from high school has grown from 49% in 1976 to 66% in 2006-07 according to the College Boards “Trends in College Pricing 2008” report.

Going to College:  Still Worth It

Generally, it is still worth the investment.  According to the US Census Bureau, those with a college degree on average will earn a median income of nearly twice that of someone with a high school degree. And other research indicates that those with a college degree historically have lower and shorter periods of unemployment.  (This may not seem like it as we go through the ongoing impact of the Great Recession but there is data supporting this).

Colleges know this and as a result price their “product” according to this demand for more educational services. One result is that without consumer pressure the colleges are pricing their “product” at whatever the market will bear.  And that price tag continues to go up. At last count, a four-year degree at a public university was around $16,000 per year for all tuition and fees. For private schools this number falls into the $34,000+ per year category.

To pay for this some parents will do almost anything and make almost any sacrifice sometimes to the detriment of their own financial health. So how do we balance the long-term investment in our children with the long-term investment in our own retirement?

Do you want to pay less for your student’s college education? Do you want to find a better way to balance paying for college without sacrificing your retirement nest egg? Be an informed consumer. Wrong, outdated or misguided information about paying for college or qualifying for financial aid just compound the problem for many families.

Too often families are under the mistaken belief that there is nothing that they can do but suck it up and write the check.  Or there is the dream of the big money athletic scholarship.  Or they mistakenly think that there is no financial aid.

All of these beliefs are dangerous to your family’s financial health. The key is having the right information and help to navigate through the minefield that is college funding and financial aid.

Myths about Financial Aid

1. Not Enough Financial Aid is Available.

During the 2009-2010 academic year, students received about $168 billion in financial aid.  This included the entire spectrum of aid such as grants, scholarships, Work Study, low-interest and government-subsidized loans. The largest proportion of this aid is in the form of loans.  Despite the budget woes in Washington, there is still money available for college through these programs.

2. Only students with good grades get financial aid.

Not true.  Colleges are seeking diversity among their classes.  Admissions officers are looking to have students from every socio-economic demographic represented.  And every student has some special skill to add to the mix. The key here is to match up the right student with the right school.  Is it better to be a big fish in a little pond or a small fish in a big pond?  Someone who is a “B” student but with a particular aptitude in a subject might have better odds of getting into a smaller school and be offered aid than the valedictorian competing with every other valedictorian applying to Harvard.

3. You have to be a minority to get financial aid.

Again, this is false.  Financial aid comes in many forms.  Loans are awarded based on the Expected Family Contribution (EFC) which is influenced by family size, parental income, and number of kids attending college at the same time. Loans are need-based and are color-blind.

4. I won’t need government help.  I’ll get scholarship money.

While you may have a talented student who excels in a particular sport, extracurricular activity or is gifted academically, hope is not a plan.  Consider the fact that National Merit Scholarships are very prestigious but can be  double-edged sword.  A student may receive the scholarship but receive no other aid from the school leaving the parent or student to foot the entire remaining bill.

Remember that College Planning is NOT just saving FOR college. It is not just saving in a 529 Plan.  College Planning is tailored to an individual family’s needs and is focused on SAVING ON the cost of college by using all the strategy tools in the financial aid tool box:  savings, investments, taxes and EFC reporting.

5. I make too much money to qualify for any aid or be able to do anything to lower the cost.

False.  This is the biggest myth of all and the most dangerous.  While a family with significant income may not be eligible for needs-based aid, there are dozens of strategies available that may lower the cost of college.  And even with a short amount of time until school, there are ways to lower the Expected Family Contribution (EFC) before filing a financial aid form.

  • Knowing how and where to hold your assets may help you qualify for more aid.  Hint:  Retirement accounts are a great way to kill two birds with one stone.
  • Checking your ego at the door when completing the FAFSA can help qualify you for more aid.  Be careful how you report the value of home or business equity or your stock portfolio.  Most people overestimate because they don’t know this one tip.

6. I have a child entering college next year and it’s too late to do anything.

Absolute nonsense.  I can literally rattle off at least 12 cost-saving tips including transfer credits, AP testing and proper use of home equity.  There are another dozen ways to lower your EFC and 10 different ways to save in the most tax-efficient way.

For one early retiree I showed him one strategy that netted him more than $9,000 in free, no-strings aid from Babson College for his college freshman son.  For another, I showed him tax strategies that will save him the cost of one year of tuition at Colby College for his soon-to-be freshman.

BOTTOM LINE: The Less You Know, the More You Pay.  The More You Think You Know, the More You Pay. The More You Know, the Less You Really Pay.

Pay Less for College with a Personal College Plan

Saving ON College Starts Here

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Tax Tips for Handling Real Estate in Divorce

Case Study:  First-Time Buyer Credit & Divorce

In 2008, Chris and Jenny purchased a home that qualified for the $7,500 first-time homebuyer credit.

They were married at the time of purchase and applied for the credit on a joint return.

In 2009, they divorced and Jenny received the house. Chris gave up ownership in 2009 and filed Form 5405 stating that he transferred the house to Jenny incident to the divorce [Form 5405, Line 13(e)].

In 2010, Jenny sold the house at a gain of $9,300.

Who repays the credit and how much?

Since Jenny received the home in the divorce, she has to repay the credit. In this example she must repay the entire $7,500 because her gain from the sale was $9,300.

The $9,300 gain was calculated by reducing the basis of the home by the $7,500 credit. If the gain had been less than the $7,500 her repayment would be limited to the amount of the gain.

If she sold it for a loss then none of the credit would have to be repaid.

According to the instructions to Form 5405, Line 13(e), the spouse who owns the residence after the divorce is responsible for the repayment, if any, of the entire first-time homebuyer credit.

Jenny will file the Form 5405 in 2010 and fill out Parts III and IV to repay the credit.

ViewPoint Newsletter for June

TAX HELPLINE:  978-388-0020 or 978-416-4107

Call the Tax and Financial Planning Helpline

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College costs continue to escalate.  The burden on families grows every year.

Even before the Great Recession trying to balance the competing and emotional needs of paying for college while trying to save for retirement was a struggle. Let’s face it: Paying for college is as much a retirement planning issue as anything else.  Don’t ever forget that.

So how much is a college education worth to you? The average price keeps going up and is the only part of the economy not showing any slowdown in price increases (besides gas prices of course).

  • Average public 4-year school tuition is now $16,000 per year
  • Private colleges are at $32,000 per year
  • Elite private colleges are near $50,000 per year

And this doesn’t include tuition, room, board, fees and “extras.”

Again, how much is this worth to you? Will you be satisfied eating Mac and Cheese or working as a Wal-Mart greeter during your “Golden Years” knowing that your child got the most expensive education that money could buy?

If the answer to that is “hell no,” then you’re at the right place.

Become an Informed Buyer of Education

Welcome to my latest blog where I will endeavor to bring you insightful and creative tips on how to be an informed consumer of higher education.

Trying to get a handle on what to do is difficult.  Let’s face it:  Unless you’re Octa-mom or do this everyday, you’re flying blind when it comes to figuring out how to manage paying for college. Have you actually seen a FAFSA form lately? Do you really want to?

Sure, if you have a couple of kids within a couple of years of each other, the rules might be the same.  Sure, you can rely on what your neighbors did for their kids who graduated a few years ago.

Or you can have a plan tailored to your situation.

Look, just like tax laws, financial aid rules and how college admissions officers work their magic change every year.

So you may as well have a plan and be a part of making it happen.

This blog and my website are here to help.

Stop by and let me know your thoughts.  Shoot me a question.  And feel free to try out the exclusive college planning service website on your own. And then let me know when you’re ready to get serious about this by calling me directly at 978-388-0020.

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As noted in previous articles and posts, whether or not your student qualifies for federal financial aid for college will depend on the Expected Family Contribution (EFC) calculation.

Typically, almost all assets and income are included in this calculation by financial aid officers.  There are exceptions to all rules and in this case, federal aid formulas (under the “Federal Methodology”) exclude home or family farm equity, money accumulated in tax-deferred retirement accounts and cash value built up in a life insurance policy.  The cash values of fixed and variable annuities are also excluded.

Since these assets are not counted in determining aid, some families may be tempted to consider “asset shifting” strategies.  With such techniques, a countable asset like savings or investments through a brokerage account are used to acquire one or more of these other non-countable asset types.

Friends and clients have attended financial aid workshops sponsored by college aid planners or insurance agents who recommend purchasing annuities or life insurance.  Sometimes these strategies involve doing a “cash out” refinance or drawing on a home equity line of credit. Tapping home equity to fund a deposit into an insurance or annuity vehicle may benefit a mortgage banker and insurance agent but is it in your best interests?

Asset Shifting to Qualify for More Financial Aid: Is it worth it?

Well, that depends on what side of the table you’re sitting on.

Yes, it’s true that anything you can do to reduce your expected family contribution may help boost the amount and type of aid your student may receive.

On the other hand, remember these points:

  • Family assets are counted at a low contribution rate of 5.6% above the asset-protection allowance calculated for your family circumstances.
  • If you put money into a tax-deferred account, it’s locked up.  Access to the funds before age 59 1/2 results in early withdrawal penalties in most cases.
  • You may have to pay to borrow your own money.

Granted, socking away money into tax-deferred vehicles may make sense for you.  And as I’ve noted before, paying for college is as much a retirement problem as anything else so anything you can do to provide for your Golden Years can be a good thing.

But don’t get tempted into long-term commitments to cover short-term financing issues.

By shifting assets you lose access and flexibility for the cash.  If employing such a strategy reduces your emergency cash reserve, then you’ve increased your risk to handle unexpected cash needs.

Cash Value Life Insurance and the Bank of You

Cash value life insurance accumulates its value over time.  Starting a policy within a couple of years of your student’s college enrollment is not going to help you.  During the initial years of such a policy very little cash is built up as insurance expenses and first-year commissions paid out by the insurer to the agent are very high which limit the amount of paid premiums that are actually invested for growth.

But consider this:  For some who have existing policies or are looking for a way to build cash over time that offers guarantees and is potentially tax-free, then by all means use life insurance.  There are strategies commonly referred to as the Infinite Banking Concept or the Bank of You which champion life insurance as a way to build and access your own pot of money available to you to borrow for almost any purpose.

There are many attributes to life insurance that make these concepts useful

  • Tax-free dividends,
  • Access to money without credit or income qualifications or delays from a traditional bank,
  • Guarantees on the cash value from the insurer.

But one downside is the cash flow needed to actually build up a pot big enough to tap into for buying a car much less paying school tuition.  You would in all likelihood need to divert all other available cash and stop funding any other tax-deferred plans to build up the cash.  And then there is the time line needed.  To effectively build up the cash, you really need to bank on at least 5 years before you have a Bank of You to tap. This is why such a solution is not recommended for those with students about to enter college.

Bottom Line:

Don’t let the financial aid tail wag the retirement planning dog here.  Only use these tactics after consultation with a qualified financial professional, preferably one who has no vested interest in whether or not you purchase a particular product.

 

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It’s never too early or even too late to start planning for ways to pay for college or post-graduate school.

Myths

There are a number of myths out there that can adversely impact your planning efforts:

1.) There’s not enough aid available;

2.) Only students with good grades get aid;

3.) My family makes too much money to qualify.

Reality

In reality, both “self-help” aid like loans and “gift” aid like grants and scholarships are available.  To increase your odds for getting your share there are a number of education-oriented and tax-oriented strategies you can use.

Some Tips When Applying for Financial Aid:

  • Fund Your Retirement— “Federal method” for calculating need usually does not consider retirement assets so put as much as you can into these accounts.
  • Reduce Assets Held in the Student’s Name—Parental assets are assessed at a lower rat: So buy the computer, dorm furniture or car in the base year (the year before filing the FAFSA) out of your student’s savings accounts.
  • Avoid Cash Gifts to Students—It’s Better for Grandma to Pay the School Directly: If you’re not qualifying for aid, at least it may help out her tax planning.  Better yet, take out the loans which are deferred until graduation and then let grandma help pay them.  This way you maximize your student aid without having grandma’s help count against the student.
  • Employ Your Child in Your Business and Use the Income to Fund a Roth IRA. The earnings won’t be subject to some of the typical payroll taxes because you’re employing family (restrictions apply) and by stashing it into the Roth, you’re building up a pot of money that can be withdrawn without tax penalty when used for qualified education expenses as long as the account has been open 5 years.

 

For more tips and help, consider using a qualified College Aid Planner like a CERTIFIED FINANCIAL PLANNER (TM) professional.

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Do you own investment real estate or a business? Have you been considering buying a rental property or starting a business? Have kids going to college in a few years?

If you already plan on your kids going to college, it’s never too late to start planning effective and efficient ways to increase savings, lower your taxes and improve your odds for receiving student financial aid.

Let’s say you already give your children an allowance. You’re already paying out of pocket and not getting any tax benefit. With a few changes you can turn that cash outflow into a tax deductible expense that can even help your kids save for college.

Consider hiring them to work in your business or on the rental property you own.

By paying them a reasonable wage for services like landscaping, cleaning, painting, shoveling snow or doing office administrative work like filing, stuffing envelopes or printing marketing flyers, you have an additional deductible expense which lowers the net income or increases the net loss of your business or property.

And for children earning income in the family business, there is no requirement for payroll taxes. And if you keep the amount of “earned” income below certain limits, you won’t be at risk of paying any “kiddie” tax either. (“Kiddie” tax limits adjust for inflation each year).

In effect, you have shifted income from a taxpayer with a higher tax rate to a low- or no-income tax paying child.

Now get your child to open a Roth IRA with the money you pay them and they have the added benefit of tax-free saving for college since Roth IRAs can be tapped for college tuition without paying a penalty as long as the Roth is open for at least five years (restrictions apply).

By reducing your income, you can also reduce your Expected Family Contribution (EFC) which is the critical number used to determine the amount and kind of student financial aid your child can get for college. The EFC is calculated using a number of things including the amount and type of parental assets as well as reported income. EFC is recalculated each time a financial aid form is submitted and is based on the assets and income from the year before.

So to improve your odds for financial aid, one strategy is to lower your reported income. By employing your child to lower your business or rental property income, you may be able to lower your EFC and improve the amount of aid your child receives.

About Steve Stanganelli, CFP ®

Steven Stanganelli, CRPC®, CFP® is a CERTIFIED FINANCIAL PLANNER ™ Professional and a CHARTERED RETIREMENT PLANNING COUNSELOR (sm) with Quest Financial, an independent fee-only financial planning and investment advisory firm with corporate offices in Lynnfield, Massachusetts and satellite locations in Woburn and Amesbury.

Steve is a five-star rated, board-certified financial planning professional offering specialized financial consulting advice on investments, college planning, divorce settlements and retirement income planning using alternatives like self-directed IRAs.

For more information on financial planning strategies, call Steve at 888-323-3456.

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When your salary stops at retirement, will you have enough to pay your bills, travel and live the lifestyle that you want in your Golden Years?

 

Sure, you may be one of the lucky ones with a pension.  Social Security may even still be around. But if you want to live your vision of retirement, then saving and investing properly is important.

 

And how you pay for college for your kids will impact your own retirement.

Think about this:  College tuitions, books, fees and housing continue to increase at a rate faster than inflation in general.  Based on current trends, the cost of sending just two kids to a private or elite college for a total of eight years will cost more than $360,000 if paid after taxes.  This means that those in the 28 percent tax bracket need to earn more than $500,000 in order to meet the costs from cash flow.

 

Regardless of where you send your kids to school, the bottom-line fact is this:  How you pay for college impacts how much you save for retirement.  For every dollar that you save on college costs means more for your personal retirement down the road.

 

There are a number of strategies you can use to improve your chances at a better retirement and a solid education at a lower personal cost.

 

There are more than thirteen strategies for increasing needs-based aid.  There are at least a dozen cost-cutting ways that any family can use to improve their bottom line.

 

Ultimately, it depends on how well you know how to use the IRS code for your advantage to lower your own Expected Family Contribution (or EFC in financial aid parlance).

 

Regardless of whether you expect to qualify for needs-based aid or not, here are some examples of cost-cutting strategies available to you.

 

Strategy 1:  Get College Credit Through Exams

By taking Advanced Placement exams or even a “challenge” exam for basic college courses, a student can get through school quicker potentially saving thousands in tuition and fees.  Opportunities are available for Advanced Placement (AP), College-Level Examination Program (CLEP) or DSST exams for 37 different courses.  For more information on these, check out www.collegeboard.com or www.getcollegecredit.com.

 

 

Strategy 2: Stay Local

In-state tuition and fees at a public higher education institution is a bargain compared to the elites and even crossing the border to go to another state’s public college.  If you are considering going across the border or away, consider having your child establish residency in that state.  Find out what the residency requirement are ahead of time by contacting the admissions office.

 

Strategy 3:  Get the Credit You Deserve from the IRS

Use the Hope Education Credit, renamed the “American Opportunity Tax Credit.” This was recently increased to $2,500 (from $1,200) and now applies to all four years of college, not just the first two.  In addition, forty-percent of the credit is now refundable. Another helping-hand comes in the form of the Lifetime Learning Credit which is available for one family member and allows you to take up to 40% credit on educational expenses up to $10,000.  Income limits apply so be sure to consult a qualified tax professional or visit www.irs.gov.

 

Strategy 4: Employ Your Child

If you own a business, work as an independent contractor or own rental real estate, consider hiring your child to work for you. Maybe your child can provide administrative support or help with marketing or real estate related chores. By hiring a child and paying him or her, you will lower your own personal taxable income through a business expense deduction and provide income for your child.  In addition, the child can use the earnings to open a Roth IRA, a tax-favored retirement account which is not assessed as an asset for financial aid purposes.  And if needed, a child can withdraw a portion of the proceeds to pay for qualified educational expenses.  There are certain limits and time restrictions that apply.  

 

Strategy 5: Establish a Section 127 Educational Assistance Plan

As a business owner you can establish a Section 127 employer-paid tuition benefits program for your employees. This plan allows the business owner to pay up to $5,250 per year to employees (including employed children) as a qualified tax deductible expense.  This can be used for both undergraduate and graduate programs of study.  Assuming that Junior was going to work in the family business during the summer and throughout the year, Junior can earn a wage (deductible expense for the business) which he can use for his own support and Roth IRA contribution (which may be eligible for paying educational expenses) and earn a tuition benefit (another deductible business expense).  If you were going to give the child the money anyway, you may as well structure it to be tax deductible.

 

Consider this: There are more than 110 different other strategies for you to consider. All the more reason to have a coordinated plan in place by speaking with a professional advisor who can help evaluate these options with you.

 

Food for thought: 

 

  • Encourage your pre-teen to open a Roth IRA with earnings from their paper route or other jobs.
  • Consider hiring your child to work in your business or help with chores related to your investment property.
  • Use a CollegeSure CD issued by an FDIC-insured bank to accumulate savings
  • Think about using a fixed income annuity to hold a portion of money for college to avoid the potential loss in principal that can happen with a 529 plan invested in mutual funds.
  • Pursue private and merit-based scholarships  (For more information on some of these options, check out www.fastweb.com, the CollegBoard and www.scholarshipexperts.com

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Market news got you down?  Not sure you want to go to the mailbox? Afraid your 401k has turned into a 201k? Afraid you’ll have to start searching for spare change in your couch to pay for college tuition?

Times are scary. And it is in times like these that all of our preconceived notions and assumptions get tested.

And they have been sorely tested these past 15 months or so.  Who is one left to believe or in what to believe?

This is why it is important to get back to basics and retake control over those things one truly can control.

It is in this spirit that I am launching a weekly series of teleconference calls starting next Wednesday (March 11).

During these trying times it may be easy to give up and say that there is nothing one can do.

But that would be wrong.  There is plenty you can do to get back on track.

First thing is to take control over those things you can control.

And to do this I will outline a Road Map and review the basic Rules of the Road.

 

Aimed at getting people back on course and in control of their finances, the Financial Focus Road Maps series will explore a variety of topics that may be impacting your personal bottom line.  Investing is only one part of a successful financial plan.  Yes, we will address investing strategies for volatile markets but we will also get back to basics. This series will also focus on issues like estate planning for newly married couples, elder care finances, maximizing cash flow to pay off debt, paying for college without busting what’s left of your retirement nest egg, evaluating employer-sponsored benefits, choosing insurance and understanding mortgage options in the new financial order.

 Financial Focus – Navigating through Volatile Times” will be the inaugural topic of this free recurring series starting Wednesday (3/11/09) from 7 PM to 8 PM. In this program, I will highlight the low- or no-cost strategies you can implement RIGHT NOW to protect what you have and map your fresh start.  

Please join me. 

This is a FREE series but space is limited to the first 95 participants.

You can register at http://events.linkedin.com/Financial-Focus-Road-Map-Series/pub/41788 or by calling me directly at 978-388-0020 or steve@focus-capital.com.

Future topics will include:

·         Breaking Up is Hard to Do – Financial Planning for Divorce and Beyond

·         The Special K Diet – Options for Nursing Your 401k Back to Health

·         IRA Triage – Making Your Retirement Money Last When the Market Won’t Cooperate

·         Catching a Falling Knife – How to Position a Portfolio to Preserve and Prosper in Tough Markets

·         The Sandwich Generation – Taking Over Family Finances for Aging Parents

·         Campus Treasure Hunting – Paying for College Without Going Broke

·         The Banker’s Secret – How to Live Debt Free and Gain Financial Freedom

In this format I will present each topic, sometimes introduce a guest speaker and then open the lines up for comments, questions and further discussion. Participants will also receive a link to download supporting educational materials and resources related to the evening’s topic.

Participate from the comfort of your own home or wherever else you are with a cell phone.

To participate in the live discussion, please call (712) 432-0800 and use the participant access code: 802437# approximately two minutes before the start of each teleconference.  There are no costs for using the conference line but you will be responsible for your own toll charges to connect.

Recordings of the program and resource materials will be available for free download at Steve’s blog, www.moneylinkpro.wordpress.com or www.stevestanganelli.com.

For more information, contact me directly at 978-388-0020 or 978-621-8268 (cell) or steve@focus-capital.com .

Financial Success Begins with Focus.

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