National Association of Student Financial Aid Administrators Presents… © NASFAA 2010 Filling the Piggybank: Saving for College

Slide 2© NASFAA 2010 The Presentation Influence of savings Savings options Advantages of 529 plans Impact of savings on eligibility for financial aid

Slide 3© NASFAA 2010 Influence of Savings Increase college aspirations Encourage personal responsibility Good first step in college-planning process

Slide 4© NASFAA 2010 Traditional Savings Accounts Advantages Disadvantages

Slide 5© NASFAA 2010 Savings Bonds Advantages Disadvantages

Slide 6© NASFAA 2010 Individual Retirement Arrangements (IRAs) Two common IRAs Traditional Roth

Slide 7© NASFAA 2010 Traditional IRAs Set up and contribute to IRA if you receive taxable compensation and are younger than age 70 and a half Annual contribution cap

Slide 8© NASFAA 2010 Traditional IRAs Annual contribution deductable on federal tax return Distributions are taxable Early distributions (before age 59 and a half) incur a tax penalty –Exception: No tax penalty for distributions used to pay qualified higher education expenses

Slide 9© NASFAA 2010 Qualified Higher Education Expenses Tuition and fees Books, supplies, and equipment Room and board if the student is enrolled at least half time

Slide 10© NASFAA 2010 Traditional IRAs Drawbacks

Slide 11© NASFAA 2010 Roth IRAs May be set up at any time Contributions are not deductible Ability to contribute limited by income Distributions used to pay for qualified higher education expenses not taxed unless distribution exceeds qualified expenses

Slide 12© NASFAA 2010 Roth IRAs Drawbacks

Slide 13© NASFAA 2010 Coverdell Educational Savings Accounts (ESAs) Savings accounts designed to encourage saving for education Annual contribution limit per beneficiary Contributions not deductible

Slide 14© NASFAA 2010 Coverdell ESAs Qualified education expenses –Higher education expenses –Qualified elementary and secondary school expenses Annual contribution limit affected by income

Slide 15© NASFAA 2010 Coverdell ESAs Treatment of funds if beneficiary has remaining balance at age 30

Slide 16© NASFAA 2010 Coverdell ESAs Disadvantages

Slide 17© NASFAA 2010 Section 529 Plans “Section 529” refers to a section in the tax code Plans generally administered by states Independent plan administered by a nonprofit consortium of private colleges

Slide 18© NASFAA Plans Two types Prepaid tuition plans College savings plans

Slide 19© NASFAA 2010 PrePaid Tuition Plans Purchase tuition credits or certificates on behalf of the beneficiary Currently available in 13 states

Slide 20© NASFAA 2010 College Savings Plans Make contributions to an investment account –Earnings based on market performance of underlying investments 49 states and Washington, DC offer savings plans

Slide 21© NASFAA 2010 College Savings Plans Accumulate free of federal and usually state tax Two types of plans –Direct-sold plans –Advisor-sold plans

Slide 22© NASFAA 2010 Qualified Higher Education Expenses Tuition and fees Books, supplies, and equipment Room and board if the student is enrolled at least half time

Slide 23© NASFAA Plans An account can only have one designated beneficiary at all times Flexibility in designating beneficiary

Slide 24© NASFAA Plans Anyone can make contributions to a 529 account Treated as completed gifts to the beneficiary for estate and gift tax purposes Can elect for contributions to be treated as if made over five years

Slide 25© NASFAA Plans Distributions not used for qualified higher education expenses are taxed at a penalty rate

Slide 26© NASFAA 2010 Advantages of 529 Plans Federal tax benefits State tax benefits Investment options Maximum plan value Educational programming resources

Slide 27© NASFAA 2010 Impact of Savings on Financial Aid Apply for most aid using Free Application for Federal Student Aid (FAFSA) Collects information about student and his or her family Data used to get an idea of the family’s financial strength

Slide 28© NASFAA 2010 Impact of Savings on Financial Aid FAFSA asset questions Current balance of cash, savings and checking accounts Net worth of investments, including real estate Net worth of current businesses and/or investment farms

Slide 29© NASFAA 2010 Impact of Savings on Financial Aid Common assets not reported on FAFSA Family home Certain small businesses Family farms Value of retirement plans and pension funds Value of noneducation IRAs

Slide 30© NASFAA 2010 Impact of Savings on Financial Aid Value of 529 plans is reported as part of net worth of investments Always the asset of the parent

Slide 31© NASFAA 2010 Impact of Savings on Financial Aid Parents not expected to deplete assets to pay for college Certain amount of assets protected for other uses such as retirement Small percentage of assets above threshold amount available for college expenses

Slide 32© NASFAA 2010 Questions

Slide 33© NASFAA 2010