2009 MASFAA Conference: Celebrating 40 Years of Change, Vision and Hope Trends in College Savings Beth Feinberg Keenan College Coach Julie Shields-Rutyna MEFA

Agenda  Savings Trends  Why Save?  How Should I Save?  What Are My Options?  Resources

Fidelity College Savings Indicator Survey  As unemployment levels rise, most parents with children in high school (79%) agree that having a college education is a minimum requirement today for a good job.  More parents of college bound students have started saving (63% up from 60%).  These parents are on track to cover an estimated 18 percent of college expenses (down from 21%).  Parents utilizing a 529 plan have a significantly higher indicator number, currently projected to cover 36% of their children’s future college costs.  90% of high school seniors believe that they should help pay for at least some college costs.

How many times have you responded to this statement?? “If I save for college, I won't get any financial aid.”

Approximate PCs $0 cash $0 home $100K cash $100K home $200K cash $200K home $300K cash $300K home $50,000 income FM: $3,000 IM: $1,400 FM: $4,800 IM: $8,200 FM: $9,700 IM: $18,200 FM: $15,300 IM: $28,200 $100,000 income FM: $17,300 IM: $10,200 FM: $20,500 IM: $16,500 FM: $26,200 IM: $26,500 FM: $31,800 IM: $36,500 $150,000 income FM: $32,000 IM: $23,200 FM: $35,100 IM: $28,700 FM: $40,800 IM: $38,700 FM: $46,400 IM: $48,700 $200,000 income FM: $46,100 IM: $35,800 FM: $49,300 IM: $41,100 FM: $55,000 IM: $51,100 FM: $60,600 IM: $61,100 FM = Federal Methodology used by public colleges IM = Institutional Methodology used by private colleges Family of Four with One College Student College coach 2009

Saving Vs. Borrowing *Based on 10 years at an interest rate of 7%. This example is an estimate only and market conditions may change.

Benefits of Saving  All educational options left open regardless of cost  Reduces or may eliminate need to borrow  Spreading out the cost of college over time may reduce the impact to your lifestyle during the years you pay for college  Minimum impact of need analysis/determination of financial aid

Saving Methods  Assets Specific to College Section 529 Savings Plans Prepaid Tuition Plans Coverdell ESAs (formerly known as “Education IRAs”)  Assets Not Specific to College Direct Asset Ownership by Parent UTMA/UGMA Accounts United States Savings Bonds  Other Methods Roth IRAs Traditional IRAs College coach 2009

Savings plans that allow account owners to grow their assets tax deferred for college expenses. Penalties apply if the account is not used for qualified post-high school educational costs. Each account may have only one person as the beneficiary, but tax-free intra-family rollovers between accounts for related beneficiaries is allowed. Section 529 Savings Plans  Taxation Tax deferred growth Tax free when used for qualified college expenses  Control Always under the control of the account owner  Financial Aid Favored: never assessed at more than 3 to 6%  Non-College Use Ordinary Income tax, a 10% penalty and state tax on account earnings State tax benefit recapture Investment Account Specifically for College College coach 2009

Most Prepaid Tuition Plans are 529 Plans that promise a rate of return approximating the inflation rate of one or more colleges. However, Prepaid Tuition Plans can be very punitive if the student attends a non-participating school. Prepaid Tuition Plans  Taxation Tax deferred growth Tax free when used for qualified college expenses  Control Always under the control of the account owner  Financial Aid Favored: never assessed at more than 3 to 6%  Non-College Use Ordinary Income tax, a 10% penalty and state tax on account earnings State tax benefit recapture Investment Account Specifically for College

MEFA’s College Savings Options U. Fund Massachusetts sponsored 529 College Investing Plan Use to pay for qualified higher education expenses at accredited post-secondary schools anywhere in the U.S. Qualified distribution are free from federal and Massachusetts income tax when used to pay for higher education. U. Plan Established in 1995, Massachusetts sponsored Prepaid Tuition Program. Allows you to lock in tomorrow’s tuition at today’s rates. Use to pay tuition and mandatory fees at participating Massachusetts public and private colleges and universities. Keeps pace with tuition at participating schools. A safe investment  U.Plan Tuition Certificates are backed by special municipal bonds issued and guaranteed by the Commonwealth of Massachusetts.  Despite any fluctuations in the market, your investment is safe and your tuition percentages are guaranteed.

The MEFA U.Plan Prepaid Tuition Program  Prepay up to 100% of college tuition and mandatory fees.  Minimum to get started is $300.  Lock in feature works for over 80 Massachusetts public and private colleges and universities.  Funds can be returned; amount is investment plus CPI.  Money saved in the U.Plan grows tax free.  Deposits are not pre-tax or tax deductible  Interest is tax-free upon withdrawal for college  Annual enrollment period is May 1-June 30 th. Access an enrollment kit online at during the enrollment period. Call 1 (800) 449-MEFA (6332).

People under 18 years old may receive a total of $2,000 per year in contributions to Coverdell ESAs, which are tax free when used for College and K-12 expenses. Unfortunately, many changes occur in 2011, making these questionable long term accounts. In addition, donors must have incomes below certain limits. Coverdell ESAs  Taxation Tax deferred growth Tax free when used for QEEs  Control Always under the control of the account owner  Financial Aid Favored: never assessed at more than 3 to 6%  Non-College Use Ordinary Income tax, a 10% penalty and state tax on account earnings Investment Account Specifically for Education Modified AIG phase out ranges for contributions (all years): $190,000-$220,000 (married filing jointly), $95, ,000 (single) College coach 2009

General parental savings that can be used for any purpose, including college. Almost any investment may be held in a taxable account, and almost any purchase made with it. Taxable Accounts  Taxation Interest, Dividends, and Capital Gains are taxable to the account owner  Control Always under the control of the account owner  Financial Aid Assessed at the lower parental rate of 3 to 6%  Non-College Use May be used for anything the account owner chooses Stocks, Mutual Funds, Saving Accounts College coach 2009

Minors (people under the ages of 18 or 21) may own assets but are not allowed to control them. The laws of each state define how a custodian may manage the minor’s assets. These accounts provide limited tax benefits to a family*, but are not financial aid friendly. UTMAs and UGMAs are examples of student owned accounts. Student Owned Accounts  Taxation A limited amount of unearned income is taxed at the child’s tax rate  Control Passes to the child at age 18 or 21  Financial Aid Assessed at higher 20% rate  Non-College Use May be used for anything that directly benefits the child/owner Asset Ownership by Minors and Students *In 2009, up to $1,900 is taxed at a non-working child/college student’s rate College coach 2009

United States Savings Bonds are a conservative investment that grows tax-deferred over time. People with moderate incomes may be able to use the proceeds from Savings Bonds tax-free when they use them for a dependent’s college tuition and mandatory fees. United States Savings Bonds  Taxation Tax deferred growth Tax free use of bond proceeds in limited cases  Control Always under the control of the account owner  Financial Aid Based on ownership  Non-College Use The accrued interest is taxable at the owner’s income tax rate The Education Bond Program 2009 modified AGI phase out ranges: $104, ,900 (married filing jointly), $69, ,950 (other statuses) College coach 2009

Roth Individual Retirement Arrangements are designed to give tax- free income to people in retirement. Only taxpayers with moderate incomes may make contributions to Roth IRAs. Unique rules governing Roth IRA withdrawals make these accounts attractive to some families as college savings vehicles. Roth IRAs  Taxation Tax deferred growth No early withdrawal penalty to pay for college  Control Always under the control of the account owner  Financial Aid None: It’s a retirement account  Non-College Use Assets are available tax-free in retirement Special Treatment for Education Withdrawals 2009 modified AGI phase out ranges for contributions: $166,000-$176,000 (married filing jointly), $105, ,000 (single) College coach 2009

Traditional Individual Retirement Arrangements are retirement accounts which provide tax deferred growth to savers, but taxable income when withdrawals are made during retirement. Many people have traditional IRAs they have rolled over from company pensions. Early withdrawal penalties are waived when IRAs are used for college. Traditional IRAs  Taxation Tax deferred growth No early withdrawal penalty to pay for college  Control Always under the control of the account owner  Financial Aid None: It’s a retirement account  Non-College Use Assets are available for retirement Most traditional IRA withdrawals are taxable Special Treatment for Education Withdrawals College coach 2009

Choosing a Savings Plan What is Right for your Family?  How much will I have to save?  Resources Current Income (saving or paying for college) Future Income (college/loan payments) Cash Flow (current & future spending) Student Stake (student loans & earnings)

Choosing a Savings Plan General Considerations What fees will you pay for the plan? Load fees Asset under management fees Application fees Annual fee Advisor Sold vs. Direct Sold  What investment options are available?  Are there plan specific limitations? Minimum investment time periods? Limited to certain uses?

Choosing a Savings Plan General Considerations  Would choosing a plan sponsored by the home state provide additional benefits? State income tax deductions for contributions Supplemental earnings for students who enroll in in-state schools Scholarship opportunities  Miscellaneous Considerations On-line or telephone access to transactions and account statements Affiliated rebate programs

Choosing a Savings Plan General Considerations  Miscellaneous Considerations On-line or telephone access to transactions and account statements Company trust – Fund Manager Affiliated rebate programs

Key Considerations  Are there tax advantages/disadvantages? Deductions for contributions? Tax deferred growth? Tax benefit when money is withdrawn?  What consequences apply if not used for college? Is someone else paying for college for your child? Scholarships Not college bound Saving for College

Tax-Deferred Savings This example is an estimate only and market conditions may change. The example is not intended to predict or project the investment performance of any security. Please see page 12 of MEFA’s Early College Planning Guide for Parents for example assumptions and additional information. In this hypothetical example, the Initial Investment is $26,000

Key Considerations  Who retains control over the funds?  Who is treated as the owner of the account? For financial aid purposes? For control purposes?  What are the Qualified Education Expenses? Saving for College

Saving For College Make saving for college a part of your regular budget. Automatic transfers Get your children involved Birthdays and special occasions No amount is too small Set a clear goal that you can attain within your particular timeframe.

College Savings Resources  Savingforcollege.com  Collegesavings.org   