1. CHAPTER 7 Educational Planning Chapter 7: Educational Planning 1

2. Saving for: child’s education  Tuition and fees at private 4-year schools rose 4.4% in the current school year to $26,273, according to a survey released by the College Board. Charges at public 4-year universities spiked over 6% for both in-state and out-of state students, to $7,020 and $18,548, respectively. — CNN/Money.com, October 20, 2009  The average debt for a graduate is now $23,000, that’s up from $13,000 12 years ago. — CBS News, November 5, 2009 Starting early makes a BIG difference. Chapter 7: Educational Planning 2

3. COLLEGE COSTS  Educational expenses represent one of family’s biggest costs  College expenses have nearly tripled in last 15 years  Estimates of how much 4-year colleges cost are available from public and private sources  Planners should emphasize that parents:  Who have time can capitalize on magic of compounding  Do not have to save it all because saving is only one of five ways to pay for college Chapter 7: Educational Planning 3

4. 4 education needs analysis

5. COLLEGE SAVINGS PLANS  UGMA AND UTMA  Custodial Accounts in Child’s Name  Inexpensive Way of Making Gift to a Minor Without Expense of Trust  Drawbacks  Taxable  Irrevocable gift  Minor takes possession at majority Chapter 7: Educational Planning 5

6. COLLEGE SAVINGS PLANS  Coverdell Education Savings Account (Coverdell ESA): Features  Represent nontaxable gifts to beneficiary and may be tax-free when distributed  Distributions represent original contributions and earnings  Cover qualified educational expenses  Tuition  Room and board  Books  Any education not just post-secondary Chapter 7: Educational Planning 6

7. Coverdell ESA Features  Current limits Max $2,000 (based on income)  Only one account permitted per Social security number  If more than one person contributing this can require some coordination  Donor can be anyone  Nothing says that I cannot give a gift of 2K to my parents, and they can contribute to the Ed IRA Chapter 7: Educational Planning 7

8. Coverdell ESA Features (Contd.)  If not used for qualified educational expenses, it is subject to income tax and 10% penalty  Money can be rolled over into a new ESA for a different beneficiary Chapter 7: Educational Planning 8

9. ESA Features (Contd.)  If rolled over within 60 days of distribution and new beneficiary is below 30 and member of original beneficiary’s family, distribution is not taxable  Distribution is tax exempt when taxpayer claims Hope credit (American Opportunity Credit 2012) or Lifetime Learning credit for a beneficiary, if not claimed for the same expense  If beneficiary reaches 30, funds remaining in ESA are assumed distributed and are subject to 10% penalty Chapter 7: Educational Planning 9

10. Section 529 Plans  Every plan must meet regulations of Section 529 of IRC to become qualified state tuition program (QSTP)  Regulations describe rules state programs and taxpayers must follow to comply with Section 529 Chapter 7: Educational Planning 10

11. Section 529 Plan Benefits  QSTP earnings are tax-deferred  529 Plans allow for high contribution limits – up to about $300,000  Distributions are excluded from gross income  Tax-exempt status extended to qualified private institution programs  Contributions to Section 529 treated as completed gift for estate and gift tax purposes Chapter 7: Educational Planning 11

12. Section 529 Plans Benefits (Contd.)  The $14,000/$28,000 (2013) exclusion can be leveraged to $70,000/$140,000 (2013)  Replacement of current beneficiary by new beneficiary is permissible  Tuition credits can be transferred tax free from one qualified tuition program to another program for the same beneficiary  Beneficiary can still claim Hope scholarship (American Opportunity credit 2012) or Lifetime Learning credit. Education expenses qualifying for credit can be paid for with 529 plan withdrawals.  Favorable tax treatment has been made permanent – it was scheduled to sunset in Jan. 2011. Chapter 7: Educational Planning 12

13. FORMS OF SECTION 529 PLAN  PREPAID TUITION PLAN  Guarantees that money saved today will match growth in tuition inflation at state-run colleges  COLLEGE SAVINGS PLAN  Contribute to a pool of money managed by state treasurer or outside investment advisor. Funds can be used at any accredited school for tuition, board, books and supplies Chapter 7: Educational Planning 13

14. SECTION 529 PLAN DRAWBACKS  Needs long time to derive benefits  Treated as income to the child, which can hurt chances for receiving financial aid  Provides limited investment choices and little flexibility in creating special portfolios  Not certain where they got this information  Programs are “sponsored” by many large companies, with many choices.  KYTIAA-CREF  OHPutnam  Do not need to use the “program” sponsored by your state. In fact some state plans are not as good as others Chapter 7: Educational Planning 14

15. SECTION 529 PLAN DRAWBACKS  Difficult to get out of a plan  10% penalty on 529 distributions included in income Chapter 7: Educational Planning 15

16. BEST PLACES TO INVEST COLLEGE FUNDS Best Places to Invest College Funds Nature of Plan 529 PlansUGMA/UTMACoverdell ESA A 401(k)-type savings plan sponsored by most states that offers a limited choice of investment A custodial account that lets you invest on behalf of the child. Like other IRAs, this is a tax-deferred plan to set up thru a financial service firm. Maximum contribution per account Varied by state – as much as $300,000 over the plan life. Unlimited, subject to Annual Maximum Contribution Per Donor $2,000 per year, through 2012. Contributions must stop when child turns 18. Limitations on Income None None Adjusted gross income limits apply. Age limitation Varies by plan None No contributions after age 18. All distributions must be made by age 30. Annual maximum contribution per donor $65,000 (2012) per beneficiary in the first year of a five-year period to avoid federal gift tax consequences ($130,000 per couple) $13,000 per beneficiary ($26,000 per married couple) to avoid federal gift tax consequences (2012) $2,000 per beneficiary per year (2012) Taxes Investments are tax-deferred. Earnings withdrawals will be free of federal income tax. First $950 free of federal income tax. Next $950 taxed at the child’s rate. Above that at parent’s rate until child reaches age 18. Investments are tax-deferred, and withdrawals are tax-free for qualified education expenses. Investments Many state plans offer only 3 or 4 investment options, and once money is invested, it’s difficult to move. You decide where to establish the account, and which stocks, bonds or mutual funds to invest in. You decide where to establish the account, and which stocks, bonds or mutual funds to invest in. Chapter 7: Educational Planning 16

17. INVESTMENT STRATEGIES FOR EDUCATION FUNDING  Develop investment strategy aimed at maximizing returns for preferred risk level  Diversify across three asset classes: stocks, bonds, and money market securities  Match time horizon of the asset and the liability Chapter 7: Educational Planning 17

18. INVESTMENT STRATEGIES FOR EDUCATION FUNDING Chapter 7: Educational Planning 18

19. INSTRUMENTS OF EDUCATIONAL INVESTMENT ALTERNATIVES  Zero Coupon Option  Savings Bonds for Education  Treasury Inflation-indexed Securities  Low-load Insurance  CollegeSure CD  Section 2503 (c) Minor’s Trust Chapter 7: Educational Planning 19

20. COLLEGE FUNDING CALCULATION  Cost of Attendance  Less: Expected Family Contribution  Equals: Student’s Financial Need Chapter 7: Educational Planning 20

21. FAMILY’S EXPECTED CONTRIBUTION  Current Federal Direct Student Loan Program has cut in half the fees on all subsidized Stafford Student Loans  In analyzing family’s student loan application, expected family contribution is used by processing firms  Worksheets Available to Calculate Expected Contribution Amount Chapter 7: Educational Planning 21

22. FINANCIAL ASSISTANCE  Grants and Scholarships  Student Loans  Work Study Programs Chapter 7: Educational Planning 22

23. MAJOR SOURCES OF STUDENT AID Source: College Board’s Trends in Student Aid 2011 http://trends.collegeboard.org/downloads/Student_Aid_2011.pdf Chapter 7: Educational Planning 23

24. REPAYMENT OF STUDENT LOANS  Deferment  Forbearance  Graduated Payment  Consolidation Chapter 7: Educational Planning 24

25. TAX RELIEF ACT OF 2001  Employer-Provided Education Assistance  5250 annually  Student Loan Interest Distribution  Some tax credits available  Deduction for Higher Education Expenses  Expired December 2011 Chapter 7: Educational Planning 25

26. EDUCATION TAX INCENTIVES  American Opportunity Credit (2012); Hope Scholarship  Lifelong Learning Credit  Below-the-line Tax Deduction (subject to 2% AGI floor) Chapter 7: Educational Planning 26