1. Paying for College for Higher Income Families EASFAA May 21, 2002

2. 2 Agenda n Why do we need a presentation specifically for families with higher income? n Review “Paying for College for Higher Income Families” –Financial planning recommendations –Understanding cost and EFC using case studies –Understanding awards using case studies –Scholarships –Other financing options –Tax Benefits

3. Why Do We Need This?

4. 4 Why do we need this? n 9 of the 14 EASFAA states rank in the top 20 states for highest income per capita n Economic downturn causing major impact on education investment plans n FA presentations focus on lower-to- middle income families n Higher income families have unique questions and issues

5. 5 Dependent Undergrads By Family Income, 1995-96 Source: US Dept. Of Ed, NSES, 1995-96 National Postsecondary Student Aid

6. 6 States with Highest Income Per Capita Top 6 in Northeast - - Top 6 states in 2001

7. 7 Cost of College, Less Aid, Increases with Income SOURCE: College is Possible, 1995-1996 data

8. 8 How You Market This Presentation n Affluent high schools, no special marketing n High schools with mixed income levels, targeted marketing to high income families

9. 9 Paying For College for Higher Income Families

10. 10 n Estimate total costs for all 4 years of college n Parents and Student together should develop a plan to fund and finance –know what you’re signing up for –know how you will pay for it n If you need to borrow –understand options: educational loans, personal loans, home equity loan –know the terms n Apply to at least one financially ‘safe’ school Financial Planning Recommendations

11. 11 $44B Loans $30B Pay-as-you-go $30B From Savings $22B Other Financial Aid/Scholarships $ 126 billion were spent by 14 million students in the 1997 - 1998 school year Sources: Estimates based on College Board, College Savings Plan Network, research conducted by Richard Day Research, Inc. for Fidelity Investments Families Use Several Sources to Finance College Costs

12. 12 Financial Planning for Higher Education

13. 13 n Parent savings n Transfer of income producing assets to a child under the Uniform Gift to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA) n Series EE and Series I US Savings Bonds n Education IRA n Traditional IRA n Roth IRA n Qualified Tuition Savings Plans Strategies for Financing Higher Education

14. 14 Comparing and Contrasting Financing Strategies + -

15. 15 Parent Invests Money in His or Her Name Advantages: n Maintains parental control over savings n Can ease tax bite by using tax efficient investments and take advantage of favorable long-term capital gains tax rates n Minimizes impact on financial aid eligibility n Can gift funds to the child as college gets closer n Withdrawals can be made for any need of the child—not just college

16. 16 Parent Invests Money in His or Her Name Disadvantages: n Earnings and capital gains taxed at parent’s rate during accumulation and distribution

17. 17 Parent Gives Money to Child via Custodial Account Advantages: n After age 14, earnings and distributions are taxed at the child’s rate, usually lower than the parent’s rate n Is an irrevocable gift and money can’t be spent on other needs

18. 18 Parent Gives Money to Child via Custodial Account Disadvantages: n Money belongs to the child when he or she reaches the age of majority n May have negative impact on financial aid eligibility

19. 19 Series EE and Series I Savings Bonds Advantages: n Interest excludable from income when used for qualified educational expenses n Bonds belong to parents

20. 20 Series EE and Series I Savings Bonds Disadvantages: n Benefits phase out at certain income ranges n Bonds pay lower interest rates than other fixed income investments n Exclusion does not apply to room and board expense, only tuition and fees

21. 21 Traditional IRA Advantages: n Both deductible and non-deductible IRA’s allow money to grow tax deferred n IRA withdrawals prior to age 59½ are penalty-free if used for qualified educational expenses n Funds remain in parental control n IRA savings are typically exempt when determining eligibility for financial aid

22. 22 Traditional IRA Disadvantages: n $2000 annual limit n Income limitations may apply –Can’t use in the same year you contribute to a Roth IRA n Withdrawals taxed at ordinary income rates to the parents

23. 23 Roth IRA Advantages: n Money grows tax free n Withdrawals prior to age 59½ are penalty-free if used for qualified educational expenses –Account established for 5 years n Funds remain in parental control n Roth IRA savings are exempt when determining eligibility for financial aid

24. 24 Roth IRA Disadvantages: n $2000 annual limit n Income limitations apply for making contributions –Can’t use in the same year you contribute to a traditional IRA

25. 25 Mid-Term Planning Horizon (Junior High School) n Begin purchasing less risky investments –Bonds and CD’s should be included along with stocks and stock mutual funds n Make contributions to tax-deferred savings plans –Qualified Savings Tuition Plans –Education IRA, Traditional IRA and Roth IRA n Purchase US Savings Bonds in parent’s name

26. 26 Short-Term Planning Horizon (High School) n Evaluate likelihood of receiving financial aid n If financial aid is unlikely, begin to transfer assets from parent’s name into child’s name using a custodial account (UTMA/UGMA account)

27. 27 Short-Term Planning Horizon (High School) n Calculate the cost of college and incidental expenses n Planning horizon less than five years n Invest in low risk fixed income investments such as CD’s, zero coupon bonds with maturities set for a specific college year, and money market funds

28. 28 Short-Term Planning Horizon (High School) n Shift higher risk investments into lower risk investments n Continue contributions to tax-deferred savings plans –Qualified Savings Tuition Plans –Education IRA, Traditional IRA and Roth IRA

29. 29 Short-Term Planning Horizon (College) n Evaluate different loan options n Use Hope Credit and Lifetime Learning Credit

30. 30 “Financially Manageable” During And AFTER The College Years PARENT STUDENT Will not jeopardize  Financial Security  Comfortable Retirement  Educating other children  Other financial goals  Will not leave excessive debt  Will not jeopardize financial independence after graduation Estimate the ‘Total’ Cost of Education 4+ years of expenses Estimate the ‘Total’ Cost of Education 4+ years of expenses Look at your entire Financial Situation Make financial decisions that :

31. 31 Understanding Cost and Expected Family Contribution (EFC)

32. 32 n Tuition n Fees n Room and Board n Books and Supplies n Transportation n Other Costs How Much Will College REALLY Cost?

33. 33 Cost Case Study n Meet Maria Martinez –good student, highly ranked tennis player –plans to major in biology and pursue pre-med –lives with parents –mother is dentist, father real estate broker –two children, including Maria and a brother in junior college –parents are homeowners

34. 34 Maria Martinez’s Cost

35. 35 How Much Will We Be Expected To Pay? n Expected Family Contribution n Federal Methodology n Institutional Methodology

36. 36 Need Analysis n A process of determining a student’s financial need by analyzing information provided by the student and the parent on a financial aid form. n Need analysis forms include the FAFSA and the CSS/Financial Aid PROFILE. Cost of Attendance (COA) - Expected Family Contribution (EFC) = Student’s Financial Need (eligibility for aid)

37. 37 Financial Aid Application Process (All Schools) Free Application for Federal Student Aid n Required for federal and state aid n Deadlines vary from school to school, earliest date is January 1st n Several filing methods –Paper (guidance and financial aid office) –FAFSA on the Web (www.fafsa.ed.gov)

38. 38 Financial Aid Application Process (Some Schools) n Institutional Aid Application n CSS/Financial Aid PROFILE - Available mid-September –Register first n Online (www.collegeboard.com) n Call 1-800-778-6888 –Complete PROFILE application n Online (www.collegeboard.com) n Paper version

39. 39 Determining EFC n Parents’ Contribution –Income and Assets –More than one child in college –Divorced parents (IM) –Private elementary or secondary schools (IM) –Unusually high medical expenses(IM) n Student’s Contribution –Income and Assets –Independent or Dependent

40. 40 Maria Martinez EFC Case Study n Applying to both an IM and FM school n Father earned $70,500 n Mother earned $79,000 n Both parents, 50 years old n Parents earned $5,650 in interest on investments n Total family income $155,150 n Maria earned $600 in wages and $30 in investments; has $500 in savings n FM SC is $175 n IM SC is $1,275

41. 41 EFC Case Study n Maria Martinez –IM provides allowance for medical expenses –IM protects a portion of assets for other children’s college expenses –FM protects a portion of assets for retirement –IM considers home equity of $75,500 (not FM) –Sibling attending college taken into account

42. Maria Martinez EFC

43. 43 Understanding Your Award

44. 44 Award Package Total amount of financial aid that the school is offering. n Scholarships - does not have to be repaid n Gift Aid - does not have to be repaid n Work-Study - school affiliated employment n Loans - must be repaid

45. 45 What Does the Award Package Really Mean? n Factors to consider in comparing offers –Grant aid vs. loan aid –Terms of loans –Unmet need –Aid renewal n Comparing Financial Aid Packages –www.collegeboard.com

46. 46 Scholarships

47. 47 Where are the Scholarships? n Institutional Scholarships –college website –contact financial aid office n Outside Scholarships –online searches, guidance counselor –local organizations –parent’s and student’s employer –church or synagogue –local hospitals, 4-H, Rotary Club, etc.

48. 48 Scholarship Tips n Apply early n Take your time on application and essays, get a teacher or parent to critique n Find out college policy on handling outside scholarships

49. 49 Scholarship Scams Look out for the scams! n Application fee n Guaranteed winning n Everyone is eligible n We apply on your behalf n Claim high success rate n Request for credit card, bank account

50. 50 Need-based Aid n Federal Pell Grant n Federal Supplemental Educational Opportunity Grant n Federal Work-Study n Federal Perkins Loan n Subsidized Federal Stafford Loan

51. 51 Financial Aid for No-Need Students Unsubsidized Federal Stafford Loan n Interest not subsidized by government n Low interest rate, payments deferred in school n 3% origination fee, up to 1% insurance fee n Annual loan limits –$2,625 (1st year) –$3,500 (2nd year) –$5,500 (remaining undergraduate years) –$8,500 (each year in graduate study)

52. 52 Financial Aid for No-Need Students n Additional eligibility for independent students (and dependent students whose parents are unable to borrow PLUS) –$4,000 per year for first and second years of undergraduate study –$5,000 per year for remaining years of undergraduate study –$10,000 per year for graduate and professional study

53. 53 Maria Martinez’s Awards

55. 55 Financial Aid Award Avoid comparing the aid award of your child with what the student down the street received. Even though the parents are in the same income bracket, too many other factors may well have been involved. TIPTIP

56. 56 Financial Aid Options: When the Award Package is Not Enough

57. 57 PLUS Loans n Parent borrows on behalf of dependent undergraduate student n Approval subject to credit check n Borrower up to cost less aid n Low, variable interest rate n 3% origination fee, up to 1% insurance fee n Repayment begins 60 days after disbursement

58. 58 Private Loan Programs n Only recommended after federal programs considered n Cosigner may be required, credit check required n Compare fees, rates, and benefits n Contact financial aid office for recommendations

59. 59 Financing Alternatives n Institutional Payment Plans n Whole Life Insurance Policies n Home Equity Loans n Employer Benefits n Retirement Plans n Margin Loans against Investment Portfolio

60. 60 What to Consider in Comparing Options n Interest rate n Evaluate true cost of loan including loss of investment return n Tax deductibility n Repayment terms

61. 61 Tax Benefits

62. 62 Lifetime Learning Credit n Annual limit up to $1,000 per family (goes up to $2,000 in 2003) n Income phase out –$40,000 to $50,000 (Single) –$80,000 to $100,000 (Joint) n Qualifying expenses –Tuition and enrollment fees n What education qualifies –All undergraduate and graduate programs n Can be used for education to acquire and improve job skills

63. 63 Hope Credit n Annual limit up to $1,500 per student n Income phase out –$40,000 to $50,000 (Single) –$80,000 to $100,000 (Joint) n Qualifying expenses –Tuition and enrollment fees n What education qualifies –First two years of undergraduate education n Other conditions –Can be claimed only for first two years of college

64. 64 Deduction for Education n Tax deduction for qualified higher education expenses (same as HOPE definition) n Maximum deduction of $3,000 in 2002 n Can’t be claimed in same year as HOPE or Lifetime Learning for same student n Income limits apply ($65,000/$130,000)

65. 65 Additional Information

66. 66 Website Resources College Search www.collegeboard.com www.wiredscholar.com Scholarship Search www.collegeboard.com www.fastweb.com www.usnews.com Paying for College www.collegeispossible.org/paying/paying.htm www.wiredscholar.com

67. 67 Website Resources Overview of Financial Aid www.finaid.org FAFSA on the Web www.fafsa.ed.gov Help in Completing the FAFSA www.ed.gov/prog_info/SFA/FAFSA The Student Guide www.ed.gov/prog_info/SFA/StudentGuide