Trends in College Savings

1. Trends in College Savings Beth Feinberg Keenan College Coach beth.feinberg@getintocollege.com Julie Shields-Rutyna MEFA jshields-rutyna@mefa.org 2009 MASFAA Conference: Celebrating 40 Years of Change, Vision and Hope

2. Agenda • Savings Trends • Why Save? • How Should I Save? • What Are My Options? • Resources

3. 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.

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

5. Approximate PCs Family of Four with One College Student FM = Federal Methodology used by public colleges IM = Institutional Methodology used by private colleges College coach 2009

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

7. 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

8. 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

9. Section 529 Savings Plans Investment Account Specifically for College 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. • 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 College coach 2009

10. Prepaid Tuition Plans Investment Account Specifically for College 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. • 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 College coach 2009

11. 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.

12. 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 30th. Access an enrollment kit online at www.mefa.org/uplan during the enrollment period. Call 1 (800) 449-MEFA (6332).

13. Coverdell ESAs Investment Account Specifically for Education 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. • 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 Modified AIG phase out ranges for contributions (all years):$190,000-$220,000 (married filing jointly), $95,000-110,000 (single) College coach 2009

14. Taxable Accounts Stocks, Mutual Funds, Saving Accounts 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. • 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 College coach 2009

15. Student Owned Accounts Asset Ownership by Minors and Students 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. • 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 *In 2009, up to $1,900 is taxed at a non-working child/college student’s rate College coach 2009

16. United States Savings Bonds The Education Bond Program 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. • 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 2009 modified AGI phase out ranges:$104,900 - 134,900 (married filing jointly), $69,950 - 84,950 (other statuses) College coach 2009

17. Roth IRAs Special Treatment for Education Withdrawals 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. • 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 availabletax-free in retirement 2009 modified AGI phase out ranges for contributions:$166,000-$176,000 (married filing jointly), $105,000-120,000 (single) College coach 2009

18. Traditional IRAs Special Treatment for Education Withdrawals 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. • 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 College coach 2009

19. Choosing a Savings PlanWhat 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)

20. 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?

21. 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

22. 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

23. Saving for College 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

24. 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

25. Saving for College 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?

26. 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.

27. College Savings Resources • Savingforcollege.com • Collegesavings.org • www.mefacounselor.org • www.morningstar.com • www.fidelity.com/college