2009 MASFAA Conference: Celebrating 40 Years of Change, Vision and Hope Trends in College Savings...
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Transcript of 2009 MASFAA Conference: Celebrating 40 Years of Change, Vision and Hope Trends in College Savings...
2009 MASFAA Conference: Celebrating 40 Years of Change,
Vision and Hope
Trends in College Savings
Beth Feinberg KeenanCollege [email protected] [email protected]
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 PCsApproximate PCs
$0 cash$0 home
$100K cash$100K home
$200K cash$200K home
$300K cash$300K home
$50,000 income
FM: $3,000IM: $1,400
FM: $4,800IM: $8,200
FM: $9,700IM: $18,200
FM: $15,300IM: $28,200
$100,000income
FM: $17,300IM: $10,200
FM: $20,500IM: $16,500
FM: $26,200IM: $26,500
FM: $31,800IM: $36,500
$150,000 income
FM: $32,000IM: $23,200
FM: $35,100IM: $28,700
FM: $40,800IM: $38,700
FM: $46,400IM: $48,700
$200,000 income
FM: $46,100IM: $35,800
FM: $49,300IM: $41,100
FM: $55,000IM: $51,100
FM: $60,600IM: $61,100
FM = Federal Methodology used by public colleges
IM = Institutional Methodology used by private colleges
Family of Four with One College Student
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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 MethodsSaving 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
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Savings plans that allow account owners to grow their assets tax Savings plans that allow account owners to grow their assets tax deferred for college expenses. Penalties apply if the account is not deferred for college expenses. Penalties apply if the account is not used for qualified post-high school educational costs. Each account used for qualified post-high school educational costs. Each account may have only one person as the beneficiary, but tax-free intra-family may have only one person as the beneficiary, but tax-free intra-family rollovers between accounts for related beneficiaries is allowed.rollovers between accounts for related beneficiaries is allowed.
Section 529 Savings PlansSection 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
College coach 2009
Most Prepaid Tuition Plans are 529 Plans that promise a rate of return Most Prepaid Tuition Plans are 529 Plans that promise a rate of return approximating the inflation rate of one or more colleges. However, approximating the inflation rate of one or more colleges. However, Prepaid Tuition Plans can be very punitive if the student attends a Prepaid Tuition Plans can be very punitive if the student attends a non-participating school.non-participating school.
Prepaid Tuition PlansPrepaid 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 OptionsU. 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 30th. Access an enrollment
kit online at www.mefa.org/uplan 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 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 contributions to Coverdell ESAs, which are tax free when used for College and K-12 expenses. Unfortunately, many changes occur in College and K-12 expenses. Unfortunately, many changes occur in 2011, making these questionable long term accounts. In addition, 2011, making these questionable long term accounts. In addition, donors must have incomes below certain limits.donors must have incomes below certain limits.
Coverdell ESAsCoverdell 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), $95,000-110,000 (single)
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General parental savings that can be used for any purpose, including General parental savings that can be used for any purpose, including college. Almost any investment may be held in a taxable account, and college. Almost any investment may be held in a taxable account, and almost any purchase made with it.almost any purchase made with it.
Taxable AccountsTaxable 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
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Minors (people under the ages of 18 or 21) may own assets but are 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 not allowed to control them. The laws of each state define how a custodian may manage the minor’s assets.custodian may manage the minor’s assets.These accounts provide limited tax benefits to a family*, but are not These accounts provide limited tax benefits to a family*, but are not financial aid friendly. UTMAs and UGMAs are examples of student financial aid friendly. UTMAs and UGMAs are examples of student owned accounts.owned accounts.
Student Owned AccountsStudent 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
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United States Savings Bonds are a conservative investment that United States Savings Bonds are a conservative investment that grows tax-deferred over time. People with moderate incomes may be grows tax-deferred over time. People with moderate incomes may be able to use the proceeds from Savings Bonds tax-free when they use able to use the proceeds from Savings Bonds tax-free when they use them for a dependent’s college tuition and mandatory fees.them for a dependent’s college tuition and mandatory fees.
United States Savings BondsUnited 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 - 134,900 (married filing jointly), $69,950 - 84,950 (other statuses)
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Roth Individual Retirement Arrangements are designed to give tax-Roth Individual Retirement Arrangements are designed to give tax-free income to people in retirement. Only taxpayers with moderate free income to people in retirement. Only taxpayers with moderate incomes may make contributions to Roth IRAs. Unique rules incomes may make contributions to Roth IRAs. Unique rules governing Roth IRA withdrawals make these accounts attractive to governing Roth IRA withdrawals make these accounts attractive to some families as college savings vehicles.some families as college savings vehicles.
Roth IRAsRoth 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 availabletax-free in retirement
Special Treatment for Education Withdrawals
2009 modified AGI phase out ranges for contributions:$166,000-$176,000 (married filing jointly), $105,000-120,000 (single)
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Traditional Individual Retirement Arrangements are retirement Traditional Individual Retirement Arrangements are retirement accounts which provide tax deferred growth to savers, but taxable accounts which provide tax deferred growth to savers, but taxable income when withdrawals are made during retirement. Many people income when withdrawals are made during retirement. Many people have traditional IRAs they have rolled over from company pensions. have traditional IRAs they have rolled over from company pensions. Early withdrawal penalties are waived when IRAs are used for college.Early withdrawal penalties are waived when IRAs are used for college.
Traditional IRAsTraditional 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
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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)
Choosing a Savings PlanChoosing a Savings Plan
General ConsiderationsWhat 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 PlanChoosing a Savings PlanGeneral 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 PlanChoosing a Savings PlanGeneral 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 CollegeSaving 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 CollegeSaving for College
Saving For College
• Make saving for college a part of your regularbudget.
• 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.