1 Topics to be covered The High Cost of Higher Education College Savings Strategies Choosing a 529 Plan Financial Aid and Student Loans Why College Is Still Worth It
2 The cost of college has been rising fast Average Tuition, Fees, Room and Board in constant (2014) dollars Published prices, 5-year intervals, adjusted for inflation $45,000 $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 Public 4-year colleges (in-state) Private 4-year colleges $42,419 $18,943 $ Source: The College Board
3 But not everyone pays the same amount Average Net Price, Estimates after including financial aid $50,000 $40,000 $30,000 $20,000 $10,000 $0 $18,943 $12,830 Public 4-year colleges (in-state) $42,419 Private 4-year colleges $23,550 Published Tuition, Fees, Room and Board Net Tuition, Fees, Room and Board Source: The College Board
4 Ways to pay Current income (cash flow) yours your child s Savings tax-advantaged non-tax-advantaged Financial Aid grants loans
5 Ask yourself how much you want to do for your child Sample scenarios: Parent pays 100% of college costs Child borrows to pay 100% of college costs Combination approach Example: parent pays 50%; child works, uses savings, and/or borrows to pay 50%
6 But don t save for college at the expense of your retirement College loans may not be ideal but are readily available. You probably can t get a loan for your retirement, so save for yourself first. In a pinch, you could borrow or withdraw assets from retirement accounts (401(k), Roth IRA), but avoid doing so if it will jeopardize meeting your retirement goals.
7 College savings vehicles Taxable account UGMA/UTMA Coverdell Education Savings Account 529 Prepaid Tuition Plan 529 College Savings Plan
8 Taxable account Pros Cons Wide variety of investment options Flexibility in case you need the money for some other purpose Income and capital gains are taxed Counts against financial aid if held in the child s name
9 Uniform Gifts to Minors Act/Uniform Transfers to Minors Act (UGMA/UTMA) Pros Cons Custodial account, can be invested in a wide variety of stocks, bonds, funds First $1,050 of earnings are income-tax free, with next $1,050 taxed at child s rate (for 2015) Counts as a child-owned asset in financial-aid calculations Gift is irrevocable Funds become property of the beneficiary at age 18 or 21 (depending on the state) with loss of custodian control
10 Coverdell Education Savings Account Pros Cons Gains and distributions used for qualified expenses are tax-free May be used for K-12 educational expenses as well as for college May be invested in a wide variety of stocks, bonds, funds Annual contribution limited to $2,000 per child Income limitation: $110k for individuals, $220k for joint filers Some major fund companies don t offer them
11 529 Prepaid Tuition Plan Pros Cons Lets you lock in future tuition payments at today s prices Avoids investment and inflation risk Growth in account s value and use of tuition credits are both tax-free Contributions may be deductible on your state income tax Credits may be usable at a private or out-of-state school Only available in about a dozen states If student attends private or out-of-state school, plan may not cover entire cost Only open to state residents (account owner or beneficiary)
12 529 College Savings Plan Pros Cons Gains and distributions used for qualified college expenses are tax-free Contributions may be deductible on your state income tax Potential to outpace rate of tuition inflation Low financial aid impact if owned by parent or dependent child Investment options limited to those offered by the plan Assets must be used for college expenses or are subject to tax penalties Risk that investment could decrease in value
13 Rules for 529 College Savings Plans State of residence, state of plan, and state of college to be attended are irrelevant. Anyone can open a 529 account in any state, and funds can be used for college expenses in any state. But you may only get a state income tax deduction by contributing to your state s plan. A beneficiary can have a 529 account in more than one state. Control of the 529 lies with the account holder, not the beneficiary. There are no income restrictions regarding who can open a 529. Maximum total contributions may exceed $300,000 per beneficiary. Contributions above $14,000 from a single source in a single year may have gift-tax implications. Unused funds in the account may be transferred to another family member s 529 account.
14 Choosing a 529 College Savings Plan: Start Local Start with your state: Does it have a 529 plan? Are there benefits available only to in-state residents? State income tax deductions State tax credits Matching grants Scholarships Are these in-state benefits portable? How much do you plan to save each year? Calculate the dollars-and-cents value of your in-state benefits.
15 Choosing a 529 College Savings Plan: Structural Basics 529 plans are either advisor-sold or direct-sold. Within the 529 plan, choose among investment options: Age-based option: asset allocation shifts from equity-heavy when kids are young, bond/cash-heavy as they near college Static option: asset allocation is fixed Some plans have several age-based tracks: Aggressive Moderate Conservative Most plans investment options eventually are invested in mutual funds.
16 Choosing a 529 College Savings Plan: Morningstar s Five Pillars People Process Parent Performance Price
17 Choosing a 529 College Savings Plan: Morningstar Analyst Rating
18 Choosing a 529 College Savings Plan 29 of the 64 plans that Morningstar rated in October 2014 received Gold, Silver, or Bronze ratings; 32 were Neutral and 3 were negative. Morningstar expects most states plans should deliver market-like or better returns, after tax benefits. If your state offers local benefits, think twice before leaving them. If your state does not have local benefits or benefits are portable, look nationally for the best plan.
19 Financial Aid: The college planning wild card Undergraduate and graduate student financial aid by source, Federal loans <1% Federal grants (Pell, others) 8% 6% 4% 4% 39% Institutional grants Federal tax breaks 19% Private and employer grants 20% State grants Nonfederal loans (mostly private) Source: The College Board Federal work study
20 Financial Aid: What to expect You will need to fill out the Free Application for Federal Student Aid (FAFSA). Expected Family Contribution (EFC) based on many factors: Parents income Student s income Parents assets (not including retirement, small business, or primary residence) Student s assets Number of family members in college Try this at home: Use FAFSA4caster at fafsa.ed.gov to determine eligibility for federal financial aid and to estimate EFC; also visit colleges online financial aid calculators.
21 A Few Words About Student Loans About 7 in 10 new grads leaves school with student-loan debt. Average amount owed among those who borrow: $30,000 Private student loans offered by banks, credit unions, other lenders Federal loan programs: Direct Subsidized Loan (need-based) Direct Unsubsidized Loan Perkins Loan (need-based) DirectPlus Loan (for Parents)
22 Federal vs. Private Student Loans Federal loans offer some advantages over private loans. Loan Feature Interest rate Fixed/variable Subsidized Income-based repayment Loan forgiveness Federal Usually lower Fixed In some cases Available Available Private Usually higher Often variable No Not available Not available
23 The Payoff Median earnings of workers age 25 and older by education level For full-time, year-round workers, 2011 Professional degree (M.D., J.D.) Doctoral degree Master's degree Bachelor's degree Associate degree Some college, no degree High school graduate Not a high school graduate Source: The College Board $102,200 $91,000 $70,000 $56,500 $44,800 $40,400 $35,400 $25,100 $0 $50,000 $100,000 $150,000