College Planning Essentials

Transcription

1 College Planning Essentials A comprehensive guide to saving and investing INVESTMENTS ARE NOT FDIC INSURED NO BANK GUARANTEE MAY LOSE VALUE

2 Section 1 College matters 4 Higher education pays 5 More education, less unemployment 6 Return on a college investment 7 Major differences in salaries 8 Good intentions, unexpected consequences Section 2 College costs 10 Tuition inflation 11 Rising college costs 12 Future four-year college costs 13 The real cost of college 14 How college costs affect behavior Section 3 Financial aid 16 Financial aid overview 17 Financial aid reality check 18 Federal financial aid eligibility 19 Estimating Expected Family Contribution 20 The effect of savings on financial aid 21 Student loan landscape 22 Private loans 23 The burden of debt 24 How college loans affect retirement Section 4 Saving and investing 26 Comparing college savings vehicles 27 Current saving and investing trends 28 Investing for long-term growth 29 Investing versus borrowing 30 The benefits of compounding 31 Performance pays 32 Invest more, pay less 33 Tax-efficient investing 34 Making college savings a family affair 35 Don t pay for college with retirement funds 36 Staying diversified over 18 years 37 The power of diversification 38 Asset allocation provided a smoother ride 39 College planning checklist Section 5 Appendix 41 Sources of financial aid 42 Financial aid: Types of applications 43 Federal aid methodologies 44 Federal student aid: A sample of grant programs 45 Federal student aid: Loan programs 46 College-related tax breaks 47 Comparing college savings options 48 The 529 plan advantage 49 Checklist: Choosing a 529 plan plans: State tax benefits 51 Index definitions 52 Disclosures 2

3 SECTION 1 College matters COLLEGE MATTERS The value of a college education is growing faster than the cost. Today, a college diploma has become a necessity for anyone seeking increased earning potential, job security and career opportunity. 28% 65% By 2020, 65% of U.S. jobs will require a degree beyond high school, up from 28% in Source: Georgetown University, Failure to Launch: Structural Shift and the New Lost Generation, Common myths and facts Myth: College is too expensive. Fact: The return on an investment in college is nearly $1 million more in lifetime earnings. Page 4 Myth: Not even college graduates can find a job in this economy. Fact: The unemployment rate among college graduates is currently just 2.5%. Page 5 Myth: College just isn t worth the student loan debt. Fact: A college graduate earns 38% more than a high school graduate, even after factoring in student loans. Page 6 College Planning Essentials: A comprehensive guide to saving and investing

4 Higher education pays A college diploma opens the door to a lifetime of higher earnings. DEGREES OF DIFFERENCE $100,000 Bachelor s degree holders earn nearly $1 million more over a lifetime than high school graduates. Those with doctorate degrees earn nearly $2 million more. 1 People who attend college but don t receive a degree earn only 11% more than high school graduates Bureau of Labor Statistics, 2014 dollars, based on 2014 earnings projected over a typical work life of ages 25 through Current Population Survey, U.S. Bureau of Labor Statistics, 2014 dollars, U.S. Department of Labor. J.P. Morgan Asset Management. Data are for persons age 25 and over. Earnings are for full-time wage and salary workers. $80,000 $60,000 $40,000 $20,000 $0 Average annual earnings by highest degree earned 2 65% GREATER PAY 145% GREATER PAY $34,736 $57,252 $85,228 HIGH SCHOOL GRADUATE BACHELOR S DEGREE PROFESSIONAL DEGREE 4

5 More education, less unemployment College graduates enjoy much better job security and opportunity, especially during economic downturns. BRIGHT JOB PROSPECTS The number of collegeeducated Americans with jobs has increased 18.2% since the beginning of the recession. 1 The unemployment rate for high school graduates aged 20 to 24 was 18.9% in 2014, nearly triple the rate for graduates with a bachelor s degree or higher. 2 A shortage of 5 million college-educated workers is projected by % 16% 14% 12% 10% 8% 6% 4% 2% 0% 1993 LESS THAN HIGH SCHOOL DIPLOMA HIGH SCHOOL, NO COLLEGE SOME COLLEGE COLLEGE OR GREATER Unemployment rates by education level as of September % Less than high school diploma 5.2% High school, no college 4.3% Some college 2.5% College or greater SAVING & INVESTING FINANCIAL AID COLLEGE COSTS COLLEGE MATTERS 1. Bureau of Labor Statistics Employment Situation Report, September National Center for Education Statistics, November Georgetown University Center on Education and Workforce, June Based on current production rate. 4. J.P. Morgan Asset Management, Bureau of Labor Statistics, FactSet. Unemployment rates shown are for civilians aged 25 and older. Data are as of 9/30/15. APPENDIX 5

6 Return on a college investment Even students who borrow for college can expect a significant long-term return on their investment. COLLEGE MATTERS Estimated cumulative earnings minus student loan repayment Bachelor s degree versus high school diploma COLLEGE COSTS $1,200,000 CUMULATIVE NET EARNINGS $1,000,000 $800,000 $600,000 $400,000 $200,000 $0 36 years old BACHELOR S DEGREE HIGH SCHOOL DIPLOMA % RETURN ON INVESTMENT In this scenario, a college diploma pays for itself by age 36. The college graduate earns 38% more over a lifetime than the high school graduate, even when factoring in loan repayment of full tuition costs. Source: College Board, Education Pays Based on median 2011 earnings for individuals working full-time year-round at each education level and each age. Includes only students who complete degrees; excludes bachelor s degree recipients who earn advanced degrees. Assumes college graduates borrow $14,352 to cover total first-year tuition and fee charges for (weighted average of $8,256 average public four-year in-state and $27,883 private nonprofit fouryear tuition and fees) for the first year and 5% more each of the next three years. Tuition payments and earnings are discounted at 3%, compounded every year beyond age 18. FINANCIAL AID SAVING & INVESTING APPENDIX AGE 6

7 Major differences in salaries Choice of college major has a significant impact on a graduate s starting salary. Average yearly starting salary by college major for the class of 2015 COLLEGE MATTERS SALARIES ON THE RISE On average, starting salaries for the class of 2015 are 5.2% higher than for the class of If salaries continue rising at this pace, the average child born today would earn roughly $91,700 in the first year after college. Engineering $62,891 Computer Science $62,103 Business $57,229 Communications $48,253 Math and Sciences $44,299 Education $40,267 Humanities and Social Sciences $38,049 COLLEGE COSTS FINANCIAL AID SAVING & INVESTING Source: National Association of College and Employers (NACE) Salary Survey Executive Summary, Fall All degrees $48,707 $0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 APPENDIX 7

8 Good intentions, unexpected consequences Saving for college is one of a family s top financial priorities, but common mistakes can keep them from achieving goals. COLLEGE MATTERS Why save for college STRONGLY AGREE An investment in child s future Child will earn more money SOMEWHAT AGREE 89% 64% 25% 84% 53% 31% 59% of parents are not confident about meeting college costs. COLLEGE COSTS FINANCIAL AID Part of the American dream College degree is more important now 83% 49% 34% 78% 52% 26% Not having a plan Investing too conservatively Starting too late Using taxable or retirement accounts Possible reasons why: Overestimating financial aid Underestimating college costs Not getting others involved SAVING & INVESTING APPENDIX Source: Sallie Mae, How America Saves for College,

9 SECTION 2 College costs Saving for college starts with a plan. And a plan starts with a goal. It s important to understand college costs so you know how much to save by enrollment time. of families have to rule out 62% colleges because of cost. COLLEGE COSTS Source: Sallie Mae, How America Pays for College, Common myths and facts Myth: I m not concerned about college inflation. It has to slow down at some point. Fact: Tuition continues to rise at a much faster rate than other expenses, so your savings need to keep pace. Page 10 Myth: I know how expensive college is. Fact: Many families underestimate just how much college costs and how quickly prices rise. Pages 11 and 12 Myth: I ll just make a few compromises to help pay for college. Fact: Non-savers often don t realize the sacrifices needed to make college affordable. Page 14 College Planning Essentials: A comprehensive guide to saving and investing

10 Tuition inflation College tuition costs have increased faster than any other household expense in recent decades. Apparel Cars 28% 47% Tuition versus other expenses Cumulative percent price change since 1983 COLLEGE MATTERS COLLEGE COSTS WHY COSTS ARE RISING Colleges are spending more to attract the best students. Colleges are hiring more to reduce student-to-faculty ratios. Colleges are receiving less financial support from cash-strapped states. Coffee Gas Housing Sweets Medical Care Tuition 108% 128% 143% 186% 356% 722% 0% 100% 200% 300% 400% 500% 600% 700% 800% FINANCIAL AID APPENDIX SAVING & INVESTING Source: BLS, Consumer Price Index, J.P. Morgan Asset Management. Data represents cumulative percentage price change from January 1983 August

11 Rising college costs College savings need to grow at a healthy rate to match or exceed rapidly rising costs. COLLEGE MATTERS Tuition, fees and room and board expenses 2 KEEPING PACE 2016 Private $43,921 TUITION AND FEES ROOM AND BOARD COLLEGE COSTS During the academic year, families spent an average of $24,164 on college up 16% from the previous year. This has been the largest increase since If prices increase 5% each year, the cost of college will more than double by Public Private Public 1. Sallie Mae, How America Pays for College, J.P. Morgan Asset Management using The College Board, 2015 Trends in College Pricing. Future college costs estimated to inflate 5% per year. Average tuition and fees for the public sector reflect four-year, in-state charges. $19,548 $47,045 $105,701 $0 $20,000 $40,000 $60,000 $80,000 $100,000 PROJECTED ANNUAL COSTS for 2034 Private $105,701 Public $47,045 FINANCIAL AID APPENDIX SAVING & INVESTING 11

12 Future four-year college costs The younger the child, the more college is likely to cost. Add up four years per child, and it equals one of a family s largest expenses. COLLEGE MATTERS $500,000 $450,000 $400,000 PRIVATE PUBLIC Projected cost of a four-year college education based on child s current age $374,811 $413,229 $455,585 COLLEGE COSTS $350,000 $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $0 $339,965 $308,358 $279,690 $253,687 $230,101 $208,709 $189,305 $183,917 $166,818 $151,309 $137,241 $124,482 $112,909 $102,412 $92,890 $84,254 Age 18 Age 16 Age 14 Age 12 Age 10 Age 8 Age 6 Age 4 Age 2 $202,768 Newborn FINANCIAL AID APPENDIX SAVING & INVESTING Source: J.P. Morgan Asset Management, using The College Board, 2015 Trends in College Pricing. Future college costs estimated to inflate 5% per year. 12

13 The real cost of college Net price is the sticker price (full cost) to attend a college, minus any grants and scholarships received. While most families don t pay the full sticker price, actual costs vary considerably based on household income and the college s financial aid policies. COLLEGE MATTERS Public four-year institutions 1 Private nonprofit, four-year institutions 1 Cost of college in ,2 $14, % $19,548 $26, % $43,921 AFFLUENT FAMILIES PAY MORE Due to financial aid policies, higherincome families paid 37% more than lower-income families in COLLEGE COSTS FINANCIAL AID $0 $10,000 $20,000 $30,000 $40,000 REAL COST On average, families paid 28% below sticker price at public colleges and NET PRICE STICKER PRICE 40% less at private colleges in HIGH-INCOME FAMILIES Income $100,000+ LOW-INCOME FAMILIES Income <$35,000 APPENDIX SAVING & INVESTING 1. Sallie Mae, How America Pays for College, The College Board, 2015 Trends in College Pricing. Figures are in 2015 dollars. 13

14 How college costs affect behavior To better afford college, many families must choose less expensive schools or change their daily lifestyles. COLLEGE MATTERS Elimination of colleges based on cost % 0% 20% 40% 60% 80% 100% OFF THE LIST After reviewing their financial aid package, 62% of families ruled out some colleges based on cost, up from 56% in COLLEGE COSTS Actions taken to make college more affordable Percentage of people taking each action STUDENT ACTIONS PARENT ACTIONS FINANCIAL AID 60% Student reduces spending 48% Student lives at home 45% Parent reduces spending 42% Student works more 25% Student accelerates education 22% Parent works more 16% Student changes major APPENDIX SAVING & INVESTING Source: Sallie Mae, How America Pays for College,

15 SECTION 3 Financial aid Financial aid can help pay for college, but not all aid is free, and not everyone qualifies. The more you save now, the less you may have to borrow later. 7 in 10 college seniors graduated with student loan debt in Source: Edvisors, MarketWatch, "Class of 2015 has the most student debt in U.S. history," May Common myths and facts FINANCIAL AID Myth: Financial aid is free money. Fact: 34% of all aid comes from loans that must be paid back with interest. Page 16 Myth: I don t need to save because my child will receive a scholarship. Fact: Only 0.3% of college students actually get a full ride. Page 17 Myth: Saving for college will hurt my chances for financial aid. Fact: Savings generally have little impact on financial aid eligibility when the funds are held in parents names. Pages 18 and 20 College Planning Essentials: A comprehensive guide to saving and investing

16 Financial aid overview Most college students require financial assistance of some kind, but 34% of all aid comes in the form of loans that must be paid back with interest. AID IS DOWN, TUITION IS UP From 2008 to 2014, state and local financing per student declined 23% nationally. From 2003 to 2015, tuition and fees increased 69% at state colleges and nearly 31% at non-profit private institutions. Undergraduate student aid by source and type in billions, $62.9 Federal loans (34%) Borrowed Free money $47.1 Federal grants including Pell (26%) $9.3 (5%) Federal work study $0.9 (<1%) State grants $10.8 (6%) $15.6 Education tax benefits (8%) Private and employer grants $37.9 Institutional grants (21%) TOTAL AID IN $184.5 billion Average aid package for full-time undergraduate students, Average total aid package $14,180 Grant aid from all sources $8,080 Federal loans $4,840 Tax credits, deductions and federal work study $1,260 Source: The College Board, November 2014 Trends in Student Aid. Percentages may not total 100% due to rounding. 16

17 Financial aid reality check Many families expect more free money from grants and scholarships than they are likely to receive. MORE APPLICATIONS, LESS AID Financial aid applicants include 86% of middle-income families and 76% of high-income families. The more people applying, the less aid there is to go around % of college students receive enough grants and scholarships to cover all costs Sallie Mae, How America Pays for College, Finaid.org. Based on full-time students at four-year colleges. 3. Sallie Mae, How America Saves for College, Financial aid expectations 3 61 % of parents who are not yet saving for college expect scholarships or grants to cover the costs. Grant reality (need-based) 45 % of families received grants averaging $7,114 1 Private 13% Private 26% 4-year Public 10% Scholarship reality (merit-based) 46 % of families received scholarships averaging $8,843 1 Percent of total costs covered by grants 4-year Public 13% 2-year Public 22% Percent of total costs covered by scholarships 2-year Public 8% 17

18 Federal financial aid eligibility The Department of Education processes the Free Application for Federal Student Aid (FAFSA) to determine the Expected Family Contribution (EFC). This is the amount colleges use to determine how much federal aid you re eligible to receive. HOW EFC IS CALCULATED 2 A family s annual income, including the student s, counts far more in the formula than savings and investments, especially when held in the parents names. TOTAL COLLEGE COSTS EACH YEAR Income PARENTS GRANDPARENTS/ OTHERS EXPECTED FAMILY CONTRIBUTION (EFC) Up to 22% 47% + 50% of adjusted gross income above the protected amount 3 Assets 5.64% of non-retirement assets above protected amount, including 529 plans, investments and savings Income of income above protected amount of $6,400 0% of income and assets considered in federal financial aid formulas. However, withdrawals for college by grandparents or others may be considered student income and must be reported on the following year s financial aid forms. Such income can reduce the amount of aid by 50%. 1. Sallie Mae, How America Pays for College Based on federal methodology for school year. 3. Protected amount for parents is dependent upon a number of factors, including household size and number of students in college. STUDENTS + FINANCIAL AID ELIGIBILITY Assets 20% of all assets in bank accounts, CDs, UGMAs/ UTMAs and any other savings FEDERAL AID In , 82% of families with a college-bound child applied for federal aid. 1 TOTAL EFC EFC is not the amount your family will pay for college or get in federal aid. It s a number used by schools to calculate how much aid a student is eligible to receive. 18

19 Estimating Expected Family Contribution The Department of Education provides the Expected Family Contribution (EFC) as guidance to colleges on financial aid eligibility in order to help determine the amount a family should pay. Use the chart below to estimate your EFC based on combined income and assets. COMBINED INCOME $50,000 $75,000 $100,000 $125,000 $150,000 $175,000 $200,000 $225,000 $250, Based on two-parent household with one child attending college, one child living at home. Assuming no income or assets for each dependent and age 49 for eldest parent. Protected amounts for assets vary based on age and income. These are estimates provided for illustrative purposes only, and they may not be representative of your personal situation and circumstances. $0 $2,364 $7,200 $15,170 $22,517 $30,257 $37,988 $45,391 $52,741 $60,091 Expected Family Contribution Estimates based on income and assets 1 ASSETS (EXCLUDING PRIMARY RESIDENCE AND RETIREMENT ACCOUNTS) $25,000 $2,364 $7,200 $15,170 $22,517 $30,257 $37,988 $45,391 $52,741 $60,091 $50,000 $2,863 $8,108 $16,236 $23,583 $31,323 $39,054 $46,457 $53,807 $61,157 $100,000 $4,282 $10,846 $19,056 $26,403 $34,143 $41,874 $49,277 $56,627 $63,977 $150,000 $6,060 $13,666 $21,876 $29,223 $36,963 $44,694 $52,097 $59,447 $66,797 $200,000 $8,299 $16,486 $24,696 $32,043 $39,783 $47,514 $54,917 $62,267 $69,617 $250,000 $11,071 $19,306 $27,516 $34,863 $42,603 $50,334 $57,737 $65,087 $72,437 Example: If you earn $150,000 in income and have $100,000 of savings, your estimated EFC is $34,143. $300,000 $13,891 $22,126 $30,336 $37,683 $45,423 $53,154 $60,557 $67,907 $75,257 19

20 The effect of savings on financial aid Savings actually count far less than income when calculating your Expected Family Contribution (EFC) for federal financial aid purposes. 529 PLAN ADVANTAGE When a 529 account is owned by parents, it has much less impact on federal financial aid eligibility than custodial accounts % Maximum parental savings considered in federal financial aid formulas. Big difference in college savings, little difference in financial aid Federal financial aid for two families earning the same income and sending a child to the same college costing $30,000 per year $30,000 $20,000 $10,000 $0 $11,848 $13,771 $18,152 Smiths $75,000 saved in 529 plan $16,229 Wilsons No savings EXPECTED FAMILY CONTRIBUTION FEDERAL FINANCIAL AID The Smiths have $75,000 more in savings but get just $1,923 less in financial aid. Source: J.P. Morgan Asset Management and finaid.org. Assumes both families earn $100,000 annually and 529 plan is owned by the parents. Does not include non-federal financial aid opportunities such as scholarships. 20

21 Student loan landscape Student loan debt has soared in recent years, putting an increased financial burden on college graduates and their parents Subsidized Stafford Loans For undergraduate students with documented financial need. The government pays interest while the student is in college. Issuance of federal and private loans Selected years, 2013 dollars in billions 1 $0 $10 $20 $30 $40 $50 $60 $70 $80 $90 $100 $110 $120 Unsubsidized Stafford Loans For undergraduate and graduate students regardless of financial need. The government does not pay interest while the student is in college. Parents PLUS For parents only. Perkins For students with high need at some institutions. t$ t$105.8 Grad PLUS For graduate students only. 1. The College Board, 2014 Trends in Student Aid. 2. Private education includes loans to students from states and from institutions, in addition to private loans by banks, credit unions and Sallie Mae. 3. Edvisors.com, May New York Federal Reserve, Wall Street Journal, 5 Things About Grad-School Debt, August t$117.7 Private Education Loans 2 Offered by private lenders, they can either supplement or replace federally guaranteed loans. The class of 2015 is the most indebted in history, with an average of $35,051 owed per student. 3 Americans carrying at least $100,000 in student loan debt have more than quintupled in the past decade to just over 1.8 million. 4 21

22 Private loans With college costs rising faster than the availability of federal aid, many families are choosing to fill the growing gap with private loans. PRIVATE LOANS AT A GLANCE Americans currently owe $91 billion in outstanding private student loan debt. 1 Private loans make up 7.2% of the $1.27 trillion student loan market. Private student loans tend to have higher interest rates and less flexible repayment options than federal loans. Federal vs. private student loans Outstanding balances (in billions) 1 $8 billion in defaulted private loans Private $ % Private loan defaults as of Federal $1, % 850,000 distinct loans in default 1. MeasureOne Private Student Loan Performance Report Q Private Student Loan Report 2012, Consumer Finance Protection Bureau. 22

23 The burden of debt Families that don t save enough for college often have no other choice than to borrow. Today, a record four in 10 households owe student debt. 1 DROWNING IN DEBT Student loan debt more than tripled to $1.2 trillion between 2004 and The average student borrower graduates with $35,051 in loans. 3 Student loan defaults are at a 20-year high, affecting over 7 million borrowers Pew Research Center. Young Adults, Student Debt and Economic Well-Being Report, May Households headed by a person younger than New York Federal Reserve, Household Debt and Credit Report, Q Edvisors.com, May U.S. Department of Education, FY 2014, Q3. 5. Accenture, 2014 College Graduate Employment Survey. 6. Upromise by Sallie Mae, American Student Assistance, Life Delayed: The Impact of Student Debt on the Daily Lives of Young Americans, Demos, At What Cost? How Student Debt Reduces Lifetime Wealth, August $1.2 $1.0 $0.8 $0.6 $0.4 STUDENT LOAN CREDIT CARD AUTO LOAN HOME-EQUITY LOAN Debt balances by type of consumer loan (in trillions) 2 In 2010, student loan debt surpassed credit card debt for the first time in history The debt impact on students and their parents 42% 65% 75% $208,000 of recent college graduates currently live with their parents 5 of parents expect to support their children for up to five years after graduation 6 of student borrowers say loan payments make it harder to buy a home 7 loss in lifetime wealth due to student loan debt 8 23

24 How college loans affect retirement Parents who borrow for college often spend their critical pre-retirement years paying off loans instead of funding 401(k)s, IRAs and other retirement accounts. DID YOU KNOW? The interest rate on federal parental college loans is 6.84%. 1 The relationship between retirement savings and college financial aid 0 % 50 % While in an account, 0% of parents retirement assets are considered in federal financial aid formulas. Withdrawals taken to pay for college are treated as student income, half of which may count against federal aid packages. If this money were invested for retirement instead Growth of $356 monthly investments made over 10 years 4 10 years 20 years 30 years $42,720 $59,687 $106,890 $191,424 TOTAL INVESTMENT Average parental debt at college graduation $30,867 $356 $42,720 Total debt 2 Monthly loan payment 3 Total cost with interest 3 INVESTMENT GROWTH 1. Interest rates apply to loans first disbursed between July 1, 2015, and July 1, Edvisors, U.S. Department of Education, National Postsecondary Student Aid Study, May J.P. Morgan Asset Management. Assumes a 6.84% interest rate and 10-year loan repayment period. 4. J.P. Morgan Asset Management. Illustration assumes $356 monthly investments over 10 years and an annual investment return of 6%, without the effects of taxes. This example does not represent the performance of any particular investment. Different assumptions will result in outcomes different than this example. Your results may be more or less that the figures shown. Investment losses could affect the relative tax-deferred investment advantage. Each investor should consider his or her current and anticipated investment horizon and income tax bracket when making an investment decision, as the illustration may not reflect these factors. These figures do not reflect any management fees or expenses. Such costs would lower performance. This chart is shown for illustrative purposes only. Past performance is no guarantee of future results. 24

25 SECTION 4 Saving and investing Choosing the right savings plan and following time-tested investment strategies can help you reduce taxes, increase growth potential and accumulate more for college. Only 27% of families saving for college invest in 529 plans. Source: Sallie Mae, How America Saves for College, Common myths and facts Myth: All college savings plans are the same. Fact: College savings plans differ in a variety of ways, including investments, tax benefits and flexibility. Pages 26 and 33 Myth: I ll just take out a loan if I don t save enough. Fact: It costs more to borrow and pay interest than to invest and earn interest. Page 29 Myth: It s too early to start saving for college. Fact: Starting early and saving regularly helps you maximize the power of compounding. Page 30 SAVING & INVESTING College Planning Essentials: A comprehensive guide to saving and investing

26 Comparing college savings vehicles Understanding the different tax benefits and features of college savings vehicles can help you choose the right one for your needs. 529 college savings plan Custodial account (UGMA/UTMA) Coverdell Education Savings Account Tax-free investing and withdrawals for any qualified higher education expense 1 Account owner control for the life of the account No income limits on contributors High contribution maximums Low impact on financial aid eligibility 27% of parents own 529 plans Funds must be used for the child s benefit, not necessarily for college Portion of investment earnings taxed at child s and parents rates Child assumes control at age of majority, usually 18 or 21 High impact on financial aid eligibility 9% of parents own UGMA/ UTMA accounts Tax-free investing and withdrawals for any level of education 1 Income limits on contributors Age limits on beneficiaries Maximum contribution of $2,000 annually per beneficiary Low impact on financial aid eligibility 11% of parents own Coverdell accounts Source: Sallie Mae, How America Saves for College, Earnings on non-qualified withdrawals may be subject to federal income tax and a 10% federal penalty tax, as well as state and local income taxes. 26

27 Current saving and investing trends Half of U.S. families aren t saving for college. The other half often choose vehicles that don t maximize their growth potential, such as savings accounts, CDs and taxable investments. UGMA/UTMA Trust Fund Coverdell Education Savings Accounts Prepaid State Plan U.S. Savings Bonds CDs Investments Checking Account 529 College Savings Plan General Savings Accounts 9% 11% 11% 12% 14% 15% 17% 23% 27% 48% Percentage of families using: 0% 10% 20% 30% 40% 50% Source: Sallie Mae, How America Saves for College, On average, those parents with a 529 plan save 89% more than those simply using a savings account. FAMILIES USING A 529 PLAN FAMILIES USING A TRADITIONAL SAVINGS ACCOUNT FAMILIES DON T FULLY MAXIMIZE GROWTH POTENTIAL More parents 48% save for college with low-yielding savings accounts than any other method. 27

28 Investing for long-term growth Starting a college savings plan early allows more time to hold investments with higher return potential. $100 $10 S&P 500 COLLEGE TUITION AND FEES U.S. 30-DAY TREASURY BILLS CONSUMER PRICE INDEX Growth of one dollar December 1979 to December 2014 $1 DEC 79 DEC 84 DEC 89 DEC 94 DEC 99 DEC 04 DEC 09 DEC 14 t$59.37 t$12.48 t$5.50 t$3.47 STOCKS OUTPACE TUITION INFLATION While short-term investments grew more slowly than tuition costs, stocks delivered high returns to help beat college inflation and achieve savings goals. Source: J.P. Morgan Asset Management. Past performance is no guarantee of future results. Hypothetical value of $1 invested at the beginning of Assumes reinvestment of income and no transaction costs or taxes. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. 28

29 Investing versus borrowing It costs less to invest now than to borrow later. When you borrow for college, you pay interest. When you invest, you earn interest and other forms of investment returns. IT TAKES A PLAN Without a plan, families run the risk of not saving enough and borrowing too much. Yet 36% of high-income families and 60% of middle-income families don t have a plan to pay for college Sallie Mae, How America Pays for College, J.P. Morgan Asset Management. The investing illustration assumes an initial lump-sum investment of $1,000, subsequent monthly investments of $300 thereafter for 18 years, and assumes an annual investment return of 6% and federal tax rate of 28%. Investment losses could affect the relative tax-deferred investment advantage. Each investor should consider his or her current and anticipated investment horizon and income tax bracket when making an investment decision, as the illustration may not reflect these factors. The borrowing illustration assumes an interest rate of 7.21% and a payback period of 10 years. This hypothetical illustration is not indicative of any specific investment and does not reflect the impact of fees or expenses. The chart is shown for illustrative purposes only. Past performance is no guarantee of future results. 3. Edvisors, U.S. Department of Education, National Postsecondary Student Aid Study, May Wall Street Journal, Congratulations Class of You re the Most Indebted Ever (For Now), May 2015, and MarketWatch, Class of 2015 has the most student debt in U.S. history, May $200,000 $150,000 $100,000 $50,000 $0 529 college savings plan versus student loan Initial investment of $1,000 plus monthly investments of $300 2 $0 $119,143 $65,800 College savings plan over 18 years $167,553 College loan: principal and interest INVESTMENT GROWTH OUT-OF-POCKET COST Average parental loan debt at graduation 3 $7,799 $10,000 $17,577 $30,867 $20,000 $30,000 $40,000 $101,753 lower out-of-pocket cost with 529 plan A BURDEN FOR EVERYONE The average parental debt load has almost doubled in a decade to nearly $31,000 in , while the average debt faced by students was more than $35,000 in

30 The benefits of compounding The sooner you start saving, the more time you may have to grow your college fund through the power of long-term compounding. Even small contributions add up over time. Start early, accumulate more If you start saving $500 per month when a child is born, you ll earn $84,214 more than if you start at age 6. Source: J.P. Morgan Asset Management. This hypothetical example illustrates the future values of different regular monthly investments for different time periods. Chart also assumes an annual investment return of 6%. Investment losses could affect the relative tax-deferred investing advantage. This hypothetical illustration is not indicative of any specific investment and does not reflect the impact of fees or expenses. Such costs would lower performance. Each investor should consider his or her current and anticipated investment horizon and income tax bracket when making an investment decision, as the illustration may not reflect these factors. A plan of regular investment cannot assure a profit or protect against a loss in a declining market. The chart is shown for illustrative purposes only. Past performance is no guarantee of future results. Start early, small savings add up Total amounts accumulated over 6, 12 and 18 years $200,000 $150,000 $100,000 $50,000 $0 $8,370 $100 MONTHLY CONTRIBUTIONS $250 MONTHLY CONTRIBUTIONS $500 MONTHLY CONTRIBUTIONS $20,926 $41,852 Total accumulation in 6 years $20,244 $50,610 $101,220 Total accumulation in 12 years $37,087 $92,717 $185,434 Total accumulation in 18 years 30

31 Performance pays Even small increases in investment returns can make a big difference when it comes time to pay for college. SEEKING HIGHER RETURNS Be an investor, not just a saver in low-yielding bank accounts. Stay invested for the long haul to avoid the risk of being out of markets during upswings. Reduce taxes to keep more of what you earn. Source: J.P. Morgan Asset Management using The College Board 2015 Trends in College Pricing. This hypothetical assumes an investment of $100,000 over an 18-year period. Different assumptions will result in outcomes different from this example. Investment losses could affect the relative tax-deferred investing advantage. This hypothetical illustration is not indicative of any specific investment and does not reflect the impact of fees or expenses. Such costs would lower performance. Each investor should consider his or her current and anticipated investment horizon and income tax bracket when making an investment decision. $350,000 $300,000 $250,000 $200,000 $150,000 $100,000 Investment growth over 18 years Calculations assume an initial investment of $100,000 at birth initial investment of $100, % ANNUAL RETURN 6.5% ANNUAL RETURN 6.0% ANNUAL RETURN 5.5% ANNUAL RETURN 5.0% ANNUAL RETURN Slightly higher returns can pay for a full year of college 5.0% 5.5% 6.0% 6.5% 7.0% covers a full year s cost at public college (in-state) covers a full year s cost at private college covers a full year s cost at Ivy League college t$337,993 $240,662 +$21,485 +$44,772 +$70,004 +$97,331 covers two full years cost at private college t$240,662 Difference of $97,331 31

32 Invest more, pay less Some savings vehicles, such as 529 plans, allow large contributions that can help you pay for much of college from your investment earnings instead of your pocket. Lump-sum investment Annual investments Out-of-pocket payment Investing versus paying out of pocket Amounts needed to fund four years of private college in 12 years $0 $100,000 $200,000 $300,000 OUT-OF-POCKET COST $165,776 INVESTMENT GROWTH $232,952 $339,965 Average private college cost $339,965 Source: College Board, 2015 Trends in College Pricing. Based on tuition, fees and room/board costs for school year. Costs estimated to inflate 5% per year. This example is hypothetical and assumes a 6% annual rate of return and an annual lump-sum contribution of $18,749 over a 12-year period. This example does not represent the performance of any particular investment. Different assumptions will result in outcomes different from this example. Your results may be more or less than the figures shown. Investment losses could affect the relative tax-deferred investing advantage. Each investor should consider his or her current and anticipated investment horizon and income tax bracket when making an investment decision, as the illustration may not reflect these factors. These figures do not reflect any management fees or expenses that would be paid by a 529 plan participant. Such costs would lower performance. Save 51% on out-of-pocket costs Save 31% on out-of-pocket costs Save 0% on out-of-pocket costs 32

33 Tax-efficient investing A tax-advantaged account, such as a 529 plan, has the potential to grow faster for college than a taxable investment earning the exact same returns. STATE TAX BENEFITS Many 529 plans offer state tax benefits in addition to federal tax-free investing. 1 See the Appendix on page 50 for more information. Taxable account Tax-free 529 plan 1. Earnings on non-qualified withdrawals may be subject to federal income tax and a 10% federal penalty tax, as well as state and local income taxes. 2. J.P. Morgan Asset Management. Illustration assumes an initial $1,000 investment and monthly investments of $300 for 18 years. Chart also assumes an annual investment return of 6% and a federal tax rate of 28%. Investment losses could affect the relative tax-deferred investing advantage. This hypothetical illustration is not indicative of any specific investment and does not reflect the impact of fees or expenses. Each investor should consider his or her current and anticipated investment horizon and income tax bracket when making an investment decision, as the illustration may not reflect these factors. These figures do not reflect any management fees or expenses that would be paid by a 529 plan participant. Such costs would lower performance. The chart is shown for illustrative purposes only. Past performance is no guarantee of future results. $0 Lower taxes equal a larger college fund Investment growth over 18 years 2 $30,000 $60,000 $90,000 $120,000 $103,666 $119,143 $15,477 more with a tax-free 529 plan 33

34 Making college savings a family affair Getting family, friends and students involved in college savings can increase the size of your account and reduce your share of the expenses. TALK TO CHILDREN Over half (54%) of college savers have discussed education costs with children, compared to just 28% of non-savers. 1 Don t go it alone Parents expect only 5% of college costs to be paid with contributions from grandparents, friends and family. 1 5% 1. Sallie Mae, How America Saves for College, J.P. Morgan Asset Management. This hypothetical example illustrates the future values of regular monthly investments by the account owner and annual investment by other contributors over an 18-year period. Investment losses could affect the relative tax-deferred investing advantage. This hypothetical illustration is not indicative of any specific investment and does not reflect the impact of fees or expenses. Such costs would lower performance. Each investor should consider his or her current and anticipated investment horizon and income tax bracket when making an investment decision, as the illustration may not reflect these factors. A plan of regular investment cannot assure a profit or protect against a loss in a declining market. The chart is shown for illustrative purposes only. Past performance is no guarantee of future results. More contributors create a larger college fund Investment growth over 18 years 2 Total $36,906 $72,264 $185,434 $294,604 Family and friends $1,000 annually Grandparents $2,500 annually Parents $6,000 annually 34

35 Don t pay for college with retirement funds Every dollar withdrawn from 401(k)s and IRAs for college can mean several dollars less for retirement, due to years of lost investment earnings and compounding. A DANGEROUS DECISION Nearly one in three parents either plans to use or would consider using retirement funds for college. 1 How college withdrawals can jeopardize retirement security 2 Amount withdrawn for college: Retirement account reduced by: $10,000 $32,071 More drawbacks of using retirement funds for college Taxes Taxes due on amount withdrawn Penalties Pay 10% penalty if under age 59½ 3 Financial aid Withdrawal treated as student income 1. Sallie Mae, How America Saves for College, J.P. Morgan Asset Management. This illustration assumes that assets would have remained in a tax-advantaged retirement account instead of being withdrawn for college, earning 6% annual investment returns for 20 years. This example does not represent the performance of any particular investment. Different assumptions will result in outcomes different from this example. Your results may be more or less than the figures shown. Investment losses could affect the relative tax-deferred investing advantage. Each investor should consider his or her current and anticipated investment horizon and income tax bracket when making an investment decision, as the illustration may not reflect these factors. These figures do not reflect any management fees or expenses. Such costs would lower performance. Shown for illustrative purposes only. Past performance is no guarantee of future results. 3. Distributions from retirement accounts may not be subject to the 10% penalty if used for qualified higher education expenses. Refer to IRS Publication 970 or your 401(k) plan provider for details. $25,000 $80,178 $50,000 $160,357 35

36 Staying diversified over 18 years Compare the best, worst and average annual returns for different investments over rolling 18-year periods. WHY DIVERSIFY? A balanced portfolio delivered higher returns than bonds with lower volatility than stocks. Even in its worst 18-year period, the balanced portfolio outperformed average tuition inflation. Even in its best 18-year period, short-term cash underperformed average tuition inflation. Source: Barclays Capital, FactSet, Robert Shiller, Strategas/Ibbotson, Federal Reserve, BLS, J.P. Morgan Asset Management. Rolling returns shown are based on calendar-year returns from 1978 to Data are as of 12/31/14. Past performance is not indicative of future results. Diversification does not guarantee investment returns and does not eliminate the risk of loss. 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Stocks 17.4% 11.9% 7.2% 18-year rolling returns Average annual returns, Bonds 12.2% 9.3% 6.9% Portfolio 14.8% 10.9% 7.9% Cash 6.7% 3.9% 1.5% Highest Return Average Lowest return 7.0% Average annual tuition inflation 36

37 The power of diversification A more diversified portfolio has historically provided higher returns with lower risk. 30% 15% Traditional portfolio S&P 500 MSCI EAFE Barclays Agg. 55% Return 4.81% Standard Deviation 10.74% Portfolio risks and returns % 8% 9% More diversified portfolio 8% 13% 4% Barclays Agg. S&P 500 MSCI EAFE Russell 2000 REIT Commodities Equity Mkt. Neutral MSCI EM Return 6.19% Standard Deviation 10.19% Source: J.P. Morgan Asset Management. Indexes and weights of the traditional portfolio are as follows: U.S. stocks: 55% S&P 500, U.S. bonds: 30% Barclays Capital Aggregate, International stocks: 15% MSCI EAFE. Portfolio with 25% in alternatives is as follows: U.S. stocks: 22.2% S&P 500, 8.8% Russell 2000; International Stocks: 4.4% MSCI EM, 13.2% MSCI EAFE; U.S. Bonds: 26.5% Barclays Capital Aggregate; Alternatives: 8.3% CS/Tremont Equity Market Neutral, 8.3% DJ/UBS Commodities, 8.3% NAREIT Equity REIT Index. Return and standard deviation calculated using Morningstar Direct. Charts are shown for illustrative purposes only. Past returns are no guarantee of future results. Diversification does not guarantee investment returns and does not eliminate risk of loss. Data as of December 31, % 22% 37

38 Asset allocation provided a smoother ride A diversified portfolio of many different asset classes fluctuated less than any one on its own. Source: Barclays Capital, Bloomberg, FactSet, MSCI, NAREIT, Russell, Standard & Poor s, J.P. Morgan Asset Management. Large cap: S&P 500, Small cap: Russell 2000, EM Equity: MSCI EME, DM Equity: MSCI EAFE, Comdty: Bloomberg Commodity Index, High Yield: Barclays Global HY Index, Fixed Income: Barclays Capital Aggregate, REITs: NAREIT Equity REIT Index. The Asset Allocation portfolio assumes the following weights: 25% in the S&P 500, 10% in the Russell 2000, 15% in the MSCI EAFE, 5% in the MSCI EME, 25% in the Barclays Capital Aggregate, 5% in the Barclays 1-3m Treasury, 5% in the Barclays Global High Yield Index, 5% in the Bloomberg Commodity Index and 5% in the NAREIT Equity REIT Index. Balanced portfolio assumes annual rebalancing. All data represents total return for stated period. Past performance is not indicative of future returns. Data are as of 9/30/15. Annualized 10-yr returns represent period of 12/31/04 12/31/14. Please see disclosure page at end for index definitions EM Equity 34.5% Comdty. 21.4% DM Equity 14.0% REITs 12.2% Asset Alloc. 8.1% Large Cap 4.9% Small Cap 4.6% High Yield 3.6% Cash 3.0% Fixed Income 2.4% 2006 REITs 35.1% EM Equity 32.6% DM Equity 26.9% Small Cap 18.4% Large Cap 15.8% Asset Alloc. 15.3% High Yield 13.7% Cash 4.8% Fixed Income 4.3% Comdty. 2.1% 2007 EM Equity 39.8% Comdty. 16.2% DM Equity 11.6% Asset Alloc. 7.1% Fixed Income 7.0% Large Cap 5.5% Cash 4.8% High Yield 3.2% Small Cap 1.6% REITs 15.7% Asset class performance Ranked in order of annual returns, Fixed Income 5.2% Cash 1.8% 2008 Asset Alloc % High Yield 26.9% Small Cap 33.8% Comdty. 35.6% Large Cap 37.0% REITs 37.7% DM Equity 43.1% EM Equity -53.2% 2009 EM Equity 79.0% High Yield 59.4% DM Equity 32.5% REITs 28.0% Small Cap 27.2% Large Cap 26.5% Asset Alloc. 25.0% Comdty. 18.9% Fixed Income 5.9% Cash 0.1% 2010 REITs 27.9% Small Cap 26.9% EM Equity 19.2% Comdty. 16.8% Large Cap 15.1% High Yield 14.8% Asset Alloc. 13.3% DM Equity 8.2% Fixed Income 6.5% Cash 0.1% 2011 REITs 8.3% Fixed Income 7.8% High Yield 3.1% Large Cap 2.1% Cash 0.1% Asset Alloc. 0.7% Small Cap 4.2% DM Equity 11.7% Comdty. 13.3% EM Equity 18.2% 2012 REITs 19.7% High Yield 19.6% EM Equity 18.6% DM Equity 17.9% Small Cap 16.3% Large Cap 16.0% Asset Alloc. 12.2% Fixed Income 4.2% Cash 0.1% Comdty. 1.1% Small Cap 38.8% 2013 Large Cap 32.4% DM Equity 23.3% Asset Alloc. 14.9% High Yield 7.3% REITs 2.9% Cash 0.0% Fixed Income 2.0% EM Equity 2.3% Comdty. 9.5% REITs 28.0% 2014 Large Cap 13.7% Fixed Income 6.0% Asset Alloc. 5.2% Small Cap 4.9% Cash 0.0% High Yield 0.0% EM Equity 1.8% DM Equity 4.5% Comdty. 17.0% EM Equity 8.8% REITs 8.3% High Yield 8.0% Small Cap 7.8% Large Cap 7.7% Asset Alloc. 5.8% DM Equity 4.9% Fixed Income 4.7% Cash 1.5% Comdty. 1.9% Annualized REITs 25.9% Comdty. 20.5% Asset Alloc. 13.3% High Yield 12.8% Fixed Income 3.2% Cash 1.0% Volatility Small Cap 20.5% EM Equity 18.8% Large Cap 16.2% DM Equity 16.2% 38

39 College planning checklist Set a goal What type of college should we consider? What costs should I expect? What is my family s financial outlook? How much of total costs do I want to pay? What can I afford to save? What does my financial advisor recommend? Create your plan Compare and choose college savings options Understand my risk tolerance Get started Open an account and select investments Set up a schedule of monthly contributions Review and adjust Review plan annually Make adjustments based on life changes 39

40 SECTION 5 Appendix Financial aid resources Parents and others can learn more about obtaining financial aid for college through the following websites: fafsa.ed.gov finaid.org irs.gov IRS Publication 970, Tax Benefits for Education ed.gov/finaid.html collegeconfidential.com collegesavings.org savingforcollege.com How to apply for federal financial aid Guide to grants, scholarships, loans and other aid Guide to federal income tax benefits for education Information from U.S. Department of Education Resources to help pay for college Information about 529 plans Comprehensive guide to college funding iefa.org Aid for students studying in a foreign country APPENDIX College Planning Essentials: A comprehensive guide to saving and investing

41 Sources of financial aid U.S. federal government States Colleges Non-profit or private organizations Banks, credit unions or other lenders TYPES OF FINANCIAL AID Grants and scholarships Loans Work study Allows qualified students to earn money for college expenses Grants and scholarships May be available even if families aren t eligible for federal aid Grants and scholarships Grants and scholarships Private loans DETAILS In addition to aid from the U.S. Department of Education, scholarships and loan repayment may be available to qualified students through additional government entities. Example: New York offers a Math and Science Teaching Incentive Scholarship to eligible students in approved programs that lead to math or science teaching careers. Aid may be available for attending a particular college and/or studying specific majors. Possible sources include charitable foundations, religious and community organizations, local businesses, ethnicitybased organizations, students and parents employers, and civic groups and professional associations related to a field of study. Tend to have higher interest rates and less flexible repayment options than federal loans. TYPES OF FINANCIAL AID Grants and scholarships are free gifts that generally don t have to be repaid. Grants are typically need-based while scholarships are merit-based. Loans must be paid back with interest. Source: (U.S. Department of Education). 41