Invest for College BUILDING A SAVINGS PLAN WHAT THIS MEANS TO YOU Putting together a plan that incorporates a tax-advantaged college savings program is an important first step in meeting your college funding goals and ensuring you don t fall short of meeting other goals. Starting early also gives your savings a chance to grow and helps you take advantage of compounding so that you can maximize the amount you save over the long term. An experienced Advisor can help you break down multiple goals into manageable pieces and choose the right investment vehicle, such as a 529 college savings plan. Starting to save and invest for college early in a child s life is important, so that college savings have time to grow and match rapidly rising college costs. With college costs increasing 5% on average each year, the price of a college degree will more than double by 2034, if current trends continue. 1 To ensure you meet your college funding goals as well as other long-term goals developing a plan that incorporates a tax-advantaged college savings program such as a 529 plan is a critical first step. 2 RISING COLLEGE COSTS Tuition, fees, and room and board expenses Tuition & Fees Room & Board Private $43,921 2016 Public $19,548 Private $105,701 2034 Public $47,045 $0 $20,000 $40,000 $60,000 $80,000 $100,000 Source: Asset Management, College Planning Essentials, 2015. 1 Asset Management, College Planning Essentials, 2015. 2 Tax-aware strategies seek to reduce capital gains. There is no guarantee that they will eliminate them. INVESTMENT PRODUCTS ARE: NOT FDIC INSURED NOT A DEPOSIT OR OTHER OBLIGATION OF, OR GUARANTEED BY, JPMORGAN CHASE BANK, N.A. OR ANY OF ITS AFFILIATES SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED 1
Regular investments of even small amounts can add up, and over time the return on your investment may begin to earn a return as well. REASONS TO PLAN AHEAD Some may find it daunting to juggle multiple goals such as investing for retirement or paying off a mortgage, so they put off saving for college until the time comes. However, paying for college is a major financial undertaking, and taking a pay as you go approach can be risky: Parents who suspend their retirement savings in order to meet tuition bills may create a shortfall that they can t make up later. There s also the chance that unexpected problems may arise in the future, making it necessary for children to take on debt. On average, the Class of 2015 graduated with $35,051 in student loan debt 3 a significant burden for a young person. According to, 529 Program Director at Asset Management, planning ahead is simply a better idea: As a rule of thumb, I think it s always better to invest and earn interest rather than to borrow and have to pay interest. Planning ahead also helps to put the power of time and compounding on your side. Regular investments of even small amounts can add up, and over time the return on your investment may begin to earn a return as well. THE ADVANTAGE OF COMPOUNDING By starting early, small savings add up Total amount accumulated over 6, 12 and 18 years $200,000 $150,000 $100 Monthly Contributions $250 Monthly Contributions $500 Monthly Contributions $185,434 $100,000 $101,220 $92,717 $50,000 $41,852 $50,610 $37,087 $20,926 $8,370 $20,244 0 in 6 Years in 12 Years in 18 Years Source: Asset Management, College Planning Essentials, 2015. 3 Pew Research Center, October 2014, based on the National Postsecondary Student Aid Study (NPSAS). 4 IRS rules apply. Consult your tax advisor before making any rollover decisions. 2
As a rule of thumb, I think it s always better to invest and earn interest rather than to borrow and have to pay interest. COMMON MISCONCEPTIONS Many people have misconceptions about financial aid in terms of who qualifies, how much or what type of aid the typical student receives, or how savings are counted in aid calculations. Recent data indicates that 61% of parents expect to receive some assistance. 5 Unfortunately, the hard truth is that not everyone qualifies, and not all aid is free 34% of all aid comes in the form of loans that have to be repaid. 6 Aid packages vary considerably and often fall substantially short of total costs. While 45% of families received some type of grant and 46% of families received some type of scholarship, only 0.3% of college students received enough aid through grants and scholarships to cover all costs. 7 5 Source: College Savings Foundation, 2012 Survey of Parents. 6 Source: The College Board, November 2014 Trends in Student Aid. 7 Source: Sallie Mae, How America Pays for College, 2015. 8 Source: Expected Family Contribution (EFC) 2016-2017 9 Tax-free means free from federal income tax. Another common misconception is that building a college fund will reduce a student s chances of qualifying for federal aid. But the fact is that family income counts much more than savings in determining eligibility. It s also important to choose the right investment vehicle. With a 529 college savings plan, for example, only 5% of the assets are counted when a parent holds the account for a child. 8 MAKE A PLAN WITH A FINANCIAL PROFESSIONAL An experienced Advisor can help you navigate the demands of multiple goals by breaking them down into manageable pieces. Even substantial goals seem less overwhelming when you regularly set aside a small amount for each one. Your Advisor will explain how much you need to save each month and which investment vehicle is most appropriate for each goal, taking advantage of tax benefits where possible. This can help you start early and stick to your program. For many parents, that will mean contributing regularly to a 529 plan as well as to their 401(k) or 403(b) retirement plan. A CLOSER LOOK AT 529 SAVINGS PLANS Let s look more closely at some of the advantages of 529 plans, as well as some limitations of Coverdell Education Savings Accounts (ESAs) and gifts to minors under Uniform Gifts to Minors Act (UGMA) that may make them less efficient vehicles. Tax-free earnings and withdrawals 9,10 Contributions to 529s are made with after-tax dollars, but investment earnings are tax-free when withdrawn for any qualified higher-education expense. For parents who start early and put time on their side, this can really add up: 15 to 20 years of investment returns plus compounding. In addition, some states also offer state tax incentives to residents. 10 Withdrawals from 529 plans are tax-free only if used to pay for qualified higher-education expenses (as defined by the IRS), such as tuition and other required fees, and room and board for students enrolled at least half time. Required course materials are also eligible, including books, calculators and software, as well as services for special-needs students. 11 Source: 529 Plan Advantages & Benefits, College Savings Plans Network 3
As long as it is used at an accredited institution that participates in the federal student-aid program, you can use a 529 to fund higher education costs in any in-state, out-of-state or international program. Residency not required You generally don t need to be a resident of a state to invest in that state s 529 plan. This lets you shop around for the most attractive program or one that offers specific benefits that are important to you. Contributions to state plans may be deductible on state returns, and some states even offer a deduction for contributions to another state s plan. Residents of Arizona, for example, receive a tax deduction for investments in any state s plan. You also are not required to use your 529 savings plan just for in-state schools. As long as it is used at an accredited institution, you can use a 529 to fund education costs in any in-state, out-of-state or international program. Low impact on financial aid eligibility One reason nearly twice as many parents choose a 529 plan over a custodial account is the difference in impact on federal financial aid. If a parent is the account owner, only 5% of 529 assets are counted for purposes of eligibility. That s considerably less than a custodial account under UGMA, for example. Because custodial accounts are treated as the student s assets, 20% of account assets are counted for purposes of eligibility. 12 Control of account A 529 account owner controls the distribution of funds for the life of the account, which can be an important consideration for parents and grandparents. By contrast, assets in a custodial account become the property of the recipient at his or her age of majority, and the recipient can decide where and how to spend the money. And 529 plans can be started by anyone, not just parents or grandparents. You can establish a 529 plan for any child in your life whether a family member or not. High contribution maximums increase efficiency Unlike a Coverdell ESA, where annual contributions are capped at $2,000 per beneficiary and eligibility is phased out for higher-income families, 529 plans are more flexible, with many plans allowing for contributions of more than $300,000 per beneficiary and no income limits on who may contribute. 529s can be used to transfer wealth to children and grandchildren efficiently, as contributions reduce an estate on a dollar-for-dollar basis. But keep in mind that contributions above $14,000 in a year may be subject to the gift tax, unless leveraging the five-year gifting feature of 529 plans. 13 12 Source: Expected Family Contribution (EFC) 2016-2017 13 Source: Savingforcollege.com 4
TAKE THE NEXT STEP Paying for college is a major financial goal, and one that can have a significant impact on your ability to retire or fund other financial goals. A key first step is developing a long-term plan that includes funding college costs among your important goals. Your Advisor can help you balance your financial goals, determine how much you need to save, and put together a well-diversified investment strategy to help you meet your goals. Investing involves market risk, including possible loss of principal, and there is no guarantee that investment objectives will be achieved. Some states, for example, offer favorable tax treatment and other benefits to their residents only if they invest in the state s own Qualified Tuition Program. Investors should determine if their home state offers a 529 Plan that may offer such favorable tax treatment and benefits to residents or beneficiaries of that state that may not be available to investors or beneficiaries of other states. Investors should consult their legal, tax or accounting advisor before investing in any 529 Plan or contact their state tax division for more information. JPMorgan Chase Bank, N.A. and its affiliates do not offer legal, tax or accounting advice. Securities (including mutual funds and variable products) and investment advisory services are offered through Securities LLC (JPMS). Annuities and insurance products are provided by various insurance companies and offered through Chase Insurance Agency, Inc. (CIA), a licensed insurance agency, doing business as Chase Insurance Agency Services, Inc. in Florida. JPMS, a member of FINRA, SIPC and CIA are affiliates of JPMorgan Chase Bank, N.A. Products not available in all states. 2016 JPMorgan Chase & Co. All rights reserved.