Saving for Education

1. Education Funding Saving for Education

2. What We Will Cover • Before you invest for school • Three Important Facts • The Cost of College • The College Funding Process • Saving Strategies

3. The Program • (continued) • Impact of Taxes and Inflation • Finding Money to Save • Planning for the “What Ifs” • What’s Next • What is a qualified expense?

4. QUIZ 1 What are your views on education funding?

5. Three Important Facts

6. The Cost of College Annual College Costs and Inflation Source: The College Board; U.S. Dept. Of Education; U.S. Bureau of Labor Statistics; Research Associates of Washington

7. The Cost of College Average Four-year Cost of College Source: The College Board, 1998

8. The Cost of College Where the Money Comes From PER $100 SPENT FOR COLLEGE FEDERAL LOANS $18 FAMILY FUNDS $60 FEDERAL GRANTS $8 ALL OTHER SOURCES $14 Source: The Federal Budget

9. QUIZ 2 What is your approach to the college funding process?

10. College Funding Process How Aid is Figured Out Expected Family Contribution (EFC) Cost of College Financial Aid Need Information Needed to Calculate EFC: 1. Parent’s available income 2. Parent’s available assets minus allowances 3. Student’s available income 4. Student’s available assets minus allowances

11. College Funding Process The Goals for Proper Planning • Minimize EFC • Maximize Outside Funds • Maximize Family Funds

12. College Funding Process Education Funding Life Cycle Birth Begin College Graduation Years Later Phase 3 Payback Phase 1 Accumulation Phase 2 College Years

13. QUIZ 3 How well are you saving for college?

14. Saving Strategies Power of Compounding -- The Rule of 72 72 Number of Years to Double ÷ = Interest Rate 6 % doubles in 12 years % doubles in years % doubles in years Note: Most investments generate fluctuating returns, so the period of time in which a specific investment will double cannot be determined with certainty.

15. Saving Strategies Popular Ways to Save for College • Coverdell Education Savings Accounts (ESA) • Section 529 Education Savings Plan • Gifts to Minors • (UTMA/UGMA Accounts) • Investments Owned in Parent’s Name

16. Saving Strategies Popular Ways to Save for College • (continued) • Withdrawals from a Traditional • or Roth IRA • Loans from a 401(k) Plan • EE Savings Bonds

17. Saving Strategies Comparison of College Savings Strategies

18. Saving Strategies Coverdell Education Savings Account Maximum Investment Permissible Use of Funds Control of Investment Decisions Income Tax Treatment Estate and Gift Tax Treatment Income Restriction Tax Credits Affected Penalties Limiting Flexibility Financial Aid Treatment $2,000 per year per beneficiary, beginning in 2002. Tuition fees, books, supplies, room and board and equipment for any accredited K-12 or post-secondary school. Owner. Earnings are federal and state income tax deferred, and beginning in 2002, withdrawals are federal tax-free if used for qualified elementary, secondary, or higher education expenses. The value of the account is removed from the account owner’s taxable estate. Yes.* Yes. See your tax advisor. Earnings on non-qualified withdrawals are taxed at owner’s rate, plus a 10% penalty. Student’s assets. * The ability to make contributions is phased out for single taxpayers with adjusted gross income (AGI) between $95,000 and $110,000 and for joint files with AGI between $190,000 and $220,000, beginning in 2002.

19. Saving Strategies Section 529 Education Savings Plan Maximum Investment Permissible Use of Funds Control of Investment Decisions Income Tax Treatment Estate and Gift Tax Treatment Income Restriction Tax Credits Affected Penalties Limiting Flexibility Financial Aid Treatment Varies by state. Maximum account balance limits generally exceed $125,000 per beneficiary. Tuition, fees, books, supplies, room and board and equipment for any accredited post-secondary school. Owner’s choices are limited to options within a particular state’s plan. Earnings are federal and state income tax deferred, and beginning in 2002, withdrawals are federal tax-free if used for qualified higher education expenses. In some states a state income tax deduction is available for contributions. The value of the account is removed from the account owner’s taxable estate, except in limited situations. No. Yes. See Your tax advisor. Earnings on non-qualified withdrawals are taxed at owner’s rate, plus a 10% penalty. Parent’s assets. Note: prepaid tuition plans may reduce aid dollar-for-dollar.

20. Saving Strategies Gifts to Minors (UTMA/UGMA Accounts) Maximum Investment Permissible Use of Funds Control of Investment Decisions Income Tax Treatment Estate and Gift Tax Treatment Income Restriction Tax Credits Affected Penalties Limiting Flexibility Financial Aid Treatment No limit. Any expense beyond basic support of the child. Custodian before the child reaches age of majority (usually age 18 or 21); after that, the child. When child is under 14, first $750 of unearned income is tax exempt, next $750 is taxed at the child’s rate, and the rest is taxed at the parents’ rate. After child turns 14, all earnings are taxed at the child’s rate. The value of the account is included in the custodian’s taxable estate if the custodian is the legal guardian of the child and dies before the child takes control. No. No. Money can be used at any time for the benefit of the child without penalty. Student’s assets.

21. Saving Strategies Investments Owned in Parent’s Name Maximum Investment Permissible Use of Funds Control of Investment Decisions Income Tax Treatment Estate and Gift Tax Treatment Income Restriction Tax Credits Affected Penalties Limiting Flexibility Financial Aid Treatment No limit. Any expense. Owner. No special tax benefits. Earnings are taxed in the year realized. The value of the account is included in the account owner's taxable estate. No. No. Money can be used at any time for any purpose without penalty. Parent's assets.

22. Saving Strategies Withdrawals from a Traditional or Roth IRA Maximum Investment Permissible Use of Funds Control of Investment Decisions Income Tax Treatment Estate and Gift Tax Treatment Income Restriction Tax Credits Affected Penalties Limiting Flexibility Financial Aid Treatment $3,000 per year in 2002, increasing to $5,000 per year by 2008. No limit on withdrawals. Tuition, fees, books, supplies, room and board and equipment for any accredited post-secondary school. Owner. Traditional IRA contributions may be tax-deductible, and entire proceeds are taxed at the owner’s rate. Earnings on a Roth IRA are tax-exempt if taken out after the owner turns 591/2 . The value of the account is included in the account owner’s taxable estate. Yes.* No. No penalty on early withdrawals if used for higher education expenses. For Roth IRAs, earnings on early withdrawals are taxed at the owner’s rate. Not considered in the expected family contribution (EFC) calculation. * The tax deductibility of contributions is phased out at certain levels of adjusted gross income, but the ability to contribute is not phased out regardless of income.

23. Saving Strategies Loans from a 401(k) Plan Maximum Investment Permissible Use of Funds Control of Investment Decisions Income Tax Treatment Estate and Gift Tax Treatment Income Restriction Tax Credits Affected Penalties Limiting Flexibility Financial Aid Treatment The lesser of $50,000 or half of the vested amount can be borrowed. Any expense. Owner. No special tax benefits. Loan amount is not subject to tax unless owner defaults on loan. The value of the account is included in the account owner’s taxable estate. No. No. Money can be borrowed at almost any time for any purpose. Not considered in the expected family contribution (EFC) calculation.

24. Saving Strategies EE Savings Bonds Maximum Investment Permissible Use of Funds Control of Investment Decisions Income Tax Treatment Estate and Gift Tax Treatment Income Restriction Tax Credits Affected Penalties Limiting Flexibility Financial Aid Treatment $15,000 per year. Tuition and fees only. Owner does not have a choice of investments. Earnings are exempt from state and local income taxes and federal income tax deferred if used for qualified higher education expenses. The value of the account included in the bond owner’s taxable estate. No. Yes. See your tax advisor. EE Bonds can be redeemed after 6 months. A 3-month earnings penalty applies to a redemption within 5 years of the issuance of the bond. Parents’ assets, if education expenses are for a child. Student’s assets, if education expenses are for bond owner.

25. Saving Strategies To summarize, the key is: Good Financial Planning

26. The Impact of Taxes and Inflation An Illustration Sample Case* Your Case* Initial deposit $1000 + 6% yield 60 - 30% taxes -18 Subtotal 1,042 - 4% inflation -41.68 Net value after taxes and inflation $1,000.32 Net percent 0.032% *This is a hypothetical illustration only and is not indicative of any specific investment.

27. The Impact of Taxes and Inflation Tax Considerations at Time of Expense • Potential Tax-Free Income* • - Education Savings Accounts (beginning in 2002) • - Section 529 Plans (beginning in 2002) • - Municipal Bonds • - EE Bonds *State and local taxes may apply to Education Savings Accounts, Section 529 Plans and Municipal Bonds. Federal taxes apply to EE Bonds for taxpayers above certain income limits.

28. The Impact of Taxes and Inflation Tax Considerations at Time of Expense • (continued) • Tax Credits and Tax Deductions • - HOPE Scholarship Credit • - Lifetime Learning Credits • - Deduction of Tuition Payments

29. The Impact of Taxes and Inflation Tax Considerations at Time of Expense • (continued) • Deductibility of Interest on Loans • - Student Loans: Generally deductible • - Parent Loans: Generally not deductible • - Home Equity Loans: Deductible • - 401(k) Loans and Insurance Policy Loans: Not deductible

30. Finding Money To Save Remember the Three Important Facts: 1. Amount already saved 2. Time available 3. Amount needed

31. Finding Money to Save Sources of College Funds That You May Already Have Possible Monthly Savings Personal Monthly Goal Check how much you can find each month: Develop and Follow a Family Budget $100-200 Refinance Your Home $100-150 Reduce Insurance Costs $50-100 Reduce Taxes Through Planning $30-50 Take Lunch to Work $30-50 Don’t Use Vending Machines at Work $10-20 Fewer Family Dinners Out $40-50 Prioritize Children’s Activities/Entertainment $40-80 Pay Off High-Interest Debt, e.g. Credit Cards $20-30 Use Tax Refunds for Cash Reserves $50-60 Reduce Utility Bills $30-40 Other $ Total Potential Monthly Savings

32. Finding Money to Save Balancing Education Funding with Retirement Planning

33. Finding Money to Save Remember, there are no scholarships or loans for your retirement.

34. Planning for the “What Ifs” Assuring that Funds will be Available

35. What’s Next For Parents • Develop an education funding plan • Regular investing • Position assets correctly • Research financial aid options • Involve grandparents • Encourage students to do their part

36. What’s Next For Students • Good grades • Prepare for entrance exams • Stay drug/alcohol free • Extra-curricular activities • Community involvement • Work and save for college • Develop special talents

37. What’s Next Qualified expense • Domestic school • tution • books • rent or mortgage if yo ulove of campus

38. What’s Next Take Action Now. Procrastination is your worst enemy.

39. What’s Next Www.collegeboard.com collegesavings.org