Saving Money for College - College Savings Plans For Kids
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Saving money for college and more at http://mysoundstrategy.wordpress.com - College savings plans for kids are reviewed in this video. Discover why not saving money for college can be a potential retirement problem for some unprepared parents. http://www.youtube.com/watch?v=z4DeGzNlQ7Q To schedule a private client consultation, email mark.geraci@lpl.com or call (847) 469-8195 or write to: LPL Financial - Mark Geraci Jr. 25782 W. West Dr. Wauconda, IL 60084 Securities offered through LPL Financial, Member FINRA/SIPC The LPL Financial Registered Representative associated with this page may only discuss, and/or transact business with residents of the following states: IL, NC, NM, WI
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Saving Money for College - College Savings Plans For Kids
- 1. For more information on saving for college Invest in Your go to Child’s Future http://mysoundstrategy.wordpress.com Start Planning for College Now! Securities offered through LPL Financial, Member FINRA/SIPC
- 2. Today’s Agenda Why should you consider college planning today? How to develop a college savings plan Get started today! Page 2
- 3. Our National Poll Revealed… College a highly valued More than 80% of credential Americans believe that sending their children to 90% of Americans view college is achievable sending their kids to college as an essential part of the American dream 83% believe that the cost 64% strongly agree that of college is worth it, their children will earn given a college more in the long run with a education’s value college degree Source of data: “Keeping College Within Reach” study sponsored by OppenheimerFunds. Page 3 1001 parents interviewed via telephone between February 2 and 26, 2009.
- 4. A Belief in the Value of a College Degree Why did 46% say it’s more important to save for a college education than retirement? Because… “I can always put off my retirement, but my kids can’t put off college.” Source of data: “Keeping College Within Reach” study sponsored by OppenheimerFunds. Page 4 1001 parents interviewed via telephone between February 2 and 26, 2009.
- 5. College Savings Efforts: Most Families Staying the Course Amidst economic slowdown, families: 60% have not put saving for college on hold 60% have not reduced the amount they are saving for college 92% have not withdrawn funds from a college savings plan and Only one in four (26%) agree that the high cost of college has discouraged them from saving However, many are considering, or planning to consider, more affordable colleges or universities (57%) Source of data: “Keeping College Within Reach” study sponsored by OppenheimerFunds. Page 5 1001 parents interviewed via telephone between February 2 and 26, 2009.
- 6. Many are Strongly Motivated to Keep Borrowing Under Control Parents are committed… Nearly 80% want to cover Preparing their children 50% or more of college expenses, 24% say they Sticking to their saving want to cover the full strategies amount …But not realistic 77% have saved less than Aspirations don’t match $20,000 the reality of their saving 43% have saved less than efforts $5,000 Reluctant to have children 56% think scholarship money take on debt will pay for a substantial portion Source of data: “Keeping College Within Reach” study sponsored by OppenheimerFunds. Page 6 1001 parents interviewed via telephone between February 2 and 26, 2009.
- 7. Financial Aspirations Not All in Sync with Financial Realities 77% of families have saved less than $20,000 for college 62% have saved less than $10,000 43% have saved less than $5,000 12% of families have saved nothing at all 56% think scholarship money will pay for a substantial portion of their kids’ college education Just 25% have limited spending on things like eating out and entertaining, to help kids get to college Source of data: “Keeping College Within Reach” study sponsored by OppenheimerFunds. Page 7 1001 parents interviewed via telephone between February 2 and 26, 2009.
- 8. We Asked: How much, if anything have you saved for your kids’ college education? Among those who say it is very or somewhat likely that their child (or any of their children) will attend college in the future: 25% 20% 15% 10% 5% 0% Nothing $1,000- $2,000- $5,000- $10,000- $20,000 or $2,000 $5,000 $10,000 $20,000 more Note: 4% responded don’t know/declined to answer. Source of chart data: OppenheimerFunds “Understanding Consumer Page 8 Knowledge of College Savings Vehicles” study, February 2006.
- 9. Financial Aspirations Not All in Sync with Financial Realities According to 2008-2009 estimates from the College Board: Roughly two-thirds of all full-time undergraduate students receive grant aid1 Grants and tax benefits averaged about $3,700 for in-state students at public four- year colleges versus average annual costs of $14,3331,2 Students at private four-year colleges received approximately $10,200, compared with average annual costs of $34,1321,2 1. Source of data: 2008-2009 College Prices: Keep Increases in Perspective Http://www.collegeboard.com/parents/csearch/know-the-options/21385.html. 2. Source of data: The College Board. Trends in College Pricing 2008. Page 9 http://professionals.collegeboard.com/profdownload/trends-in-college-pricing-2008.pdf
- 10. What Does This All Mean? Need to increase awareness of college savings vehicles Fitting college into overall savings and investment plans is a huge challenge Parents need help! And… Page 10
- 11. College Can Be a Retirement Issue How old will you be when your youngest child graduates college? Have you spent all your savings? Have you borrowed to the hilt? Have you taken out a second mortgage? Have you tapped your retirement funds? How will you pay off college debt and save enough to retire? Page 11
- 12. College Can Be a Retirement Issue There are generally loans available for college But, who will lend your clients money for retirement? Effective planning today can help ensure: A successful college plan and A comfortable retirement Page 12
- 13. College Can Be a Retirement Issue 1. Set goals. 2. Prioritize tax, financial aid and control of assets issues. 3. Determine the account owner. 4. Select appropriate investments. 5. Start saving now. Page 13
- 14. Step 1: Set Goals Recognize the value of a college degree Understand real costs of college Consider impact of college inflation Determine amount you need to save Page 14
- 15. Set Goals College Is an Investment The value of a college education as reflected in future earnings potential: • High School Diploma $31,500 Difference = • Bachelor’s Degree $50,900 +218% • Professional Degree $100,000 The lifetime gap in earnings potential is over $1 million! Source of data: The College Board, “Education Pays 2007” Page 15 U.S. Census Bureau. Based on median annual household income in 2006.
- 16. Set Goals Two Types of Parents 1. Parents who want the best regardless of cost. 2. Fearful parents who only consider low-cost schools. Page 16
- 17. Set Goals How Much Does College Really Cost? Tuition and fees Room and board Books and supplies And… • Transportation • Personal expenses • “Extras” Page 17
- 18. Set Goals Projected College Costs by Category $450,000 $400,000 Cost for 4 Yrs 2008 $350,000 Cost for 4 Yrs 2016 $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $0 State State Moderate More Ivy League College, In- College, Priced Expensive or Similar State Out-of- Private Private College Resident State College College Resident Page 18 Source of chart data: College Money Annual College Cost Survey, 2008.
- 19. Set Goals Projected College Costs by Category College inflation has increased by almost double the amount of the CPI State college tuition rose 6.4% in 2008 8% 7% College Inflation CPI 6% 5% 4% 3% 2% 1% 0% Last 5 Yrs Last 10 Yrs Last 15 Yrs Last 20 Yrs Page 19 Source of chart data: The College Board 2007 U.S. Department of Labor Bureau of Labor Statistics.
- 20. Set Goals Which type of college makes the most sense? How aggressive should investments be? How much do you need to save? The College Savings Projector can help Page 20
- 21. Step 2 Prioritize Tax, Financial Aid and Control of Assets Build the plan around these three issues: Tax savings Financial aid Control of assets Page 21
- 22. Prioritize Tax, Financial Aid and Control of Assets Tax Savings Depends on tax bracket and how much you save May not be important if you can take advantage of other benefits Page 22
- 23. Prioritize Tax, Financial Aid and Control of Assets Financial Aid Some who hope to qualify, won’t Some who could qualify, assume they won’t Consider the Financial Aid Evaluator Page 23
- 24. Prioritize Tax, Financial Aid and Control of Assets Control of Assets What if the kids don’t go to college? Who makes the decisions about the college funds? Page 24
- 25. Prioritize Tax, Financial Aid and Control of Assets Balance Is Key Benefits have trade-offs Difficult to get all three in one plan Choose an investment that maximizes the single benefit most important to your family Page 25
- 26. Step 3 Determine the Account Owner In student’s name: May help reduce tax burden Can limit financial aid In parent’s name: Potentially less damaging to financial aid May reduce potential tax savings Page 26
- 27. Step 4 Select the Appropriate Investments for Your Situation 529 college savings plans Coverdell Education Savings Accounts UGMA/UTMA accounts Traditional portfolio of funds Variable universal life insurance U.S. savings bonds Page 27
- 28. 529 College Savings Plans – Savings Plans Tax-free growth and withdrawals if used for qualified expenses Estate tax benefits Potential state tax deductions and exemptions on gains1 Usually somewhat financial aid friendly (cont’d.) 1. Some states offer favorable tax treatment to their residents only if they invest in the state's own plan. Out of state residents should consider whether their state offers its residents a 529 plan with alternative tax advantages and should consult their tax Page 28 advisor for more details.
- 29. 529 College Savings Plans – Savings Plans Account owner controls assets Limited control over investments Can be used at any eligible post-secondary institution Ordinary income tax and an additional 10% federal tax due on funds not used for college expenses Can be rolled over to another family member (cont’d.) Page 29
- 30. 529 College Savings Plans – Prepaid Plans Tuition credits for future years Designed to return approximate college inflation Can be financial aid unfriendly Can be rolled over to another child Changing plans may be difficult If withdrawals are used for purposes other than qualified higher education expenses, earnings portion is taxable and a 10% federal tax penalty applies. Page 30
- 31. Coverdell Education Savings Accounts Maximum annual contribution now $2,000 Income limitations Potentially financial aid unfriendly Gains not taxed 10% penalty + taxes Limited control over distribution Maximum control over investments Can be used for K-12 expenses Page 31
- 32. UGMA/UTMA Accounts Money is irrevocably given to the minor and cannot be transferred to another child Can be financial aid unfriendly Student controls money at majority Page 33
- 33. Traditional Portfolio of Funds Financial aid friendly Not tax friendly Parental control over ownership and investment decisions Page 34
- 34. Variable Universal Life Insurance Financial aid friendly Potential tax benefits Owner controls Limited investment choices Page 35
- 35. Variable Universal Life Insurance Name owner, beneficiary and insured with care Design contract to: Minimize death benefit Maximize cash value Preserve tax benefits Page 36
- 36. Step 5 Start Saving Now! Many parents may be: Panicking because of huge costs Overwhelmed by the amount they have to save Paralyzed into “inaction” Page 37
- 37. The Life of a College Plan Hypothetical College Cash Flow $150,000 Savings $100,000 $50,000 Spending: Pay for College Spending: Pay for College $0 -$50,000 Recovery: Repay Debt Recovery: -$100,000 -$150,000 -$200,000 0 5 10 15 20 25 30 35 40 Page 38
- 38. Remember… 1. Set goals. 2. Prioritize tax, financial aid and control of the assets. 3. Determine the account owner. 4. Select appropriate investments. 5. Start saving now. Page 39
- 39. Get Started Today 1. Consider which type of college your child will attend 2. Determine projected college costs 3. Evaluate your financial aid eligibility 4. Identify how much you need to save 5. Talk to your financial advisor Page 40
- 40. Thank You! Investments in 529 college savings plans are neither FDIC insured nor guaranteed and may lose some value. Some states offer favorable tax treatment to their residents only if they invest in the state’s own plan. Investors should consider before investing whether their or their designated beneficiary’s home state offers any state tax or other benefits that are only available for investments in such state’s qualified tuition program and should consult their tax advisor. Before investing in a plan, investors should carefully consider the investment objectives, risks, charges and expenses associated with municipal fund securities. Plan disclosure documents contain this and other information about a plan, and may be obtained by asking your financial advisor, visiting our website at www.oppenheimerfunds.com or calling 1.800.525.7048. Investors should read these documents carefully before investing. This material is provided for general and educational purposes only, and is not intended to provide legal, tax or investment advice, or for use to avoid penalties that may be imposed under U.S. federal tax laws. Contact your attorney or other advisor regarding your specific legal, investment or tax situation. Shares of Oppenheimer funds are not deposits or obligations of any bank, are not guaranteed by any bank, are not insured by the FDIC or any other agency, and involve investment risks, including the possible loss of the principal amount invested. Oppenheimer funds and 529 college savings plans managed by OppenheimerFunds are distributed by OppenheimerFunds Distributor, Inc., Member NASD, SIPC Two World Financial Center, 225 Liberty Street, New York, NY 10281-1008. © Copyright 2009 OppenheimerFunds Distributor, Inc. All rights reserved. Page 41
Notas do Editor
- Today we are going to talk about an investment in your child’s future—college. Fortunately, you are not alone when it comes to needing a strategy to help meet college expenses. We/I/your advisor can help you create a plan that works for your particular situation. If, after this seminar, you would like to schedule a free, one-on-one consultation with me/us, please leave your contact information with me/my associate. We will follow up to schedule a meeting with you so we can discuss your individual needs and circumstances.
- Let’s review the agenda. First, we’re going to discuss why you should consider college planning today. Second, we’re going to go over how to develop your college savings plan. Finally, we’re going to talk about steps you can take to get started today!
- 90% of Americans view sending their kids to college as an essential part of the American dream – on a par with: having a comfortable retirement (94%) being able to do what you want for a living (91%) owning your own home (89%) being able to live where you want (87%)
- It’s evident that many families could use help understanding how to fit saving for college into an overall family financial strategy that addresses multiple goals. Nearly half of parents (46%) polled said that it’s more important to save for college education than retirement because “I can always put off my retirement, but my kids can’t put off college.”
- The survey found that hard times and rising costs notwithstanding, many parents are still saving for college. Amidst economic slowdown, families: 60% have not put saving for college on hold 60% have not reduced the amount they are saving for college 92% have not withdrawn funds from a college savings plan and Only one in four (26%) agree that the high cost of college has discouraged them from saving However, many are considering, or planning to consider, more affordable colleges or universities (57%)
- Nearly 80% say they want to cover 50% or more of their kids’ college expenses 24% say they want to cover 100% of these expenses 66% say they want to cover at least part of their kids’ college expenses because they want their kids to graduate college with as little debt as possible 87% would hate for their kids to have to drop out of college for financial reasons
- Furthermore, our survey suggests that many parents don’t have well-thought-out plans: 77% of families have saved less than $20,000 for college 62% have saved less than $10,000 43% have saved less than $5,000 12% of families have saved nothing at all 56% think scholarship money will pay for a substantial portion of their kids’ college education One set of costs parents could clearly do a better job scrutinizing is their own discretionary spending on things like eating out and entertaining. Just 25% say they have done so to a great extent in an effort to help get their kids to college.
- American parents have powerful hopes when it comes to minimizing the financial burden of college costs on their children. But for some parents, their aspirations don’t match the reality of their savings efforts. Among those who say it is very or somewhat likely that their child (or any of their children) will attend college in the future: 12% have saved Nothing 14% have saved between $1 to under $2,000 17% have saved between $2,000 to under $5,000 19% have saved between $5,000 to under $10,000 14% have saved between $10,000 to under $20,000 20% have saved $20,000 or more
- According to 2008-2009 estimates from the College Board: Roughly two-thirds of all full-time undergraduate students receive grant aid Grants and tax benefits averaged about $3,700 for in-state students at public four-year colleges versus average annual costs of $14,333 Students at private four-year colleges received approximately $10,200, compared with average annual costs of $34,132 It’s likely that many parents, as their children approach college age, will discover a gap between the financial resources they have on hand and the cost of many college options. These facts speak to the wisdom of considering as many options as possible – and to the need to begin saving for college as soon as one can, and as much as one can.
- What does this all mean? OppenheimerFunds’ recent survey indicates that: The need for awareness about college savings investment vehicles is still high. Fitting college savings into the overall saving needs of consumers is a huge challenge. Parents need help with college planning! That’s why fund companies and financial advisors are working together to create consumer-friendly communications and solutions that raise the profile, understanding and use of the new types of college savings vehicles.
- If you don’t believe college is a subset of the “retirement problem,” answer these questions: How old will you be when your youngest child graduates from college? Have you spent all your savings? Have you borrowed to the hilt? Have you taken out a second (or third) mortgage on your home? Have you tapped into your retirement funds? How are you going to pay off college debts and save enough money to retire? Paying for college can easily become a retirement problem. So, the goal of an effective college plan is to prevent this from happening.
- There are generally loans available to help pay for college, but… Do you know anyone who will lend you money for your retirement? By designing and sticking to an effective college plan today, we can help you seek both a successful college plan AND the retirement you’ve always dreamed of.
- So let’s talk about how to design and build your college savings plan. There are five steps to consider in building an effective college savings plan. We’ll go into more detail on each: 1. Understand your family’s needs and set goals. What type of college do you want to send your children to? What type of college would you like to save for and how much do you have to save? 2. Discuss tax, financial aid and who will have control over assets, with your advisor. Gain an understanding of which are most important to your family. 3. Determine the account owner to help maximize the benefits you are seeking. 4. You will need to choose the investment(s) that make(s) the most sense for your situation. Your advisor can help you make this decision. 5. Parents (and/or grandparents) need to start saving NOW—or as soon as possible—because the price of procrastination is steep.
- First, parents need to recognize the value of a college degree, especially if they don’t seem receptive to the idea of planning ahead. Some may question whether it’s really “necessary” or if it’s a “good investment.” The cost of college is much more complex than most people realize. It’s very important to understand the real costs of college. We will also look at the impact of college inflation and its effect on future college costs. Understanding all of these things allows you to set realistic goals and determine how much you’ll need to save.
- According to the U.S. Census Bureau’s Historical Income Tables study, average household earnings in 2006 were as follows: On average, people with a high school diploma earned $31,500 If they graduated with a Bachelor’s degree, their earnings potential increased 61% to $50,900 Add a professional degree, like a medical or law degree, and the average annual income is up to $100,000—a 218% increase over the high school grad So, although college is expensive, it is an investment in your child’s future—and future earnings potential. Over a lifetime, the gap in earnings potential between those with high school diplomas and those with Bachelor’s degrees (or higher) exceeds $1,000,000. While the cost of college may be imposing to many families, the cost associated with NOT going to college is likely to be much greater.
- When it comes to college costs, parents tend to fall into one of two categories: There are parents who want “the best, regardless of cost.” But often these parents have not considered the impact of what they’re really saying. Are they truly willing to jeopardize their retirement plan in order to send their children to very expensive colleges? At the other end of the spectrum are the parents who are so afraid of college costs they refuse to consider anything but a low-cost college. But what if their children have academic needs that cannot be met at a large state college? What if they would be better off in a smaller, private college that costs more? If you fall into one of these extremes, you are not alone. It is very common. And it is important to think about college goals realistically.
- Do you know how much college really costs? Many parents may not have a real grasp of what college costs now, much less what it might cost in the future. College costs consist of the things you might expect: Tuition and fees: Tuition is the charge for instruction. Fees cover services like the library, student activities or health center. Room and board: Some colleges insist students enroll in the meal plan regardless of whether they plan to eat three meals per day. Books and supplies: This includes books, pens, notebooks, etc. Some courses require more supplies than others. [ASK AUDIENCE:] But what are some other costs that many people forget about? Transportation: Parents might find their child in a college on the opposite coast. Someone has to pay for them to come home, usually several times a year for holidays or breaks. Personal expenses: This includes laundry, toiletries, recreation and fraternity or sorority dues. And, what about the “extras?” Items such as computers, stereo equipment, TV, refrigerator and furnishings for the dorm room. Or, the extra cash parents slip to their child from time to time. Or, replenishing their child’s bank account. That’s something we don’t always factor into our plans. And, we’ve learned that parents can spend $2,000 to $3,000 or more on “extras.”* * Source of data: The College Board 2005.
- As parents, your clients need to explore the full range of colleges and college costs. We often find it’s best to categorize schools by type to make it easier for parents, rather than try to choose specific schools. Let’s look at some of the cost categories: • First, we’ve found it’s easier if parents consider college costs in five different groups (or by type of college) • At the low end of the cost spectrum, we have community college and state college for an in-state resident. Today, four years at a community college or state college, average across the country, is more than $71,500 (two years at community college and two additional years at state college) and $97,160 respectively. • At the high end, an Ivy League school is going to run about $236,363 for four years • But look at what this means for a student who will enter college in 2018. At the state college level, it will be nearly $160,000 for four years and over $391,000 for an Ivy League or similar college. • By helping understanding college costs, looking at your needs and determining what you’ll be able to afford, you’ll be in a better position to set realistic college savings goals
- The second thing we have to look at is college inflation. College inflation is important for two reasons: First of all, it obviously affects projections for future college costs But, more importantly, it also affects the rate of return you may need on their investments to stay ahead of college inflation and have enough in the account when the time comes If we look at the last 20 years of college inflation, it has averaged nearly 6% as compared with 3.21% for the CPI. This is nearly double! More recently, parents have rushed to point out that college inflation has dropped to an average of 5.46% over the past five years. But in 2008 we noted state college tuition increased an average of 6.4%! So, if college inflation is running at almost 6% and you are saving in a CD earning 3%, what is that going to do to a college plan?
- We encourage you to take a look at the OppenheimerFunds College Savings Projector because it can help you answer questions such as: Which college cost category suits your family? How aggressive do you have to be with your investments to outpace college inflation? How much do you really need to save each month to help reach your goals? Earlier, we discussed the dilemma of parents who want the best for their children at the risk of their own retirement and those parents who were so afraid of college costs they were going to force their child to go to a less expensive— and possibly the wrong—college. The COLLEGE SAVINGS PROJECTOR allows you to put the projected costs of various types of colleges into perspective so that you and your advisor can determine appropriate savings amounts and set realistic goals.
- When it comes to designing a college plan, there are three major issues you may want to consider—tax, financial aid and who will have control over the assets. The next step is to prioritize them and determine which one(s) best fit your individual situation: First, we’d all like to take advantage of tax savings in whatever plan we design Second, we’d all like to capitalize on financial aid, if at all possible And third, ideally, we’d like to have absolute control over the money. That means: “Who makes the investment decisions and who has control over the money when it’s time to start withdrawing funds?” It’s unlikely that you will be able to maximize on all three benefits in any single plan. So, it’s important to identify which benefits are most important to you before designing a plan.
- Let’s discuss tax savings. Many people know paying less in taxes can help increase savings. But the amount of money actually accumulated due to tax savings depends on two things: 1. Your tax bracket. The higher the bracket, the more potentially significant the benefit. However, there may also be tax savings opportunities specifically available to investors in lower tax brackets that are not available in higher tax brackets. 2. And, how much money is actually saved. For example, if you only save small amounts of money, even if you’re in a high tax bracket, the net benefit will be fairly low. So while everyone likes to save on taxes, we need to look at the big picture and say, “Let’s not kid ourselves and push for tax savings when other features, such as financial aid eligibility, may be more important or beneficial.” The fact is tax savings and financial may work in opposite directions. So, it’s important to decide which will give you the most bang for your buck and you should discuss your particular situation with a qualified tax advisor.
- Let’s talk about financial aid. There are many parents who hope their children will qualify for financial aid and, the truth is, they won’t. So the parents don’t save and when their child is ready for college they’re really in a bind because they can’t afford to pay the bill. On the other hand, some parents assume they won’t get financial aid but could if they’d planned properly. Many parents who assume they won’t get aid save improperly and lose their financial aid eligibility by the time college rolls around. In effect, they’re creating a self-fulfilling prophecy. The OppenheimerFunds FINANCIAL AID EVALUATOR worksheet allows you to look at your financial aid eligibility based on your current situation. It can help give you a good indication as to the likelihood of qualifying for aid in the future and whether you need to take it into consideration when selecting investments. Please keep in mind, the FINANCIAL AID EVALUATOR is only a tool and does not predict or guarantee financial aid eligibility and should be used for planning purposes only. Note: This discussion refers to need-based financial aid (as opposed to merit-based financial aid).
- The third issue we need to consider is control of assets. What happens if your child does not end up going to college? Who now “owns” the college fund? Is it your child’s money that he or she can spend on whatever he/she wants? Or, can you—the parent—take it back and perhaps use it for another child or even yourself? Second, who’s making investment decisions on the college funds? Are you willing to give up some amount of investment control? Would you prefer to do the asset allocation and choose the underlying funds? This may matter to you.
- The key here is that balance is what’s really important to you. You’re unlikely to be able to take advantage of all three benefits in any one plan, so you and your advisor need to decide which is most important to you. For example, a plan designed to maximize tax savings may reduce financial aid eligibility. Before you choose an investment, make sure you know which feature you want to capitalize on.
- The next step to think about is what type of account you want to establish because this can change the investment’s potential benefits. For example, if the account is in your child’s (the student’s) name, it will impact the amount of financial aid they may be eligible for. Conversely, if the account is in your (the parents’) name, then you may be able to take advantage of potential tax deductions, if applicable, but earnings may be taxable to you. Again, there’s always a trade-off. What type of account you establish may be an important consideration, especially as it relates to who owns and will be able to control the account. If it is registered directly in the name of the child, or for his or her benefit, such as a custodial UGMA/UTMA account, then there are limits on how the money can be used and the child may take ownership and control of the account at some point.
- Next, you need to select appropriate investments given all the information you’ve gathered in Steps 1-3. You may already be familiar with the investments listed here. The one you choose depends on which features and benefits best match your situation. [The best way to do this is to schedule a one-on-one consultation with me so that I can evaluate your individual situation and goals.] Let’s discuss each of these individually. Note to advisor: The OppenheimerFunds BUILD YOUR COLLEGE PLANNING BUSINESS advisor reference guide contains more in-depth information on all of these investments. In addition, you will find a College Investment Selection Grid which can help you match your client’s needs and goals to the most appropriate investment.
- There are two types of 529 plans (sometimes referred to as qualified tuition plans or QTPs): college savings plans and prepaid plans. Let’s start with the more popular college savings plans. There’s been a lot of hype about them in recent years, especially since the 2001 tax law change made them even more attractive. 529 Plans can be invested in a number of different underlying investments, earnings are not subject to federal income tax and withdrawals are tax free when used for qualified education expenses. There may also be federal estate tax benefits available. Parents and grandparents can generally each gift up to $60,000 per child in a single year without gift taxes as long as they treat the contribution as having been ratably made over a five-year period. Some states also offer favorable tax treatment including deductions for contributions and exemptions on gains to their residents only if they invest in that state’s own 529 Plan. Keep in mind that those who invest in an out-of-state plan may not be eligible for that state’s tax exemption. These plans are generally relatively financial aid friendly for federal financial aid. The asset is generally attributed to the owner, whether parent, student, or grandparent. However, parents and their advisors need to understand that the college is another source of financial aid – frequently scholarships and grants. Federal aid is largely comprised of loans and is limited in amount. Colleges are not required to use the same calculation as federal aid when determining eligibility. It is possible that the college could decide to include the asset as that of the student and attribute the growth portion of distributions as income to the student. This may result in less financial aid. (Continues on next slide and script)
- CONT’D. FROM PREVIOUS SLIDE: There are some limitations on investment decisions but the account owner can decide when and how to use the money. Money can be used at any eligible post secondary institution in the U.S. or abroad. If withdrawals are not used for college expenses, they will be subject to ordinary income tax and an additional 10% federal tax penalty. (There are some exceptions, e.g., if the student receives a scholarship, a withdrawal in the amount of the scholarship would not be subject to the federal penalty but would be subject to taxes.) However, the account can be rolled over to a new beneficiary without penalty. Keep in mind that gift taxes might be due depending on the age of the new beneficiary.
- The second type of 529 plan is the prepaid plan. Prepaid plans allow you to purchase future tuition credits at today’s prices. The tuition is pegged to the tuition at the state colleges of the plan sponsor. So there is no control over the investments once the account is opened. This is one way you can be assured of keeping up with college inflation. For example, some states like Washington and Pennsylvania recently saw huge increases in state college tuition. In addition, prepaid plans only cover tuition (not other college expenses) so they could make sense for commuter students in some situations. These plans are not generally financial aid friendly. Amounts withdrawn for college may reduce financial aid dollar for dollar. There is no control over the investments once the account is opened The plan can be rolled over to another family member But, changing a prepaid plan may be difficult because of potential state-tax penalties. For example, what if the student decides to go to a private college in that state, or out-of-state? Today, many prepaid plans allow you to use money for any college—in or out-of-state. But it doesn’t guarantee the tuition cost of the other college so you’ll likely get the average of that state’s tuition. If withdrawals are used for purposes other than qualified higher education expenses, earnings portion is taxable and a 10% federal tax penalty applies.
- Coverdell Education Savings Accounts (formerly Education IRAs) also have potential tax benefits. In 2002, the annual contribution increased from $500 to $2,000. However, Coverdells have income limitations to qualify for the tax deductions. For single filers, those limits are generally $95K-110K; for married filing jointly, $190K-220K. Coverdell Accounts can be financial aid unfriendly because the assets are attributed to the parent or student, depending on ownership. The growth is not counted as income. Like the 529 savings plan, however, this is only true for federal financial aid. College sponsored aid is not necessarily subject to the same rules. Colleges can decide how they want to treat this type of savings plan when it comes to giving out their own aid. If the money is used for qualified education expenses, gains are not taxed. Funds can be used at any school in any state. As with 529 savings plans, if withdrawals are not used for college, they are subject to taxes and a 10% penalty. The custodian has control over the investment decisions as well as how and when to request distributions. Continued on next visual.
- Continued from previous visual. Another caveat is funds must be used by the beneficiary’s 30th birthday. [Note: Special-needs students are not limited by this constraint.] If there is money in the account at that time it may be rolled over to a new beneficiary or it will be distributed to the original beneficiary and subject to taxes and the 10% penalty. But, one of the primary reasons you might consider Coverdell accounts is that the money can be used for education expenses for grades K-12. With any 529 plan, it is important that you obtain and read the Plan’s disclosure documents which include more information on the investments, risks, charges and expenses and other information that you should consider carefully before investing.
- UGMA and UTMA accounts were not designed specifically to be college funding vehicles. UGMAs can impact financial aid eligibility because student assets are assessed at 35% for financial aid. And, there are generally no tax benefits other than the fact that, because of the “Kiddie Tax,” these accounts are generally taxed at the student’s tax rate from age 14 until the money is used. (Generally taxed at parents’ rate prior to age 14.) In UGMA/UTMA accounts, money is gifted to the student—it is an irrevocable gift—but the account is controlled by a custodian until the student reaches majority. At the age of majority, the student makes all decisions because the money is in the student’s name. And, there is no penalty if the funds are used for something other than college.
- The traditional portfolio of funds is merely a portfolio of parent-owned mutual funds that is not tax sheltered. For families that qualify for financial aid, they may want to consider this option because parents’ assets are calculated differently when determining federal financial aid eligibility. It’s no surprise this investment is not tax friendly. Money goes into the plan on an after-tax basis and taxes on gains may be due annually. This can be mitigated somewhat by designing a tax-efficient portfolio. Control of assets belongs completely to the parents. They own the mutual funds and make all the investment decisions.
- Using variable universal life insurance to save for college has potential advantages, that may benefit families in high tax brackets and under very specific circumstances. Currently, life insurance is not counted as an asset on the federal level, for determining financial aid. (And, if owned by a grandparent, it would not be counted anyway.) The owner of the policy controls the investment decisions, but can only choose from the investments offered by the insurance company. The owner also controls how and when to use the money—it can be used for college or anything else.
- Using Variable Universal Life Insurance to fund a college plan requires careful plan design: The owner, beneficiary and insured should be named carefully. Remember, you are trying to capitalize on both financial aid and tax benefits in some cases The contract should be designed to minimize the death benefit and maximize the cash value The plan should be designed to preserve the potential tax-sheltering benefits of life insurance Keep in mind, when making withdrawals: Withdrawals up to the amount of premiums paid are considered return of principal Additional withdrawals over this amount are policy loans There must be enough money left in the contract to keep the policy in force so that it ultimately matures as a death claim and the death benefit pays off the loans
- This last step is key. Parents (and grandparents) should start saving NOW. Of course, this is easier said than done. Parents may be panicking over the enormous cost of college Some will be overwhelmed when they calculate the amount they will need to save Some may be “paralyzed” into inaction
- But even if you can’t start right away, don’t panic. It would be great to save it all, but if you can’t, you can borrow. The important thing is to pay off college debt BEFORE retirement. There are three periods over the life of a college plan: The Saving Period—you are trying to put away as much money as possible. The Spending Period—the college years when you spend your savings and, if necessary, borrow. The Recovery Period—the time after college when you need to pay off loans before retirement. Although the recovery period can make it easier to “spread out” your college “problem,” it should demonstrate a warning signal of an impending retirement problem. Saving for college is like buying a house. The bigger the down payment (savings), the lower the mortgage (college loans) and payments.
- Remember, building an effective college savings plan is complicated, but we can help you. To sum up the process: Set realistic goals by looking at the real costs of college and how much you’ll need to save on a regular basis. Determine which plan benefits are most important to your individual situation—tax savings, potential financial aid eligibility and who will have control over assets. Determine the account owner and ensure accounts are titled properly. Select appropriate investments, given all of the above. Start saving now!
- In order to help you get started today, this checklist covers some of the main considerations to think about as you embark on your college planning strategy. First, you should think about which college your child might attend, and when. If your children are very young, you or they might not be in a position to decide now what their college plans will be. However, failure to think about these things now may cause you to be unable to provide a college education to your child when they decide that they want to obtain their degree. Make sure you understand the true costs of college and what they are projected to be in the future. College costs do not just include tuition, room and board – there are transportation expenses, personal expenses and “extras,” like computers, stereos, TVs, refrigerators, dorm furnishings. And what about the extra cash many parents slip to their kids from time to time? Or, replenishing their bank accounts? Consider your financial aid eligibility. The OppenheimerFunds FINANCIAL AID EVALUATOR worksheet allows you to look at your financial aid eligibility based on your current situation, and it should also give you a good indication as to the likelihood of qualifying for aid in the future. Once you’ve thought about when your child might go to college, what sort of college he or she might attend, how much it is going to cost, and what your financial aid eligibility is likely to be, you’ll need to determine how much you are going to need to save. As I mentioned, the COLLEGE SAVINGS PROJECTOR allows you to put the projected costs of various types of colleges into perspective so that you and your advisor can determine the required savings amounts and set realistic goals. Finally, the most important step to take today is talking to a financial advisor about college planning. A financial advisor can provide expert knowledge of the different features and benefits of college savings vehicles, and can analyze your financial situation, your time horizon, your risk tolerance and your other financial goals in order to tailor a college savings plan specifically to meet your needs. We can help. If you leave your contact information with me after this presentation, I will follow up to schedule a one-on-one consultation so that I can help you design and implement a college savings plan around your family’s needs and circumstances.
- Thank You. Does anyone have any questions?