saving for education education funding. what we will cover before you invest for school three...
TRANSCRIPT
Saving for Education
Education Funding
What We Will Cover
Before you invest for school
Three Important Facts
The Cost of College
The College Funding Process
Saving Strategies
Impact of Taxes and Inflation
Finding Money to Save
Planning for the “What Ifs”
What’s Next
What is a qualified expense?
(continued)
The Program
QUIZ 1
What are your views on education funding?
Three Important Facts
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
The Cost of College
Average Four-year Cost of College
Source: The College Board, 1998
The Cost of College
FAMILY FUNDS $60
ALL OTHER SOURCES $14
FEDERAL GRANTS $8
FEDERAL LOANS $18
Source: The Federal Budget
PER $100 SPENT FOR COLLEGE
Where the Money Comes From
QUIZ 2
What is your approach to the college
funding process?
College Funding Process
Cost of College
Expected FamilyContribution (EFC)
Financial Aid Need
Information Needed to Calculate EFC:1. Parent’s available income2. Parent’s available assets minus allowances3. Student’s available income4. Student’s available assets minus allowances
How Aid is Figured Out
College Funding Process
Minimize EFC
Maximize Outside Funds
Maximize Family Funds
The Goals for Proper Planning
Phase 1Accumulation
Phase 2College Years
Phase 3Payback
Birth Begin College Graduation Years Later
College Funding Process
Education Funding Life Cycle
QUIZ 3
How well are you saving for college?
Saving Strategies
72 =Interest Rate
6 % doubles in 12 years
% doubles in years
% doubles in years
÷Number of Years to Double
Note: Most investments generate fluctuating returns, so the period of time in which a specific investment will double cannot be determined with certainty.
Power of Compounding -- The Rule of 72
Saving Strategies
Coverdell Education Savings Accounts
(ESA)
Section 529 Education Savings Plan
Gifts to Minors
(UTMA/UGMA Accounts)
Investments Owned in Parent’s Name
Popular Ways to Save for College
Withdrawals from a Traditional
or Roth IRA
Loans from a 401(k) Plan
EE Savings Bonds
(continued)
Saving Strategies
Popular Ways to Save for College
Comparison of College
Savings Strategies
Saving Strategies
Saving Strategies
Coverdell Education Savings Account
* 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.
$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.
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
Saving Strategies
Section 529 Education Savings Plan
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.
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
Saving Strategies
Gifts to Minors (UTMA/UGMA Accounts)
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.
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
Saving Strategies
Investments Owned in Parent’s Name
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.
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
Saving Strategies
Withdrawals from a Traditional or Roth IRA
$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.
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 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.
Saving Strategies
Loans from a 401(k) Plan
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.
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
Saving Strategies
EE Savings Bonds
$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.
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
To summarize, the key is:
Good Financial Planning
Saving Strategies
The Impact of Taxes and Inflation
An Illustration
*This is a hypothetical illustration only and is not indicative of any specific investment.
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%
SampleCase*
YourCase*
The Impact of Taxes and Inflation
Potential Tax-Free Income*
Tax Considerations at Time of Expense
- 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.
The Impact of Taxes and Inflation
Tax Credits and Tax Deductions
Tax Considerations at Time of Expense
- HOPE Scholarship Credit
- Lifetime Learning Credits
- Deduction of Tuition Payments
(continued)
The Impact of Taxes and Inflation
Deductibility of Interest on Loans
Tax Considerations at Time of Expense
- Student Loans: Generally deductible
- Parent Loans: Generally not deductible
- Home Equity Loans: Deductible
- 401(k) Loans and Insurance Policy Loans:
Not deductible
(continued)
Finding Money To Save
Remember the Three Important Facts:
1. Amount already saved
2. Time available
3. Amount needed
Finding Money to Save
Sources of College Funds That You May Already Have
PossibleMonthly Savings
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 $
PersonalMonthly
Goal
Total Potential Monthly Savings
Balancing Education
Funding with
Retirement Planning
Finding Money to Save
Remember, there are
no scholarships or loans
for your retirement.
Finding Money to Save
Assuring that Funds
will be Available
Planning for the “What Ifs”
What’s Next
Develop an education funding plan
Regular investing
Position assets correctly
Research financial aid options
Involve grandparents
Encourage students to do their part
For Parents
What’s Next
Good grades
Prepare for entrance exams
Stay drug/alcohol free
Extra-curricular activities
Community involvement
Work and save for college
Develop special talents
For Students
What’s Next
Domestic school
tution
books
rent or mortgage if yo ulove of campus
Qualified expense
Take Action Now.
Procrastination is your
worst enemy.
What’s Next
Www.collegeboard.com
collegesavings.org
What’s Next