Transcript Training

Presented by:
Scott D. Prince
Director of External Relations &
Communications
Massachusetts Educational Financing
Authority
1
Who is MEFA?
• Not-for-Profit State Authority of the
Commonwealth of Massachusetts
• MEFA’s mission:
– Promote higher education industry in MA
– Help make MA higher education more affordable
and accessible
• Works in partnership with over 90
Massachusetts Colleges and Universities
offering low cost loan programs and college
savings programs
2
Today’s Presentation
• Overview of State College Savings
Programs
• Historical development & trends
• Current national picture
• Highlights of the 529 plans
• The Massachusetts College Savings
Programs:
– U.Plan Prepaid Tuition Program
– U.Fund College Investing Plan
• Financial Aid Treatment
3
Importance of Saving for
College
• Parents overwhelmingly cite saving for
college as a top priority, second only to
retirement savings
• Studies show over 60% report some
savings, but only about 40% save
regularly
• Many saving in traditional bank accounts,
savings bonds, CDs etc.
4
Overview
• What are these programs?
– Created by state legislatures to encourage savings
for postsecondary education
– States took the lead in responding to the need for
structured college savings programs
– Sought and obtained federal support (clarifying
and codifying favorable tax status)
– Housed in various “agencies”
• Treasury Departments
• Student Financial Aid Agencies
• Independent State-Sponsored Entities
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Overview (continued)
• Two types
– Prepaid tuition programs (i.e. U.Plan)
• “Purchase” tomorrow’s tuition today
• Value increases as tuition increases
• Often based on in-state colleges with provisions for use
elsewhere
• “Unit” or “contract” types
• Hybrid varieties
– Savings programs (i.e. U.Fund)
•
•
•
•
Special accounts for college – market based
Similar to mutual funds
Often “age-based” investment options
Several portfolio options
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Historical Development
• 1987-1988. First programs: prepaids
– WY (1987), Fl (1988), MI (1988)
• 1988-1995. Slow growth
– 6 states (5 prepaid, 1 (KY) saving)
• 1996-1997. More rapid growth
– 9 states (5 prepaid, 4 saving)
• 1997 to present. Huge growth
– All states now have programs or authorizing
legislation. 22 prepaids, 51 savings
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State College Savings Programs
National Overview 1991 – 7 States
- Has
Program
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State College Savings Plans
National Overview 2002 – All 50 States have passed legislation
- Has
Program
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State College Savings Programs
Prepaid Tuition
20 states have a prepaid tuition program
2 more states are developing a program
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State College Savings Programs
Savings Plans
All 50 states and DC are will have
savings plans by the end of 2002
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National Overview of 529 College Savings
Plans
State offers a 529 prepaid or guaranteed savings option in addition to a savings plan
State offers a 529 college savings plan
Significant Events
• Small Business Job Protection Act (1996)
– Codified in IRC Section 529 the ability of
states to offer tax-advantaged college savings
programs
• Tax-deferred growth; tax at beneficiary’s rate
– Qualified State Tuition Plans (529) must:
• Be offered by the state (or state instrumentality)
• Prohibit self-direction of investments
• Establish and enforce contribution maximums
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Significant Events
• Taxpayer Relief Act (1997)
– Expanded “qualified higher education
expenses” to include room, board, books
and supplies
– Clarified QSTP contributions as completed
gifts
– Enabled accelerated gift option
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Tax Relief Act of 2001
• Earnings from 529 plans are free from
federal tax if used for qualified higher
education expenses (began 2002,
subject to sunset provision, if not
extended by Congress, after 2010)
• Rollovers to another 529 for same
beneficiary now permitted (once every
12 months)
• Maximum “qualified” distribution for
room and board increased (previously
restricted for off-campus housing)
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Tax Relief Act of 2001
(continued)
• Education Savings Accounts can be used
concurrently with 529 (Previously
prohibited)
• Transfer to first cousins now permissible
• IRS 2001-55
– Annual opportunity to redirect investments
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Recent Trends
• National marketing of state programs
– Consumers now have many options, and can
choose based on program structure and
features, typically without residency
restrictions
• Increased awareness of savings programs
– “529” emerging as 401(k) did for
retirement
17
Current national picture
• All 50 states & DC have or are in the
process of developing a program
• 73 Programs
– 20 Prepaid Operational + 2 in development
– 51 Savings (includes DC)
• Over 3.5 million accounts
• Total investments of over $20 billion
• Average account size is $5,700
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Private Sector Partners
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•
•
•
Fidelity Investments
Alliance Capital
TIAA-CREF
Saloman Smith
Barney
• Strong Investments
• State Street Global
• Merrill Lynch
(partial list)
•
•
•
•
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•
•
T. Rowe Price
Waddell & Reed
Manulife
American Funds
Mercury Funds
Putnam Investments
Vanguard
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529 College Saving Plans
• No income limitations like other Federal
Tax benefits (Hope, Lifetime, Savings
Bonds)
• States must be “actively involved” in
management of programs
• Cash contributions only
• Penalties if not used for “qualified higher
education expenses”
– Exceptions: death, disability, scholarship
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Benefits of 529 Plans
• Earnings are federal tax free if used for
qualified higher education expenses
• Generous contribution limits set by each
state ($100,000 - $300,000)
• Gift tax benefits, including the ability to
invest up to $55,000 in a single year
and pro-rate at $11,000 per year over a
5 year period
• Donor maintains complete control of
asset, even though considered a
“completed gift”
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Fidelity Investment’s Strategy
• Aged-Based Allocation: Funds invested
in one of eight investment portfolios
based on the age of the beneficiary
– Ten or more years until college - more
equity funds for growth
– Gradually shifts emphasis to bond and
money market funds to preserve capital as
beneficiary approaches college enrollment
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U.Fund Age-Based Portfolios
23
New Investment Options:
Custom Allocations offer additional flexibility
• Create a personalized investment plan
• Target Strategy – invest in any portfolio
regardless of the age of the beneficiary
• Static Strategy – choose to invest in the
U.Fund’s static portfolios
– 100% Equity portfolio
– 70% Equity portfolio
– Conservative portfolio
• Combined Strategy – choose to invest in a
combination of portfolios
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U.Fund Static Portfolios
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Savings with Flexibility
• Use for qualified educational expenses
(tuition, fees, room, board, books, and
supplies)
• Use anywhere in the United States
–
–
–
–
Accredited post-secondary institution
Public and private
Two-year community college
Vocational technical schools
• Undergraduate and Graduate Education
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Withdrawals
• Can be withdrawn for non-educational
purposes, but will be taxed at owners
rate and pay 10% federally mandated
tax on earnings
• May change beneficiary to be another
family member of the original beneficiary
• If beneficiary receives scholarship, may
withdraw amount equal to scholarship
without penalty
• No age or time limit on withdrawals
27
Key state features
• 30 states offer income tax
exemption for earnings
• 25 states offer income tax
deduction for contributions
• Residency requirements
• Guarantee
• Impact on state financial aid
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U.Plan Prepaid Tuition Program
U.Fund College Investing Plan
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The U.Plan
Prepaid Tuition Program
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U.Plan Account Update
• 82 MA College and University
Partnerships
• Over 35,000 Accounts
Opened
• Over $108 million invested
• 4219 Total Certificates
Matured in 2002
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What are Investors Buying?
Lock in Tomorrow’s Tuition at Today’s Rates
An Inflation-Proof Investment:
Prepaid College Savings
• Special bonds issued and guaranteed by the
Commonwealth of Massachusetts (tuition
certificates)
• Purchasers buy ownership share of bonds‘tuition certificates’
• Bond return guaranteed to keep pace with
rising tuition costs
• Money back at maturity, with interest, if not
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used for college
How the U.Plan Works
• Select maturity year(s) corresponding to
anticipated years of college enrollment
• Select investment amount of each U.Plan
Bond
• Investor buys tuition certificate used to
purchase Commonwealth General Obligation
Bonds (U.Plan Bond)
• U.Plan certificates mature at time of college
enrollment
• U.Plan certificates are redeemable at any
U.Plan participating college
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U.Plan Example
Participants purchase a percentage of tuition with the
U.Plan to be used at maturity in the future:
PURCHASE AMOUNT  TUITON & FEES = %
Original U.Plan
Purchase Amount
$1,000
$1,000
$1,000
Tuition & Fees in
Year of Purchase
College A $5,000
College B $10,000
College C $15,000
% of Maturity year
Tuition &Fees Guaranteed
20%
10%
6.67%
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Purchase Information
• 2003 Enrollment Period:
May - June 2003
• Purchase Amount:
Minimum of $300 per maturity year
• Program Fees:
All Fees Waived
• For More Information:
(800) 449-MEFA (6332)
www.mefa.org/uplan
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The U.Fund
College Investing Plan
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U.Fund – The Massachusetts 529
Plan
• Tax Advantaged Investing
• State tax-free distributions in Massachusetts
• Choose level of investment risk
• Low investment and high contribution
limit
• Flexible to change beneficiaries
• Use anywhere in U.S. for qualified
education expenses
• Low fees and expenses
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Low Minimum Investment and High
Contribution Limit
• Start for as little as $50 per month with
automatic payments
• Lump sum of $1000 (without automatic
payments)
• Maximum contribution of $250,000
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Fees and Expenses
• U.Fund charges an annual $30
maintenance fee per account
• Fee waived for direct deposit or Fidelity
Automatic Account Builder (FAAB)
• Daily charge equal to 0.30% ($3 per
$1,000) of your account assets per year
• Mutual fund management fees vary by
portfolio (average 0.7%)
• No loads deducted from purchase
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U.Fund Distributions
• Participants get distribution form
from Fidelity Investments
• Participant indicates distribution
amount
• Fidelity Investments sends checks
to participant payable to the
participant or to designated
institution
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How to Enroll in the U.Fund
• Call 1-800-544-2776 to speak with a
U.Fund representative at Fidelity
• Visit www.fidelity.com/ufund
• Enrollment kit includes




Brochure & Fact Kit
Participation Agreement
Brokerage Account and Customer
Agreement
Two U.Fund Applications
• Transfer proceeds from other Fidelity
investments or mutual funds
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Upromise
• The U.Fund is part of the Upromise savings network
which is a service that supplements college savings
in the U.Fund
• Companies contribute a percentage of a consumer’s
spending to their U.Fund account
• Companies include:
– AT&T, Citibank, Coca-Cola, CVS/pharmacy, Exxon
Mobil, General Motors, McDonald’s, Toys”R”Us,
Inc, America Online, Inc., Borders Group, Century
21, Coldwell Banker, and ERA, Staples, Starwood
Hotels and Resorts, as well as over 7,000
restaurants and 70 online retailers
• More information at www.upromise.com
42
Financial Aid Treatment:
Reporting Plans on the FAFSA
• Prepaid tuition is not currently
reported on the FAFSA and is not
included in the federal methodology
formula (defined p.2 FAFSA, Notes
for Q’s 47-48, 81-82)
• College Savings Plans are reported as
an asset of the owner (FAFSA Q.81)
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Reporting Plans on PROFILE
and “Q” questions
Q. 521
Q. 522
Q. 523
Q. 38
College savings plans established by
someone other than parent
Prepaid tuition plans established by
someone other than parent
Estimated amount that will be withdrawn
for the student from prepaid tuition plan
a) State-sponsored prepaid tuition plans for
the student’s brothers and sisters,
b) State-sponsored prepaid tuition plans for
the student
Qualified State Savings Programs:
Treated like other assets
• If asset in parent’s name, maximum
of 6% of asset will be considered
toward the expected family
contribution, after asset protection
allowance for retirement
• Same treatment as savings accounts,
mutual funds, CD’s and other assets
45
Prepaid Tuition: Section §480j of the Higher Education Act of
1965, Title IV – Student Assistance, Part F – Needs
Analysis, Section 480 [20 U.S.C. 1087vv]. Definitions.
• (2) (A) Except as provided in subparagraph
(B), for purposes of determining a student’s
eligibility for funds under this subchapter and
part C of subchapter I of chapter 34 of Title
42, tuition prepayment plans shall reduce the
cost of attendance (as determined under
section 1087ll of this title) by the amount of
the prepayment, and shall not be considered
estimated financial assistance.
• (B) If the institutional expense covered by the
prepayment must be part of the student’s cost
of attendance for accounting purposes, the
prepayment shall be considered estimated
46
financial assistance.
Prepaid Tuition Plans
Treated as a “Resource” in Federal Methodology
• Saving in a prepaid tuition plan is counted as a resource
in meeting the cost of attendance
• Results in a dollar for dollar reduction in cost of
attendance and therefore reduces financial aid eligibility
(counted 100%)
• Cannot be used to replace expected family contribution
(EFC)
• Treated same as an “outside scholarship”
• Penalizes some families for saving in prepaid tuition
program as opposed to other savings options (CD’s,
savings accounts, mutual funds, etc.)
47
Legislative Priorities
• Consistent Financial Aid Treatment for
College Savings Plans (Reauthorization)
• Permanency of Federal Tax Exempt (IRS)
• Inclusion of Computers as a Qualified
Higher Education Expense (IRS)
48
Internet Resources for
more Information
• MEFA Homepage
– www.mefa.org
• Fidelity Homepage
– www.fidelity.com
• College Savings Plans Network
(CSPN)
– 1-877-CSPN-4-YOU
– www.collegesavings.org
• Saving for College with 529 Plans
– www.savingforcollege.com
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Scott D. Prince
Director of External Relations
and Communications
50
Questions…