529 College Savings Plans: A National Overview

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529 College Savings PlansA National Overview

• Presented by
• Scott D. Prince
• Director of External Relations Communications
• Massachusetts Educational Financing Authority

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Who is MEFA?

• Not-for-Profit State Authority of the
  Commonwealth of Massachusetts
• MEFAs 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

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Todays 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

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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.

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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 tomorrows 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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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
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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 beneficiarys 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

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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

• Fidelity Investments
• Alliance Capital
• TIAA-CREF
• Saloman Smith Barney
• Strong Investments
• State Street Global
• Merrill Lynch

• 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 Investments 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
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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.Funds 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

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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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The Massachusetts College Saving Programs

• U.Plan Prepaid Tuition Program
• U.Fund College Investing Plan

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The U.PlanPrepaid 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 Tomorrows
Tuition at Todays 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
  used for college

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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 Tuition Fees in
  of Maturity year
• Purchase Amount Year of Purchase Tuition
  Fees Guaranteed
• 1,000 College A 5,000 20
• 1,000 College B 10,000 10
• 1,000 College C 15,000 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.FundCollege 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 consumers
  spending to their U.Fund account
• Companies include
• ATT, Citibank, Coca-Cola, CVS/pharmacy, Exxon
  Mobil, General Motors, McDonalds, ToysRUs,
  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

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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
  Qs 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
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
students brothers and sisters, b)
State-sponsored prepaid tuition plans for the
student
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Qualified State Savings Programs Treated like
other assets

• If asset in parents 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,
  CDs and other assets

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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 students
  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 students cost of
  attendance for accounting purposes, the
  prepayment shall be considered estimated
  financial assistance.
•  

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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 (CDs, savings accounts, mutual funds,
  etc.)

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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)

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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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Massachusetts Educational Financing Authority125
Summer Street, Suite 1450Boston, MA
021101(800)842-1531 x214sprince_at_mefa.org
www.mefa.org
Scott D. PrinceDirector of External Relations
and Communications
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• Questions