Making Cents Clay Community Center September 12, 2013 PAYING FOR COLLEGE

Disclaimer Andreas Rauterkus is not a registered investment advisor or broker/dealer. Readers are advised that the material contained herein should be used solely for informational purposes. Andreas Rauterkus does not purport to tell or suggest which investment securities attendants should buy or sell for themselves. You should always conduct your own research and due diligence and obtain professional advice before making any investment decision.

Why Save for College? College is Expensive Type of Institution Projected 4-year tuition and fees Private College$124,700$355,800 Public (in-state)$36,050$102,900 Based on average tuition and fees for as reported by The College Board, assuming to increase 6% annually

Goal: afford the college of choice How do you finance the investment in education? Pay as you go Pay later  Student loans Find someone to help pay  Scholarships and grants Start saving now

Example: Monthly savings goal* through final month of college Type of schoolPublicPrivateIvy Current annual costs** $16,000$37,000$47,000 Child’s ageNewborn$432$999$1,269 Four$487$1,126$1,431 Eight$578$1,337$1,698 Twelve$756$1,748$2,221 Sixteen$1,224$2,831$3,596 *Assumes 6% annual college cost increase and 6% annual investment return **incl. tuition, fees, room, board and books according to The College Board

Federal tax incentives Qualified Tuition programs (529 plans) Earnings grow tax deferred Distributions are tax-free when used for qualified post-secondary education costs Coverdell Education Savings Accounts Same as above Max. contribution is $2,000 per year per child May also be withdrawn tax-free for primary and secondary school expenses U.S. Savings Bonds EE and I bonds can be redeemed tax free to pay for college tuition. Income has to be less than $85,100 ($135,100) Individual Retirement Accounts No withdrawal penalties for qualified post secondary education costs Taxes are still due on withdrawals

Qualified Tuition Plans (529 Plans) Authorized by Section 529 of the Internal Revenue Code Tax-advantaged savings plan designed to encourage saving for future college costs If money is withdrawn and not used for eligible college expenses, earnings are subject to income tax and a 10% federal tax penalty All 50 states and the District of Columbia sponsor at least one type of 529 plan Pre-paid tuition plans versus college savings plans

Prepaid Tuition vs. College Savings Plan Prepaid Tuition PlanCollege Savings Plan Locks in tuition pricesNo lock on college costs All plans cover at least tuition and mandatory fees Covers all qualified expenses, incl. tuition, room & board, mandatory fees, books, computers Lump sum and installment payments prior to purchase based on age of beneficiary and number of years of college tuition Many plans have contribution limits in excess of $200,000 Many states plans guaranteed or backed by state No state guarantee. Investment options are subject to market risk Age/grade limit for beneficiaryNo age limits Most state plans require either owner or beneficiary to be a state resident No residency requirement Limited enrollment periodEnrollment open all year

Alabama 529 plans Higher Education 529 Fund (advisor sold) Contributions to state plan are tax deductible up to $5,000 per year Higher Education 529 Fund (direct sold) Contributions to state plan are tax deductible up to $5,000 per year Prepaid Affordable College Tuition (PACT) Program Since 2008 contributions to state plan are tax deductible up to $5,000 per year Closed to new enrollments

Putting the Plan Together Establish a savings budget Minimize taxes Children can earn up to $1,900 in investment income without paying federal income tax Consider 529 plans and education savings accounts even for older children Invest tax-free whenever possible Create the right mix between taxable and tax-free investments Concentrate growth portion in taxable accounts Income producing portion in 529 account or education savings account Capital losses in a 529 plan or ESA do not produce a capital loss for tax purposes

Financing Your Education Free Application for Federal Student Aid (FAFSA) Determine eligibility for federal student financial aid Determine expected family contribution  Measure of family’s financial strength Student Aid Report (SAR) Summary of FAFSA responses Eligibility Nearly every student is eligible for some financial aid Need to meet certain eligibility criteria

Need-Based Options Loans Long-term, low interest Subsidized Federal Direct Stafford Loans Maximum amount depends on status Low interest rate Interest is deferred until 6 months after graduation

Need-Based Options (cont’d)  Federal Perkins Loans  Based on exceptional need  Interest is subsidized and fixed  Repayments begin 9 months after graduation (up to 10 years)

Federal Grants Grants do not have to be repaid Pell grants Supplemental Education Opportunity grant Academic Competiveness grant SMART grant Veteran benefits G.I. bill

Other Need Based Options Work Study Federal program Earn money to pay for college State programs Alabama Commission on Higher Education 

Non-Need-Based Options Unsubsidized Federal Direct Stafford Student Loan Similar to subsidized variety, but higher interest rate Federal Direct Parent Loan for Undergraduate Students (PLUS) Direct PLUS for graduate and professional students Borrow directly from a private lender Federal consolidation loans Combine loans to one lender Fixed interest rate State programs Qualified state tuition programs (529 plans) Prepaid tuition plans

Scholarships Money that you are not expected to repay Colleges award many scholarship Based on GPA Based on major Based on specific talent Based on residency Outside scholarships Companies Religious and civic organizations Scholarship scams

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