College Savings Plans: 529s and Financial Aid Implications

1. College Savings Plans:529s and Financial Aid Implications Date Presented by Name Title

2. Agenda • 529 Plan Basics • Impact of account ownership, assets and income on Financial Aid • Student Categorization and Third Parties • Financial Aid Methodologies • Important Resources • Questions?

3. What is a 529 Plan? • Named after the federal tax code by which they are governed, 529 college savings plans are tax-favored, qualified tuition programs administered by each state, for the purpose of helping families save for college nationwide and, in many cases, overseas as well. Source: CollegeInvest, Internal Revenue Service - IRS (http://www.irs.gov/pub/irs-pdf/p970.pdf), Municipal Securities Rulemaking Board - MSRB (http://www.msrb.org/EducationCenter.aspx)

4. 529 Plan Basics - Overview • Administered – By individual state • Maintained – By “program managers” (typically mutual fund firms) • Purchased – Sold through advisors or directly purchased by account owners (online or paper application) • Investments – Offers the availability to invest in various investment options, typically age-based and individual fund options on a tax-advantaged basis • Qualified Distributions – Qualified educational expenses at any higher educational institution which participates in the U.S. Department of Education’s Free Application for Federal Student Aid (FAFSA) program Source: CollegeInvest, Internal Revenue Service - IRS (http://www.irs.gov/pub/irs-pdf/p970.pdf), Municipal Securities Rulemaking Board - MSRB (http://www.msrb.org/EducationCenter.aspx)

5. Who Can Participate? • Account Owner: • Must be a U.S. resident & have a Social Security or federal tax ID number. • No age or income restrictions on owner or beneficiary. • Maintains full control of the account, including distributions & investment choices. • A Successor account owner may be named to take over ownership of the account in the event of the account owner’s death. • Beneficiary: • Does not need to be living in the U.S. at time of account opening, but must have a valid Social Security or Federal Tax ID number. • May be changed to another “member of the family” of the beneficiary at any time without penalty. • Accounts may be held without a beneficiary in the case of scholarship accounts with 501c(3) organizations as owners. Source: CollegeInvest, Internal Revenue Service - IRS (http://www.irs.gov/pub/irs-pdf/p970.pdf), Municipal Securities Rulemaking Board - MSRB (http://www.msrb.org/EducationCenter.aspx)

6. What Is Financial Aid? • Funding to students for the purpose of helping to pay for college-related expenses, including: • Grants, work-study and student loans such as Pell Grants, Federal Work-Study, Stafford Loans and Federal PLUS Loans. • Source can be Federal agencies, state governments, colleges and other types of groups or institutions such as companies, the YMCA or Boys Club. • More than $125 billion is awarded every year, based on factors such as: • Academic strength • Talents • Financial aid is more than just for economic need. Source: National Center for Education Statistics

7. Financial Aid Implications • Impact of account ownership and subsequent withdrawals. • Assets • Income • Introduction to different financial aid methodologies • Federal vs. Institutional Alternative • FAFSA vs. PROFILE • Which financial transactions impact income and financial aid calculations at institutional level Note: FAFSA represents Free Application for Federal Student Aid; PROFILE represents College Scholarship Service Profile

8. Federal Methodology: Formula Overview • FAFSA • Referred to as Federal methodology • Stands for Free Application for Federal Student Aid • Issued by U.S. Department of Education to determine student eligibility for multiple student federal financial aid programs, state aid programs and institutional aid • Examples include Pell Grant, Federal Student Loans and Federal Work-Study • Overseas Institutions • Nearly 400 schools accept FAFSA • Can be used for study abroad or a degree program • U.S. Department of Education suggests researching program early, offers resources to help with decision process and guidance by phone (1-800-4-FED-AID) • Need determined as difference between cost of attendance (COA) and expected family contribution (EFC) Source: http://ifap.ed.gov/efcformulaguide/attachments/091913EFCFormulaGuide1415.pdf; https://fafsa.ed.gov/fotw1415/pdf/PdfFafsa14-15.pdf; http://www.tgslc.org/pdf/HEA_Title_IV_Oct02.pdf

9. Federal Methodology: Formula • FAFSA Calculation • Cost of Attendance (COA) • Tuition, required fees, books, supplies, transportation, personal computer, room and board, • Determined by Higher Education Act, Sec. 472 • Expected Family Contribution (EFC) • Based on FAFSA (Free Application for Federal Student Aid) • The higher the EFC, the more money expected to pay and lower the need • Federal Aid Methodology • COA – EFC = Financial Aid Need Note: FAFSA represents Free Application for Federal Student Aid. Source: http://ifap.ed.gov/efcformulaguide/attachments/091913EFCFormulaGuide1415.pdf; https://fafsa.ed.gov/fotw1415/pdf/PdfFafsa14-15.pdf; http://www.tgslc.org/pdf/HEA_Title_IV_Oct02.pdf

10. Federal Methodology: Example Note: COA represents Cost of Attendance; EFC represents Expected Family Contribution; COA is reduced by other “resources” (grants and scholarships) Source: http://ifap.ed.gov/efcformulaguide/attachments/091913EFCFormulaGuide1415.pdf; https://fafsa.ed.gov/fotw1415/pdf/PdfFafsa14-15.pdf; http://www.tgslc.org/pdf/HEA_Title_IV_Oct02.pdf

11. 529 Account Ownership Does Matter • Parent • Student • Dependent • Independent • Third Parties • Grandparents • Aunts and Uncles Source: http://ifap.ed.gov/efcformulaguide/attachments/091913EFCFormulaGuide1415.pdf

12. Parents • Assets (including 529 plans) • 2.64% to 5.64% of assets depending on parent’s income level • Assets across investment vehicles have same impact • Income • 22% to 47% of parent’s income depending on income level • Qualified distributions from 529 plans are not included as income or as a resource in the following year’s FAFSA Note: FAFSA represents Free Application for Federal Student Aid;

13. Dependent vs. Independent • Based on FAFSA, student is a “Dependent” unless: • Born before 1/1/1991* • Married, or has dependents • Attending a master’s or doctorate program • Currently serving on active duty in U.S. Armed Forces • Dependent on parents for less than half their support • An orphan, in foster care or a ward of the court (other rules may apply) • Emancipated minor (freed from parents) • U.S. military veteran • Was determined to be “homeless” • Has special circumstances which can be documented * 1991 adjusts one year each year. Source: https://fafsa.ed.gov/fotw1415/pdf/PdfFafsa14-15.pdf; https://fafsa.ed.gov/help/fotwfaq52.htm; https://fafsa.ed.gov/fotw1415/help/fahelp29a.htm; http://www.fsa4counselors.ed.gov/clcf/attachments/DependencyOverrides.pdf)

14. Independent Students • Assets (including regular or custodial 529 plans) • 529 and Non-529 Assets (checking/saving accounts, Trusts) • 20% of assets impact EFC • Income • 50% of income impacts EFC Note: EFC represents Expected Family Contribution.

15. Independent Students Note: EFC represents Expected Family Contribution.

16. Dependent Students • Assets(including regular or custodial 529 plans) • Regular or custodial 529 Plans • Treated as parent asset if the student is a dependent student, which is 2.64% to 5.64% • Non-529 Assets (checking/saving accounts, UGMA/UTMA) • 20% of 529 or other assets impact EFC • Income • 50% of income impacts EFC Note: EFC represents Expected Family Contribution; UGMA represents Uniform Gifts to Minors Act; UTMA represents Uniform Transfers to Minors Act

17. Dependent Students • Custodial 529 Accounts • Defined as a 529 account owned by a custodial account such as a UGMA/UTMA (Uniform Gifts/Transfers to Minors Act) • One strategy to mitigate tax impact of assets in UGMA/UTMA is to transition UGMA/UTMA assets to a custodial 529 plan • Process: Pay the tax on gains for sale of assets in UGMA/UTMA, transfer cash to custodial 529 plan • Impact: Pay taxes on gains at time of liquidation, but treated as parent asset (5.64% instead of 20%) Note: UGMA represents Uniform Gifts to Minors Act; UTMA represents Uniform Transfers to Minors Act

18. Dependent Students Note: EFC represents Expected Family Contribution.

19. Dependent Students: Custodial Accounts • Custodial 529 Accounts • Caveats: Any gains realized in liquidating custodial account would be subject to tax • Assets should remain in the 529 plan long enough for the power of tax-free compounding to compensate for the taxes paid at the time the custodial account is liquidated • UGMA/UTMA have earnings taxed every year at kiddie tax rate (investment income taxed at parent rate on income over $2,000) Note: UGMA represents Uniform Gifts to Minors Act; UTMA represents Uniform Transfers to Minors Act

20. Third Party • Defined: Grandparents, Aunts, Uncles or other non-parents • Assets (including 529 plans) • Not reported, and therefore impact among any non-parents are treated similarly • Income • Income in excess of income allowances included at 50% in calculation of EFC Note: EFC represents Expected Family Contribution.

21. Third Party – Example • Example: Gary the grandparent is a 529 account owner with $10,000 for his grandchild, Charlie. Gary distributes all $10,000 in year 1. While the assets are not included in FAFSA in year 1 (freshman year) when the distributions are made, the sophomore year EFC calculation is impacted by $5,000, which is 50% of $10,000 as the distribution is considered income for Charlie. Note: FAFSA represents Fee Application for Federal Student Aid; EFC represents Expected Family Contribution.

22. Third Party – Example • Example continued: One option is to transfer account ownership to Patricia the parent the year prior to taking the distribution. • If the transition took place the year before freshman year, the impact on EFC would be up to $564 freshman year (5.64% of $10,000, as the 529 assets are parent’s) • Sophomore year impact of distributions is $0, as it is not included in student’s income • Ownership transfers are generally allowed, but rules are plan-specific — not all states allow ownership transfers. • Ownership transfers are generally irrevocable. • Colorado allows transfers.

23. Treatment of Non-529 Assets • Non-529 Assets • Retirement Assets • Non-Retirement Assets

24. Non-529 Assets • Not counted as assets (FAFSA does not ask) • Qualified Retirement Accounts (401(k), 403(b), Pensions) • Home equity (of primary residency that one lives in) • Insurance • Business value if fewer than 100 full-time equivalent employees, or family farm if live on and operate • Counted • Cash, savings, checking accounts, investment accounts, second homes, non-family businesses with over 100 full-time equivalent employees • Non-retirement parental assets including checking and savings accounts • Impact EFC at a rate of 2.64% to 5.64% of assets Note: FAFSA represents Free Application for Federal Student Aid; EFC represents Expected Family Contribution. Source: https://fafsa.ed.gov/fotw1415/pdf/PdfFafsa14-15.pdf

25. Non-Retirement Assets • Federal Asset Protection Allowance • Non-retirement assets up to a certain amount are not included as assets, which is covered under the Federal Asset Protection Allowance (APA) program • Therefore only amounts over a certain level for non-retirement assets will be included in calculation • Retirement savings will not negatively impact financial aid unless distributed • Level of non-retirement assets not impacting financial aid typically ranges between $30,000 and $45,000 for parents between the ages 40 and 60 • Amount is positively correlated with age of the oldest parent • The higher the age of the parent, the higher the exclusion Source: http://ifap.ed.gov/efcformulaguide/attachments/091913EFCFormulaGuide1415.pdf; https://fafsa.ed.gov/fotw1415/pdf/PdfFafsa14-15.pdf

26. Federal Asset Protection Allowance (APA) Allowance by Age and Number of Parents • Note: Table is as of 2014-2015 academic year. Table shows certain dates, but amounts changes every year. • Source: http://ifap.ed.gov/efcformulaguide/attachments/091913EFCFormulaGuide1415.pdf

27. Non-Retirement Assets • Example of Federal Asset Protection Allowance • Patricia the parent, who is 53 years old, inherits $75,000 in nonretirement assets from her parent (Gary, the student’s grandparent). • Patricia’s son, Charlie, is entering his freshman year this year. • Patricia is married to Phil who is 60 years old. As the age of the older parent is taken into account, the allowance is $45,500 instead of $37,600 per table on the prior slide, which is table A5 in the source below. $75,000 minus $45,500 leaves $29,500, which is assessed at 5.64% or $1,663.80. Source: http://ifap.ed.gov/efcformulaguide/attachments/091913EFCFormulaGuide1415.pdf

28. Non-Retirement Assets – Example • Therefore the inheritance of $75,000 will potentially reduce financial aid up to $1,663.80 Note: APA represents Asset Allocation Allowance; EFC represents Expected Family Contribution. Source: http://ifap.ed.gov/efcformulaguide/attachments/091312EFCFormulaGuide1314.pdf

29. Institutional or Non-Federal Methodology: CSS/Financial Aid PROFILE • CSS/Financial Aid PROFILE • College Scholarship Service Profile • College Board is coordinator of this methodology • Institutional Alternative method used primarily by private schools • Assets • Student assets valued at 25% instead of 20% • Parent assets assessed 4% to 6% • Includes value of home • Includes value of family run business • Check with school on how to incorporate 529 plans Note: FAFSA represents Free Application for Federal Student Aid; PROFILE represents College Scholarship Service Profile Sources: www.collegeboard.org http://professionals.collegeboard.com/profdownload/PROFILE_Student_Guide.pdf; http://www.collegeinvest.org/; http://studentaid.ed.gov/prepare-for-college/choosing-schools/types/international; http://student.collegeboard.org/css-financial-aid-profile)

30. Additional Information • Resources to Learn More • Questions? • Important Disclosure

31. Resources to Learn More • IRS Publication 970: Tax Benefits for Education • IRS Tax Topics • IRS Tax Tips • http://www.irs.gov/irm/part7/irm_07-025-044.html • FINRA.org“Smart Saving for College – Better Buy Degrees” • www.savingforcollege.com • www.collegeinvest.org • www.collegeboard.org

32. Resources to Learn More • http://ifap.ed.gov/efcformulaguide/attachments/091913EFCFormulaGuide1415.pdf • https://fafsa.ed.gov/fotw1415/pdf/PdfFafsa14-15.pdf • http://www.fafsa.ed.gov/ • http://studentaid.ed.gov/ • http://trends.collegeboard.org/student-aid • http://professionals.collegeboard.com/profdownload/PROFILE_Student_Guide.pdf

33. 529s and Financial Aid Implications • Questions?

34. Important Disclosure • An investor should consider the Program’s investment objectives, risks, charges and expenses before investing. The Program Disclosure Statement at scholars-choice.com, which contains more information, should be read carefully before investing. If an investor and/or an investor’s beneficiary are not Colorado taxpayers, they should consider before investing whether their home states offer 529 plans that provide state tax and other benefits only available to state taxpayers investing in such plans. • Investments in the Scholars Choice College Savings Program are not insured by the FDIC or any other government agency and are not deposits or other obligations of any depository institution. Investments are not guaranteed by the State of Colorado, CollegeInvest, QS Legg Mason Global Asset Allocation, LLC, Legg Mason Investor Services, LLC, or Legg Mason, Inc. or its affiliates and are subject to investment risks, including loss of principal amount invested. • Legg Mason, Inc., its affiliates, and its employees are not in the business of providing tax or legal advice to taxpayers. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any such taxpayer for the purpose of avoiding tax penalties or complying with any applicable tax laws or regulations. Tax-related statements, if any, may have been written in connection with the “promotion or marketing” of the transaction(s) or matter(s) addressed by these materials, to the extent allowed by applicable law. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor. • Scholars Choice is a registered service mark of CollegeInvest. CollegeInvest and the CollegeInvest logo are registered trademarks. Administered and issued by CollegeInvest, State of Colorado. QS Legg Mason Global Asset Allocation, LLC is the Investment Manager and Legg Mason Investor Services, LLC is the primary distributor of interests in the Program; together they serve as Manager of the Program. QS Legg Mason Global Asset Allocation and Legg Mason Investor Services, LLC are Legg Mason, Inc. affiliates. • QS Legg Mason Global Asset Allocation (QS LMGAA) is part of the combined QS Investors investment platform, which is comprised of QS Investors, LLC, QS Batterymarch Financial Management, Inc. and QS LMGAA. scholars-choice.comFN1412891