529 College Savings Plans: A National Overview

1. 529 College Savings Plans:A National Overview Presented by: Scott D. Prince Director of External Relations & Communications Massachusetts Educational Financing Authority

2. 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

3. 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

4. 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.

5. 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

6. 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

7. 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

12. 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

13. 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

14. 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

15. 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)

16. 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

17. 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

18. 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

19. Private Sector Partners • T. Rowe Price • Waddell & Reed • Manulife • American Funds • Mercury Funds • Putnam Investments • Vanguard • Fidelity Investments • Alliance Capital • TIAA-CREF • Saloman Smith Barney • Strong Investments • State Street Global • Merrill Lynch (partial list)

20. 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

21. 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”

22. 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

23. U.Fund Age-Based Portfolios

24. 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

25. U.Fund Static Portfolios

26. 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

27. 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

28. 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

29. The Massachusetts College Saving Programs U.Plan Prepaid Tuition Program U.Fund College Investing Plan

30. The U.PlanPrepaid Tuition Program

31. 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

32. 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 used for college

33. 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

34. 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%

35. 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

36. The U.FundCollege Investing Plan

37. 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

38. 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

39. 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

40. 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

41. 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

42. 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

43. 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)

44. Q. 521 Q. 522 Q. 523 Q. 38 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 student’s brothers and sisters, b) State-sponsored prepaid tuition plans for the student

45. 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

46. 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 financial assistance.

47. Prepaid Tuition Plans Treated asa “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.)

48. 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)

49. 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

50. Massachusetts Educational Financing Authority125 Summer Street, Suite 1450Boston, MA 021101(800)842-1531 x214sprince@mefa.orgwww.mefa.org Scott D. PrinceDirector of External Relations and Communications