how to pay for college student aid demystified · what you need to know about federal student aid 5...

1 WHAT YOU NEED TO KNOW ABOUT FEDERAL STUDENT AID

WHAT YOU NEED TO KNOW ABOUT FEDERAL STUDENT AID

How to Pay for College Student Aid Demystified

Date: Presenter:


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Explaining the 4 types of financial aid

Demystifying the financial aid eligibility calculation

Providing 5 steps to successful college savings

Understanding 529 benefits and financial aid impact

Learning Objectives


The Challenge

Paying for college


College Costs: Rising at a Higher Rate Than CPI

Source: Dshort.com, Bureau of Labor Statistics, Consumer Price Index (CPI). CPI is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. The CPI is calculated by taking price changes for each item in the predetermined basket of goods and averaging them; the goods are weighted according to their importance. Changes in CPI are used to assess price changes associated with the cost of living. Investors cannot invest directly in an index, and unmanaged index returns do not reflect any fees, expenses or sales charges.


Based on the average annual cost of attendance, adjusted for a hypothetical 5.0% rate of education inflation over four years (labeled as “Now”) and 18 years (labeled as “In 18 years”), with an expected four years of attendance for each scenario. Source: © 2016 The College Board, collegeboard.com.

College Costs: Now…and 18 Years From Now

$153,749

$97,061

Now (2016-2020)

$191,090 $222,466

$352,396

In 18 years (2034-2038)

$437,982

Public (in-state)

Public (out-of-state)

Private

Cost of Attendance: 4 Years


How Many Americans Pay for College


Understanding Financial Aid

What sources of student aid are available?


Types of Financial Aid

These 3 types are available at no cost to students

Scholarships. Money awarded that the recipient is not expected to pay back. May hinge on maintaining certain requirements.

Grants. Unlike scholarships, grants generally come with no strings attached: Institutional Need-based Assistance (awarded by the college) Federal Grants:

Pell Grant Supplemental Educational Opportunity Grant (FSEOG).

Work-study. Part-time jobs located both on- and off-campus for students who demonstrate financial need.

For links to student aid resources, please see pages 34-35.


Types of Financial Aid

There are also loans, but they come at a price

Loans. Today, there are two types:

Federal Student Loan. Allows students to borrow money at low fixed interest rates with flexible repayment terms through programs supported by the federal government

Private Loan. Issued (generally to the parent) by a lender such as a bank or a credit union.

For links to student aid resources, please see pages 34-35.


How to apply for aid

Accessing Financial Aid


The FAFSA Application and CSS Profile

Two Different Applications

The application process begins by completing one – or both – of the following financial aid forms:

For Federal Student Aid – FAFSA: Acronym = Free Application for Federal Student Aid All colleges that award Federal Student Aid require that students complete

the FAFSA in order to determine eligibility Apply on-line: www.fafsa.gov

For Institutional Needs-based Assistance – CSS Profile: Acronym = College Scholarship Service Approximately 300 private colleges also require that the CSS Profile be

completed (in addition to the FAFSA) Used to assess the student’s eligibility for the college’s own aid dollars Apply on-line: collegeboard.org


Free Application for Federal Student Aid

What you should know about FAFSA


How to Apply for Federal Student Aid

Completing the FAFSA (Free Application for Federal Student Aid) form is the first step:

fastest and easiest way to apply is on-line: www.fafsa.gov

make sure you visit the official U.S. Dept. of Education website.


How is information on the FAFSA used?

Most colleges use FAFSA to determine eligibility for: • federal, state, college-sponsored financial aid • including grants, work-study, student loans • some colleges also require FAFSA to determine scholarship eligibility.

How much, depends upon the Expected Family Contribution = EFC • FAFSA looks at assets, income, other information to determine EFC • Expected Family Contribution (EFC) is the number used to determine financial

aid eligibility • Difference between the Cost of Attendance (COA) and EFC = “Financial Need.”


Demystifying EFC

What are the most important factors in calculating EFC?


At-a-glance: What goes into the EFC calculation?

Most college students and families are expected to contribute toward the cost

The EFC calculation takes into account assets and income – for both the student and the parent(s).

Some additional considerations: How many children in the family How many children in college others.

Assets1 Income2

Student 20% 50%

Parents Up to 5.6% 22% - 47%

1Total current balance of cash, savings and checking accounts; net worth of investments, including real estate, excluding the home in which parents and student live; net worth of parent and student current businesses and/or investment farms, excluding family farms or businesses with 100 or fewer full-time or full-time equivalent employees. Net worth means current value minus debt. Source: FAFSA 7/1/14 - 6/30/15.

2 Income includes the adjusted gross income from the parents‘ and students’ Forms 1040 along with certain other items representing untaxed income and benefits, e.g., untaxed portions of IRA distributions and veteran non-education benefits, such as disability. Source: FAFSA 7/1/14 - 6/30/15.


Estimating future Federal Student Aid eligibility

FAFSA4caster

Parents, not yet ready to apply for federal student aid, can get an estimate using a free financial aid calculator – FAFSA4caster.

Provides an early estimate of eligibility

The calculator is offered on the FAFSA website: http://studentaid.ed.gov/fafsa/estimate


New FAFSA Rules for 2016

Earlier Application Date. Families can now file the FAFSA beginning October 1, 2016, for the 2017-18 academic year.

• Previously, FAFSA filings started January 1.)

No More Estimated Taxes. Families can now use income tax returns from the previous year (e.g., 2015 filing for the 2017-18 academic year).

• Previously, families had to estimate your income taxes for the previous year, then update the information once their taxes were filed.)

• Under the new rule, the look-back will be two years beginning with the 2017-18 academic year.


What if your client can’t count on financial aid?

The Solution


Start a Savings Plan

Consider these 5 steps:

1. Determine the cost of college

2. Identify your savings profile

3. Set your savings goal

4. Choose a savings vehicle

5. Establish a savings schedule

Helpful Hint Use these free tools on the Legg Mason website: College Cost Projector College Savings Planner Cost of Waiting Tool 529 Plan Comparison


Understanding the Options

What advantages do each type of savings vehicle offer?


A Number of Ways to Save

UGMAs/UTMAs

Trusts

Savings bonds

Traditional taxable accounts

Roth IRAs

Coverdell Education Savings Accounts

529 Plans: Pre-paid Tuition and Savings Plans


Benefits of 529 College Savings Plans

529 plans offer 4 main benefits

Tax advantages

Gifting & estate planning advantages

Account owner control

Flexibility


Benefits of 529 plans

Tax Advantages: Federal

Tax-deferred growth: Investment earnings grow tax deferred

Tax-free withdrawals, when used for Qualified Higher Education Expenses (QHEE), including: Tuition Room & Board Fees Books and required supplies New in 2016: Computers and computer equipment



Tax Advantages: State

States With Tax Considerations. 27 States and the District of Columbia offer either an in-state tax deduction or tax credit on state taxable income for contributions into the State’s plan. o 4 of those States offer an unlimited in-state tax deduction from State taxable

income (CO, NM, SC and WV).

Tax Parity States. 5 additional states are considered “tax parity” States meaning contributions made to any State’s 529 plan are eligible for an in-state tax deduction (AZ, KS, MO, MT and PA).

Tax Neutral States. 18 States do not offer a tax deduction or credit.


Benefits of 529 plans Maximize Gift Tax Exclusions

Annual. Contributions qualify for the $14,000 annual gift tax exclusion per filer.

Accelerated gifting. A special provision that allows for five years’ worth of contributions/gift tax exclusions in a single year.

Annual or “Accelerated” Maximum Contributions (per child, for joint filers)

This planning assumes no other gifts being made to the donee by the contributor. Contributions to an account for a beneficiary between $14,000 and $70,000 made in one year can be prorated over a five-year period without incurring federal gift taxes or reducing an investor’s unified estate and lifetime gift tax credit. If the account owner dies before the end of the five-year period, a prorated portion of the contribution will be included in his or her taxable estate.



Account Owner Control

Owner remains in full control over the assets in the account and has the ability to:

Change beneficiary

Change investment options

Change Owner

Rollover assets to another 529 plan1

Make withdrawals2

1 Allowed once every 12 months, from the time of the last rollover. 2 Regarding Non-Qualified withdrawals, Distributions that are made for Non-Qualified expenses are subject to ordinary income tax, plus a 10% additional federal

penalty on the earnings portion of the withdrawal.



Flexibility

No income, age or time restrictions

Anyone can contribute – even legal entities (e.g., Trust)

Assets may be used at any “accredited” higher education institution that participates in the U.S Department of Education’s Federal Student Aid (FAFSA) program, including: colleges universities vocational schools trade schools over 500 schools abroad1

1The college must accept U.S. Federal Student Aid. Check FAFSA website for eligibility.


Factoring in 529 plans

How, exactly, are 529 plan assets and distributions counted in the EFC?


Factoring in 529 Plans

Impact on EFC calculations

529 plan account owned by a parent is treated as parental assets, which count up to 5.6%

Third-party-owned 529 plans (e.g., grandparents) are treated differently: assets are not considered at all in the EFC calculation distributions are considered income of the student

1 Total current balance of cash, savings and checking accounts; net worth of investments, including real estate, excluding the home in which parents and student live; net worth of parent and student current businesses and/or investment farms, excluding family farms or businesses with 100 or fewer full-time or full-time equivalent employees. Net worth means current value minus debt. Source: FAFSA 7/1/14 - 6/30/15.

Owner Assets1 Distributions Parent Up to 5.6% 0%

Third Party 0% 50%


Factoring in 529 Plans

Summary

Despite their expectations, many of your clients:

are unlikely to qualify for much – if any – needs-based Federal Student Aid

if they qualify at all, the aid will likely come in the form of federal loans or work-study (vs. grants).

A 529 Plan account:

affects a client’s EFC less than student-owned assets (e.g., UGMA), and far less than the parent’s income

owned by a person other than the parent or student (e.g., grandparent), is not considered in the EFC formula at all.*

*Distributions (withdrawals from a 529 Plan account) are considered income of the student the following year.


Resources


Resources: Student aid primary sources

Scholarships

www.scholarships.com Private database of > 2,700,000 scholarship opportunities

www.careerinfonet.org/scholarshipsearch U.S. Department of Labor database of > 5,000 scholarship opportunities

Grants

http://studentaid.ed.gov/types/grants-scholarships

Also see the two websites listed under scholarships (above)

Work-Study

www.studentaid.ed.gov/types/work-study


Resources: Student aid primary sources (cont’d)

Federal student loans www.studentaid.ed.gov/types/loans

• Perkins Loan1: up to $5,550 for undergraduates; up to $8,000 for graduates.

• Direct Subsidized Stafford Loan1: $5,500 - $12,500 (undergraduates only). • Direct Unsubsidized Stafford Loan1: $5,500 - $12,500 for undergraduates;

up to $20,500 for graduates. • Direct Plus Loan: Student’s Cost of Attendance (COA) minus any other

financial aid (for parent of dependent undergraduate students and for graduate or professional students).

Private student loans If student does not have sufficient funds Consult with school’s Financial Aid Office or parent’s bank

1Source: U.S. Department of Education; as of Dec 2015.


Why Scholars Choice® 529 Plan?

It’s the Legg Mason difference


Why Scholars Choice?

A Leading 529 Plan from a Leading Investment Company

With over $700 billion in assets under management, and over a century of experience delivering solutions to clients, Legg Mason is a global leader in the investment management business.1

With over $3.6 billion in assets under management, and over 15 years helping clients achieve their college savings goals, Scholars Choice 529 Plan is one of the largest and one of the first-ever advisor-sold 529 Plans.2,3

1AUM as of 9/30/16. 2AUM as of 9/30/16. 3Source: Strategic Insight, “529 Quarterly Data Update”; data as of 3/31/16.



Expert Portfolio Construction + Performance Monitoring

The Plan’s Investment Manager, QS Investors, performs ongoing:

Fund selection from among both Legg proprietary and non-proprietary funds

Asset allocation adjustments of all Scholars Choice multi-fund Portfolios.

QS Investors 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.



Multi-Manager

Legg Mason proprietary fund managers:

ClearBridge Investments

Brandywine Global

QS Investors

Royce & Associates

Western Asset

Non-proprietary fund managers:

Franklin Templeton Investments*

Thornburg Investment Management*

*Thornburg and Franklin Templeton are not affiliates of Legg Mason.



Proven, Active Management

Awards given to Legg Mason affiliates include:

Western Asset – manager of five of the underlying funds in the Plan, including Core Plus Bond Fund (WAPSX), which received the Lipper award for the 3-year period (ended 12/31/15) in the Core Plus Bond Funds category.

Please see slide #47 for important disclosure regarding the Morningstar and Lipper award discussed above. Western Asset Core Plus Bond Fund is not available in all Scholars Choice investment options. Please also note, the Western Asset Core Plus Bond fund is not a standalone investment option in the Scholars Choice program, but rather part of a broader investment selection within the plan, no offer is made hereunder or pursuant to the Program of the above lsited fund. An investor in the Program does not have a beneficial interest in the fund. Please refer to the Program Disclosure Statement (PDS) for more information on the underlying investments of the program.



High Marks From Independent Sources

Savingforcollege.com has awarded Scholars Choice:

#2 performance ranking for the 5-year period (ended 6/30/16)1

5 Cap rating (for residents) / 4.5 Cap rating (for non-residents).2

1. Among 27 advisor-sold Plans with 5 years or more of performance history, not including sales charge; the Plan was ranked #3 for the same time period, including sales charge. 2. Among all advisor-sold Plans, as of 6/30/16. See slide # 48 for important disclosures regarding SavingforCollege.com performance rankings, including their methodology.



Low Fees

Low asset-based fees 3rd-lowest expenses of all actively-managed, advisor-sold Plans1

Competitive load structures Class A:

• low up-front (maximum) sales charge of 3.5% • NAV breakpoint at $500,000

Class C: • no up-front sales charge • NO back-end CDSC

1. As of 6/30/16. Source: Strategic Insight “529 College Savings Quarterly Fee Analysis – Second Quarter 2016.”



Full Range of Investment Options

Age-Based Portfolios

Years to Enrollment Portfolios

Static Multi-Fund Portfolios

Individual-Fund Portfolios

Cash Reserve Portfolio

An investment in the Cash Reserve Portfolio is not a bank deposit and is not insured or guaranteed by the FDIC or any other governmental agency. There is no assurance that the Cash Reserve Portfolio will be able to maintain the value of its units at $1 per unit. It is possible to lose money by investing in this option. The Cash Reserve Portfolio will not seek capital appreciation and may underperform other investment options. While the Cash Reserve Portfolio will invest all of its assets in a money market mutual fund and will value its units based on the underlying money market fund share value, the Cash Reserve Portfolio itself is not a money market mutual fund.



State Tax Deduction

Available in 6 States. CO (Colorado), plus the (5) “tax parity” States – AZ, KS, MO, MT, PA.

Unlimited for Colorado Residents. Contributions to the Program by Colorado taxpayers are deductible from Colorado state income tax in the year of the contribution, up to the contributor’s Colorado taxable income for that same calendar year.

• Recapture Provision in Colorado. The principal portion of rollovers and Non-Qualified withdrawals are included in taxable income to the extent of prior tax deductions. (Excludes withdrawals made due to death or disability of Beneficiary, or receipt of scholarship.)

If neither the investor nor the Beneficiary is a Colorado taxpayer, a prospective investor should consider before investing whether the investor’s or the Beneficiary’s home state offers a 529 Plan that provides state tax and other benefits only available to state taxpayers investing in such plans.


For more information

Contact us:

[email protected] (including questions regarding CE credits)

Legg Mason Sales Desk 800-544-7835

Visit our website:

scholars-choice.com


Questions?


Important Information The 2016 Western Asset Lipper Award was for Class IS shares (WAPSX). Best among 188 Core Plus Bond Funds for the 3-year period ending 12/31/15 based on risk-adjusted performance. The 2016 Lipper Fund Award winners are selected based on the highest risk-adjusted performance among funds within a given category. The calculation periods extend over 36, 60, and 120 months. The highest Lipper Leader for Consistent Return (Effective Return) value within each eligible classification determines the fund classification winner over three, five or 10 years. A high Lipper rating does not necessarily imply that a fund had the best total performance or that the fund achieved positive results for that period. Lipper Inc. is a major independent mutual fund tracking organization. Other share classes may have different performance characteristics.

Past performance is no guarantee of future results. BEFORE INVESTING, CAREFULLY CONSIDER A FUND’S INVESTMENT OBJECTIVES, RISKS, CHARGES AND EXPENSES. YOU CAN FIND THIS AND OTHER INFORMATION IN EACH PROSPECTUS OR SUMMARY PROSPECTUS, IF AVAILABLE, AT WWW.LEGGMASON.COM. PLEASE READ THE PROSPECTUS CAREFULLY.


Important Information All Savingforcollege.com performance rankings are as of June 30, 2016, and are based on the universe of advisor-sold plans for Class A share performance. The portfolios within the plans are compared and ranked based on published investment returns. The plan’s composite ranking is determined by the average of its percentile ranking. The Program ranked 19 (out of 30 plans), 12 (out of 30), 2 (out of 27) and 8 (out of 14) for the quarterly rolling 1-, 3-, 5- and 10-year periods, respectively, without sales charge. The Program ranked 9 (out of 30 plans), 6 (out of 30), 3 (out of 27) and 7 (out of 14) for the quarterly rolling 1-, 3-, 5- and 10-year periods, respectively, including sales charge. Past performance is no guarantee of future results. The performance and rankings discussed are inherently limited and are not indicative of longer-term performance. Current performance may be lower or higher than performance results used for these rankings, resulting in different rankings that may be lower than those shown. Market volatility, interest-rate changes and economic events, among other factors, can affect an investment’s short-term returns. Ranking Methodology Savingforcollege.com derives the rankings using each plan’s relevant portfolio performance in seven unique asset allocation categories: 100% Equity, 80% Equity, 60% Equity, 40% Equity, 20% Equity, 100% Fixed and 100% Short Term. The plan’s composite ranking is determined by the average of its percentile ranking in these categories. Within each category, portfolios are compared and ranked based on published investment returns. Separate rankings are produced for 1-, 3-, 5- and 10-year periods. In addition, two versions of rankings for each performance period are produced: one based on performance without sales charges and the other based on performance with maximum sales charges. Please visit savingforcollege.com for more information about the ranking. Additional unit classes may exist for each plan ranked. Please refer to each plan’s program disclosure statement for more information regarding its performance, fees and expenses. For the Scholars Choice’s program disclosure statement, please visit www.scholars-choice.com/PDS.


Important Information An investor should consider the Program’s investment objectives, risks, charges and expenses before investing. The Program Disclosure Statement at www.scholars-choice.com/PDS, 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 Investors, 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. Scholars Choice is a registered service mark of CollegeInvest. CollegeInvest and the CollegeInvest logo are registered trademarks. Scholars Choice College Savings Program is administered and issued by CollegeInvest, State of Colorado. QS Investors, 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 Investors, LLC, Brandywine Global Investment Management, LLC, ClearBridge Investments, LLC, Royce & Associates, LP, Western Asset Management Company, and Legg Mason Investor Services, LLC are Legg Mason, Inc. affiliates. Thornburg Investment Management, Inc. and Templeton Global Advisors Limited are not affiliated with Legg Mason, Inc.

© 2016 Legg Mason Investor Services, LLC, a Legg Mason Inc. subsidiary. Member FINRA, SIPC 11/16

how to pay for college student aid demystified · what you need to know about federal student aid 5...

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