A college education can be the key to unlocking a child’s full potential. A good education will pay a lifetime of benefits, including creativity and independence. A college education also offers significantly higher earning potential. According to the U.S. Census Bureau, college graduates earn 62% more on average than high school graduates, a difference in earning potential that could exceed $800,000 over a lifetime. (Source: The College Board, 2008.) But a college education is an investment — and one that is getting more expensive every day.
College costs are going up. Using a conservative 5.5% inflation rate, if current trends continue, in 18 years tuition could cost over $163,000 at a public college. Whereas, tuition at a private college would be projected to total over $388,000.
Few students can afford to pay for college without some form of education financing. Undergraduate students receive 46% of their funding in the form of grants and 49% in the form of loans, including alternative nonfederal loans. The proportions for graduate students are 33% grants and 64% loans. Two thirds (65.7%) of 4-year undergraduate students graduate with some debt, and the average student loan debt among graduating seniors is $19,237 (excluding PLUS Loans but including Stafford, Perkins, state, college and private loans). This level of debt seems even more daunting when you consider that the median salary for a graduate with a bachelor’s degree is $50,900. Graduate and professional students borrow even more, with the additional debt for a graduate degree ranging from $27,000 to $114,000.
Like most major financial goals, financing a college education requires planning. A 529 plan offers many benefits for families who want to save for college.
529 plans were started by individual states to help state residents pay for in-state public universities. In the 1990s Congress built these plans into the Internal Revenue Code (Section 529), and they became available to college savers nationwide. The Ohio Tuition Trust Authority was established in 1989 to ensure that the needs of Ohio residents are met by the state’s 529 plan. With a 529 plan, not only do you pay no taxes while the account is accumulating, you also pay no federal income taxes on withdrawals to pay for qualified higher education expenses like college tuition, room, and board. While qualified withdrawals are federally tax free, state taxes may apply. Subsequent changes make the tax benefits even better. The Pension Protection Act of 2006 makes the federal income-tax-free treatment of qualified distributions from 529 accounts permanent. However, withdrawals of earnings not used to pay for qualified higher education expenses are subject to taxes and penalty. (Of course, your tax advisor or financial representative can help you determine what’s best for you in terms of tax consequences.)
With a 529 plan, you control the account and have flexibility on how the savings are used. Anyone can contribute on behalf of a single beneficiary, including parents, grandparents, other relatives, and family friends. Contributions can be as low as you like or as high as $331,000 over the life of the account. You may change beneficiaries, providing they are members of the same family as defined by the IRS. You can even name yourself as a beneficiary. Proceeds may be used at any accredited college in the country to pay for tuition, fees, room and board, books, and other qualified college expenses. You have more control over withdrawals. Ownership of the account does not transfer to the student when he or she reaches legal age, generally 21. This is not the case with custodial accounts like UGMAs or UTMAs, which are often used to help pay for college expenses. (529 accounts opened on a conversion from an UGMA remain subject to restrictions.) If the beneficiary receives a scholarship or decides not to attend college, you can still use your savings for another beneficiary. You also may use your savings for other purposes — but keep in mind that nonqualified withdrawals of earnings are subject to regular income tax and a 10% additional tax.
Today, not only do you pay no taxes while the account is accumulating, you also generally pay no federal income taxes on withdrawals used for qualified higher education expenses like college tuition, room, and board. [Withdrawals for qualified higher education expenses subject to tax if HOPE Scholarship or Lifetime Learning Credit is claimed for same expenses. If withdrawing funds for qualified higher education expenses from both a 529 account and a Coverdell Education Savings Account, a portion of the earnings distribution may be subject to tax and penalty on amounts that exceed qualified higher education expenses. State taxes may apply. Please read the Offering Statement for details.] 529 plans can also accommodate large lump-sum contributions, which can help make a big dent in the cost of college while lowering an individual’s estate-tax liability. Lets look at this tax benefit more closely. [go to next slide] [Contributions are generally treated as gifts to the beneficiary for federal gift-tax purposes and are subject to annual federal gift-tax exclusion amount ($13,000 for 2009). Contributor may elect to treat contribution in excess of that amount (up to $65,000 for 2009) as prorated over five years. Election is made by filing a federal gift-tax return. While contributions are generally excludable from contributor’s gross estate, if electing contributor dies during five-year period, amounts allocable to years after death are includible in contributor’s gross estate. Consult your tax advisor.]
A 529 plan also offers estate planning benefits. While the contributions will reduce both current taxable assets and the value of their estate, the grandparents still control the assets in the account. * Contributions are generally treated as gifts to the beneficiary for federal gift tax purposes and are subject to annual federal gift tax exclusion amount ($13,000 for 2009). Contributor may elect to treat contribution in excess of that amount (up to $65,000, or $130,000 for couples filing jointly, for 2009) as pro-rated over 5 years. Election is made by filing a federal gift tax return. While contributions are generally excludable from contributor’s gross estate, if the electing contributor dies during the 5-year period, amounts allocable to years after death are includible in contributor’s gross estate. Consult your tax advisor for more information.
Most parents do not pay for every college expense themselves. There is government financial aid, aid that may come from the college, and student loans. Government grants are issued on the basis of financial need. The reality is that most grant aid goes to families earning less than $40,000 per year. Still, you don’t want to disqualify yourself unnecessarily. Federal financial aid is generally based on a certain percentage of the student’s income and assets, and a lower percentage of his or her parents’ income and assets. The good news is that the federal financial aid formula treats accounts owned by parents as parental assets and thus the assets do not count as heavily as assets in an UGMA or UTMA, which are considered the student’s assets. Moreover, distributions from a 529 for qualified expenses are not considered to be the student’s income and thus do not reduce financial aid. The formulas are complicated and can vary based on circumstances, so you should consult a financial aid advisor about your situation.
As we discussed earlier, a child born today will pay about $163,000 for four years of tuition, room, and board at the average university. [Source: The College Board, 2008; and www.FinAid.org, 2008.] In this example, the Jones family has a newborn and starts saving right away. To cover the cost of the average public university in 18 years, they have to contribute $340 each month to their CollegeAdvantage account. The Smith family waits 10 years to start saving. They can still meet their goal, but they’ll have to contribute considerably more — $1,219 — each month. The sooner you start contributing, the easier it will be to pursue your college savings goals. Remember, systematic investing does not assure a profit or protect against loss. You should consider your ability to continue investing during periods of low prices.
In this example, we see what financing a college education might be like if the whole family gets involved. The Jones grandfather makes an initial lump-sum contribution of about $13,000, leaving the Jones parents to contribute $226 a month in order to meet their savings goals.
CollegeAdvantage is a 529 plan sponsored by the State of Ohio and managed by Putnam Investments, one of the world’s largest investment firms. Putnam CollegeAdvantage offers everything you need in a college savings plan — tax benefits, a wide arrange of investment options, professional portfolio management — all backed by Putnam’s industry-leading service, which has earned nine DALBAR triple crown awards for service excellence.
Now that we have reviewed the benefits a 529 plan can offer, I want to tell you about how to pursue opportunities with Putnam Investments. Putnam has been helping people pursue their financial goals since 1937. They use the same prudent approach to manage all their funds, although there is no guarantee a fund will meet its objectives. Every fund strives to deliver performance that is consistent, dependable, and superior over time. A time-honored tradition in money management Since 1937, our values have been rooted in a profound sense of responsibility for the money entrusted to us. A prudent approach to investing We use a research-driven team approach to seek superior investment results over time. Funds for every investment goal We offer a broad range of mutual funds and other financial products so investors and their financial advisors can build diversified portfolios. A commitment to doing what’s right for investors With a focus on investment performance, below-average expenses, and in-depth information about our funds, we put the interests of investors first and seek to set the standard for integrity and service. Industry-leading service We help investors along with their financial advisors, make informed investment decisions with confidence. Putnam is a nine-time winner of the DALBAR triple crown award for service excellence.
Putnam CollegeAdvantage offers a high account value limit of $331,000. There are no age or time restrictions. Owners may contribute after the beneficiary turns 18, and there are no deadlines for withdrawals. With Putnam CollegeAdvantage, you have 20 investment options and multiple ways to invest. And a single account can invest in all portfolios.
Think of the age-based portfolios as being on “automatic pilot.” As the student approaches college age, each portfolio automatically becomes more conservative — with fewer stocks and more fixed-income investments. In addition, the portfolio is rebalanced quarterly to make sure it stays on track. The Conservative portfolio begins with a ratio of 66% equity, 3% cash, and 31% fixed income; by the time the beneficiary is age 21, the ratio is 85% cash, 11% fixed income, and 4% equity. The Moderate portfolio begins with 85% equity and 15% fixed income; by the time the beneficiary is age 21, the ratio is 15% equity, 60% cash, and 25% fixed income. The Aggressive portfolio begins with 100% equity; by the time the beneficiary is age 21, the ratio is 37% equity, 21% cash, and 42% fixed income.
Goal-based portfolios allow you to choose the investments that best meet your clients’ goals and risk tolerance. The Balanced Portfolio offers a balanced approach, with more moderate potential returns and less risk than the growth or aggressive growth portfolios. It typically has a mix of 60% equity, 34% fixed income, and 6% cash, with maximum and minimum band ranges, although the target allocation may change from time to time as market conditions warrant. The Growth Portfolio offers potentially higher returns with a greater risk of principal loss. It has a targeted allocation of 85% equity and 15% fixed income. It may help you accumulate savings more rapidly than the Balanced Portfolio, but it comes with the potential for greater risk. The Aggressive Growth Portfolio offers the potential for the highest returns over time, along with a correspondingly higher risk of principal loss. It has a targeted allocation of 100% equity.
The individual asset class options invest in a variety of professionally managed mutual funds. The options cover the full risk/reward spectrum, from a conservative money market option to an aggressive-growth option. With the help of your financial representative, you can create your own portfolio tailored to your specific situation by combining any of the asset allocation options and any of the individual asset class options.
You can contribute as much or as little as you need until the account value reaches $331,000. With CollegeAdvantage, you can make five years’ worth of contributions all at once, putting up to $65,000 (or $130,000 for couples filing jointly) to work in your account without exceeding the annual federal gift tax exclusion amount. In that case, any additional gifts in the same five-year period to the same beneficiary would be subject to federal gift tax. This may be a lot more money than you have on hand, but it may make sense for a grandparent or another relative who wants to help and is also looking for a way to reduce the size of his or her taxable estate. Anyone can contribute to an account you’ve set up.
There are a number of ways to contribute to the account: You can sign up for a systematic investment plan using payroll or bank account deductions A dollar cost averaging program allows you to gradually transfer lump-sum contribution from one investment option to another You can even order gift certificates that friends and relatives can use to make contributions to your account. Systematic investing and dollar cost averaging do not assure a profit or protect against loss in a declining market. You should consider your ability to continue investing during periods of low prices.
When you’re ready to withdraw your savings, simply fill out a single form, indicate how the check should be made out, and mail the form to Putnam. The money can then be sent to the account owner, to the beneficiary, or directly to the college or university the beneficiary is attending.
Contact me. I’m here to answer any questions you have about saving for college and CollegeAdvantage 529 plan. You can also access and manage your account online, or call 1-800-225-1581 for assistance. Thank you for coming.
1. No Bank Guarantee May Lose Value Not FDIC Insured
2. The challenge
3. College costs are rising Figures include tuition, fees, room, and board. Estimated growth rate of 5.5%. Sources: The College Board, 2008; and www.FinAid.org, 2008. Four years of tuition, room, and board 2008 $148,210 Private college $62,238 Public college $163,154 2026 $388,528
4. College debt is also rising Undergraduates nationwide use loans to finance 49% of their college costs. The average college senior owes $19,237 at graduation. The median starting salary for a graduate with a bachelor’s degree is $50,900. Sources: Trends in Student Aid 2007 (The College Board); National Postsecondary Student Aid Study, Trends in Undergraduate Borrowing II, March 2008.
5. Help meet the challenge with a 529 plan
6. What is a 529 plan? <ul><li>A way for families to save for college </li></ul><ul><li>An investment account with tax advantages </li></ul><ul><ul><li>Qualified withdrawals are federally tax free </li></ul></ul><ul><li>Operated by states and educational institutions </li></ul><ul><li>Ohio Tuition Trust Authority established in 1989 </li></ul>
7. Benefits of a 529 plan <ul><li>Can be used for any accredited college in the country </li></ul><ul><li>Anyone can contribute to your account </li></ul><ul><li>You have more control than with other types of college savings investments </li></ul><ul><li>You can change beneficiaries </li></ul><ul><li>You have other options if the beneficiary does not attend college </li></ul>
8. Tax benefits for every investor <ul><li>Withdrawals used for qualified higher education expenses are free from federal income tax* </li></ul><ul><li>No taxes on earnings while your account accumulates </li></ul><ul><li>Lower estate-tax liability without sacrificing control of your assets </li></ul>* Withdrawals of earnings not used to pay for qualified higher education expenses are subject to tax and a 10% penalty. State taxes may apply. Withdrawals for qualified higher education expenses subject to tax if HOPE Scholarship or Lifetime Learning Credit is claimed for same expenses. If withdrawing funds for qualified higher education expenses from both a 529 account and a Coverdell Education Savings Account, a portion of the earnings distribution may be subject to tax and penalty on amounts that exceed qualified higher education expenses. Please read the Offering Statement for details.
9. Estate planning <ul><li>Grandparent uses Putnam CollegeAdvantage to lower estate tax </li></ul>* Married couples filing jointly may contribute up to $130,000 per beneficiary. Individuals may contribute up to $65,000. Contributions are generally treated as gifts to the beneficiary for federal gift tax purposes and are subject to annual federal gift tax exclusion amount ($13,000 for 2009). Contributor may elect to treat contribution in excess of that amount (up to $65,000 for 2009) as pro-rated over 5 years. Election is made by filing a federal gift tax return. While contributions are generally excludable from contributor’s gross estate, if electing contributor dies during 5-year period, amounts allocable to years after death are includible in contributor’s gross estate. Consult your tax advisor for more information. Child A $65,000 Age 11 Child B $65,000 Age 5 Child C $65,000 Age 2 $0 Estate taxes due $3,500,000 Estate tax exemption for 2009 $3,500,000 Estate value after contribution Beneficiaries $195,000 Contribution to 529 plans* $3,695,000 Current estate value
10. A 529 has limited impact on financial-aid opportunities <ul><li>Assets in a 529 account owned by parent are generally considered to be assets of the parent </li></ul><ul><li>Distributions for qualified expenses do not reduce financial aid </li></ul>
11. Make the most of your investment
12. Start early, contribute often This chart is for illustrative purposes only and is not intended to be representative of past or future performance. The Jones family saves $340 monthly for 18 years. The Smith family saves $1,219 monthly for 8 years. Assumes a hypothetical 8% annual return compounded monthly. The Jones family starts saving today, contributing $340 every month Total contribution $73,440 The Smith family waits 10 years to start saving, contributing $1,219 every month Total contribution $117,024 Earnings $89,714 Account value $163,154 after 18 years Earnings $46,130 Account value $163,154 after 8 years
13. Let the whole family contribute This chart is for illustrative purposes only and is not intended to be representative of past or future performance. The Jones grandfather makes a lump-sum contribution of $13,000 today. The Jones parents contribute $226 each month. Assumes a hypothetical 8% annual return compounded monthly. The Jones grandfather makes an initial contribution of $13,000 Total contribution $61,816 The Jones parents contribute $226 every month Earnings $101,338 Account value $163,154 after 18 years
14. Saving with Putnam CollegeAdvantage
15. The Putnam Investments difference <ul><li>A time-honored tradition in money management </li></ul><ul><li>A prudent approach to investing </li></ul><ul><li>Funds for every investment goal </li></ul><ul><li>A commitment to doing what’s right for investors </li></ul><ul><li>Industry-leading service </li></ul>
16. Putnam CollegeAdvantage benefits and features <ul><li>High account value limit of $331,000 * </li></ul><ul><li>No age or time restrictions </li></ul><ul><li>Choose from 20 investment options </li></ul><ul><li>As of January 2009. Subject to periodic review. </li></ul>
17. Age-based portfolios * Allocations shown are target allocations; actual allocations may vary. See offering statement for details. Asset allocation options reallocate annually, becoming more conservative as beneficiaries approach college age Conservative Moderate Aggressive Age of beneficiary 21+ 20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 Newborn Cash Fixed Income Equity
18. Goal-based options Balanced Allocations shown are target allocations; actual allocations may vary. See the offering statement for details. Asset allocation portfolios based on the investor’s objective Aggressive growth Growth Equity 60% Fixed Income 34% Cash 6% Equity 85% Fixed Income 15% Cash 0% Equity 100% Fixed Income 0% Cash 0%
19. Build your own portfolio Cash Fixed Income Equity * Although a money market fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money investing in a money market fund. Money market funds are not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other governmental agency. ** Available on or about January 2009. † Putnam Stable Value Asset Class Option invests in Putnam Income Fund and Putnam Money Market Fund, and in insurance wrapper agreements issued by a bank or an insurance company. U.S. Small-Cap Equity Growth | Fidelity Advisor Small Cap Option Diversified Small-/Mid-Cap Equity | Fidelity Advisor Leveraged Company Stock Option U.S. Large-Cap Equity Growth | Maxim Janus Large Cap Growth Option ** International Small-Cap Equity Blend | Putnam International Capital Opportunities Option International Large-Cap Equity Blend | Putnam International Equity Option U.S. Mid-Cap Equity Growth | Maxim T. Rowe Price Mid Cap Growth Option ** U.S. Small-Cap Equity Value | Maxim Loomis Sayles Small Cap Value Option ** Diversified Large Cap Equity Blend | Davis New York Venture Option U.S. Large-Cap Equity Blend | Fidelity Spartan 500 Index Option U.S. Large-Cap Equity Value | Putnam Equity Income Option High-Yield Bond | Putnam High Yield Option Investment Grade Bond | Putnam Income Option Capital Preservation | Putnam Stable Value Option † Capital Preservation | Putnam Money Market Option *
20. Getting started is easy
21. How much can you contribute? <ul><li>No minimum investment </li></ul><ul><li>As much as $65,000 in a single year ($130,000 for couples filing jointly) without exceeding the federal gift-tax exclusion * </li></ul><ul><li>Account value can be as high as $331,000 ** </li></ul> * A gift of $65,000 in 2009 would constitute five years’ worth of gifts. Additional gifts made for the same beneficiary in the same five-year period would be subject to federal gift taxes. Election is made by filing a federal gift tax return. If the electing contributor dies during the 5-year period, amounts allocable to year after death are inducible in the contributor’s gross estate. ** Contribution limit as of 1/1/09. Subject to periodic review.
22. Many ways to contribute <ul><li>Invest a lump sum </li></ul><ul><li>Establish a dollar cost averaging program </li></ul><ul><li>Encourage contributions with gift certificates </li></ul>Systematic investing and dollar cost averaging do not assure a profit or protect against loss in a declining market. You should consider your ability to continue investing during periods of low prices.
23. Withdrawals are easy <ul><li>You tell us how to make out the check </li></ul><ul><li>Mail the completed form to Putnam Investments </li></ul>* Withdrawals of earnings not used to pay for qualified higher education expenses are subject to tax and a 10% penalty. State taxes may apply.
25. The IRS has announced that it intends to repropose Section 529 regulations that will include certain changes and clarifications to existing proposed regulations. Although the exact content of the new proposed regulations, and the ultimate content of the final regulations, is not known at this time, the reproposed regulations could limit or require changes to, and affect tax consequences of, certain features of the Putnam CollegeAdvantage Program, including those described herein. CollegeAdvantage is offered and overseen by the Ohio Tuition Trust Authority. Ohio taxpayers may obtain state tax benefits through the plan. However, anyone may invest in the plan and use the proceeds to attend school in any state. Before investing, consider whether your state's plan or that of your beneficiary offers state tax and other benefits not available through CollegeAdvantage. If you withdraw money for something other than qualified higher education expenses, you will owe federal income tax and may face a 10% federal tax penalty on earnings. Consult your tax advisor. You should carefully consider the investment objectives, risks, charges, and expenses of the plan before investing. Ask your financial representative or call Putnam at 1-800-225-1581 for an offering statement containing this and other information for Putnam CollegeAdvantage, and read it carefully before investing. Putnam Retail Management, principal underwriter and distributor. Putnam Investment Management, investment manager.