ANNUAL REPORT

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Dear Fellow Pennsylvanians:

On behalf of the Tuition Account Program Advisory Board, I am honored to present this annual report of the Pennsylvania 529 College Savings Program (PA 529) for fiscal year 2014-15. PA 529 continues to provide families an effective way to make higher education a reality – fulfilling the legislative intent in creating the program.

Since its inception, PA 529 has helped nearly 80,000 students pay their college bills. On the direction of account owners, the program has paid over $2.1 billion to cover qualified higher education expenses. And, of that amount, $570 million were earnings on contributions – representing a gain of over 37 percent. The program continues to experience strong growth in both the number of accounts and amount of assets – growing more this year than the average growth experienced in 529 programs nationally. Annual contributions were also strong this year, exceeding $460 million, which is the highest amount contributed in one year since the program’s inception in 1993.

The actuarial funded status of the PA 529 Guaranteed Savings Plan (GSP) became even stronger going from 109.5 percent last year to 113.2 percent this year. This allowed the program to refund and waive fees for the second year in a row – as a result $4.5 million remained in owners’ accounts to continue to grow until used for college.

We are encouraged by the program’s success but much more must be done to ensure that everyone with the desire and academic ability to obtain higher education is not thwarted by a lack of funds or is burdened by oppressive student debt. Often that debt hinders the ability to save for the next generation’s education perpetuating the cycle of indebtedness. We must break the cycle by improving college access and affordability – and the PA 529 can be a significant part of that effort. Pennsylvania can encourage more families to use the program by providing the Commonwealth’s explicit backing of the PA 529 GSP’s guarantee. We also should end the PA 529’s competitive disadvantage by joining the 28 states that only provide a tax deduction for contributions to their home state program. Our last recommendation is that the Commonwealth provide more resources to support our efforts to increase awareness of PA 529 so that every Pennsylvania family with a potential college student knows how the program can make college affordable.

It is never too early or too late to save for college through PA 529. So, however old your future scholar is, start now! As Treasurer, my pledge to you is that I will continue to work to ensure that PA 529 helps you to make higher education a reality for your family.

Yours in service, Timothy A. Reese State Treasurer

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INTRODUCTION

1. Brief program overview.

2. Authority for and purpose of the annual report. 2. Program administration.

3. Advisory board members.

PROGRAM ACCOMPLISHMENTS

7. Record number of families saving at record levels.

12. $312 million to help make higher education possible for 23,345 students.

PA 529 GUARANTEED SAVINGS PLAN

17. How the PA 529 Guaranteed Savings Plan works.

19. PA 529 GSP Fund exceeded a 100 percent funded actuarial status. 19. PA 529 GSP Credit Rate Premiums were reduced or eliminated. 20. PA 529 GSP contributions and assets grew.

22. The PA 529 GSP remains a successful, lower-risk college savings plan.

PA 529 INVESTMENT PLAN

27. PA 529 IP investment options described. 28. PA 529 IP contributions and assets grew. 29. Investment performance was positive.

SUBSEQUENT CHANGES

37. PA 529 GSP fees refunded and waived.

FINDINGS AND RECOMMENDATIONS

41. Findings and recommendations.

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Timothy A. Reese, Pennsylvania State Treasurer

The Pennsylvania 529 College Savings Program provides one of the best ways to save for college. It is an easy and tax-efficient way to make college affordable. To meet the needs of nearly anyone who wishes to invest for college, Pennsylvania offers two distinct plans – the Pennsylvania 529 Guaranteed Savings Plan (PA 529 GSP) and the Pennsylvania 529 Investment Plan (PA 529 IP).

The PA 529 GSP is a lower-risk way to save. When used for college, growth is based on college tuition inflation. For example, if a family has saved enough for one or 120 credits at a Pennsylvania State System of Higher Education university, they will have enough for that many credits at that university in the future – no matter how much tuition has increased in the meantime. And, even if the account is not used for higher education, the minimum amount refunded is the remaining principal, minus any fees. The Pennsylvania Treasury oversees the investments.

The program’s second plan, the PA 529 IP, offers 13 different investment options, including three age-based options, provided by The Vanguard Group. These options include varying asset allocations, ranging from 100 percent equities to inflation-protected securities and money markets.

Both plans provide the same great advantages:

• Tax deferral and exemption. Earnings grow tax free and, when used for qualified higher education expenses, are tax exempt.

• Pennsylvania income tax deduction. Contributions to both plans are deductible from taxable state income up to $14,000 per beneficiary each year. For a married couple with two incomes of $14,000 or more each, the deduction could total $28,000 per child.

• Federal gift and estate tax advantages. Contributions up to $70,000 can be made in a single year ($140,000 for a married couple filing jointly) for each beneficiary and prorated over five years for federal gift and estate tax purposes. And, while contributions are considered completed gifts and are no longer part of the contributor’s estate, the contributor (if the account owner) retains complete control – including the ability to take back contributions at any time for use toward any other purpose (subject to applicable taxes and penalties).

• Pennsylvania inheritance tax exemption. Assets in a PA 529 account are not subject to

Pennsylvania inheritance tax, which, depending on the heirs, could be a savings of up to 15 percent of the assets.

• No income restrictions. Unlike most other tax advantages for saving (like the American

Opportunity Credits, formerly the Hope Credit or the Lifetime Learning Credit, and Roth IRAs), there are no income restrictions to limit who can benefit from a 529 plan’s tax advantages.

• Federal bankruptcy protection. Assets in a PA 529 account are protected in federal bankruptcy proceedings, depending on when contributions were made and the value of the account.

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The Pennsylvania 529 College Savings Program

• Protection from creditors. Assets in a PA 529 account are protected in state court proceedings from creditors of the account owner and/or the beneficiary.

• State financial aid advantage. Assets in a PA 529 account are not counted in determining state financial aid eligibility. PA 529 savings will not disqualify otherwise eligible students from getting Pennsylvania grants – or reduce the grant awarded. In academic year 2014-15, the average PA 529 account beneficiary received about $154 more in state grants because of this advantage.

• Tuition discounts at over 340 private colleges nationwide with 52 in Pennsylvania. Through the program’s arrangements with SAGE Scholars, tuition discounts, like “frequent flyer miles” for college tuition, are earned based on the value of the PA 529 College Savings Program account. Discounts can be earned of up to one year of tuition (currently valued at $8,500 to $49,542 – depending on the school). To date, PA 529 account beneficiaries enrolled in SAGE have earned over $1 billion in potential tuition discounts.

• Cash back rewards. Account owners can link their PA 529 accounts to a Upromise Rewards program account, which allows families to earn cash back on qualified purchases from some of America’s leading companies, including grocery stores, drug stores, gas stations, restaurants, retail stores, and online shopping sites. The cash back earned can be invested automatically in their PA 529 accounts on a quarterly basis. Through June 30, 2015, PA 529 account owners earned nearly $13 million through Upromise Rewards.

Act 11 of 1992 established the PA 529 College Savings Program, created an advisory board to oversee the program, and required the board and the Pennsylvania Treasury to submit annual reports to the Governor and the General Assembly. Pursuant to those requirements, the advisory board and Pennsylvania State Treasurer Timothy A. Reese have prepared this joint report for the period of July 1, 2014, through June 30, 2015.

Adoption and submission of this report was approved by the advisory board at its November 10, 2015, meeting.

Act 11 of 1992 also charged the Pennsylvania Treasury with establishing and administering the PA 529 College Savings Program and required the department to create the Tuition Account Programs Bureau. Treasury’s investment advisors and asset managers oversee assets in the PA 529 GSP. Contributions to a PA 529 IP account are invested in Vanguard mutual funds with oversight by Treasury. Ascensus College Savings Recordkeeping Services, LLC (formerly Upromise, Inc.) performs the record-keeping and processing functions for both the PA 529 GSP and PA 529 IP, with close supervision by the program bureau. Treasury’s Tuition Account Programs Bureau is responsible for customer service under both plans.

AUTHORITY FOR AND PURPOSE OF THE ANNUAL REPORT.

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ADVISORY BOARD MEMBERS [as of June 30, 2015]

Dr. Peter W. Teague

President Lancaster Bible College

The Honorable William F. Adolph, Jr.

Pennsylvania House of Representatives

Jeffrey S. Batoff, Esquire

Obermayer Rebmann Maxwell & Hippel LLP

Karen D. Beyer

Strategic Account Executive, Pennsylvania Xerox Corporation

Frank T. Brogan

Chancellor

Pennsylvania State System of Higher Education

The Honorable Andrew E. Dinniman

Senate of Pennsylvania

John R. Evans

Director, Office of Small Business Advocate Pennsylvania Department of Community and Economic Development

Gregory DeFeo

President

Pittsburgh Technical Institute

Jill Hans

Deputy Secretary

Pennsylvania Department of Education

Dr. Richard E. McDowell

President Emeritus University of Pittsburgh at Bradford

Mark A. Nordenberg

Chancellor University of Pittsburgh

Jason E. Salus

Treasurer Montgomery County

Jonathan Peri, Esquire

Vice President and General Counsel Neumann University

The Honorable Timothy A. Reese

State Treasurer

James Grandon

Chairman Council of Higher Education

James L. Haddock

Small Business Owner

Theresa Barnaby

Acting Deputy Secretary Pennsylvania Department of Education

Dr. John M. Anderson

President Millersville University

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RECORD NUMBER OF FAMILIES SAVING AT RECORD LEVELS.

One of the most important goals for the PA 529 program is to increase awareness of the program. Each Pennsylvania family with higher education in its future needs to know about this great state-offered program. Of course, increased awareness alone is not enough. Families need to be encouraged to open accounts and begin saving as early in their children’s lives as possible. And those with accounts need to be encouraged to save more. These continue to be the three goals of the PA 529 program’s outreach efforts.

To increase public awareness, the program utilizes direct mail, online and radio advertisements, and webinars in addition to earned media. Again this fiscal year, the program attempted to reach new individuals through partnerships with employers, financial planners, accountants, tax advisors, community organizations, and schools.

More families opened accounts.

The number of new accounts increased 2.0 percent. For both plans combined, there were 19,393 new accounts in fiscal year 2014-15, compared with 19,022 in the prior year. However, looking at the individual plans, there was an increase in new PA 529 IP accounts but a decrease in new PA 529 GSP accounts. In the PA 529 IP, 11,798 new accounts were opened compared to 10,616 in 2013-14, while in the PA 529 GSP, 7,595 new accounts were opened compared to 8,406 opened last fiscal year. The following graph shows the history of new accounts over the last five years.

Fiscal Year 529 GSP 529 IP Total 529 N/A N/A N/A 1.8% -0.1% 0.9% 5.4% 19.7% 12.0% -11.2% 15.7% 2.1% -9.6% 11.1% 2.0%

20,000

18,000

16,000

14,000

12,000

10,000

8,000

6,000

4,000

2,000

2010-11 2011-12 2012-13 2013-14 2014-15

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Total enrollment increased.

Total enrollment for the PA 529 program increased to 200,359 accounts – an increase of 6.5 percent over June 30, 2014. The PA 529 GSP increased to 106,820 accounts from 103,512 – an increase of 3.2 percent – while the PA 529 IP increased to 93,539 accounts from 84,554 – an increase of 10.6 percent. The graph below provides the history of total net enrollment over the last five years.

Year 529 GSP 529 IP Total 529

210,000

200,000

190,000

180,000

170,000

160,000

150,000

140,000

130,000

120,000

110,000

100,000

90,000

80,000

70,000

60,000

50,000

40,000

30,000

20,000

10,000

3.2% 10.6% 6.5% 2015 N/A N/A N/A 2011 3.7% 9.7% 6.1% 2012 3.9% 9.4% 6.2% 2013 1.4% 10.1% 5.1% 2014

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Families across the Commonwealth are served.

The PA 529 serves families throughout the state. For each county, the foldout map shows the amount of contributions (not including growth) in current accounts and the percentage of the population under 18 years of age who have accounts.

While families in every county have accounts, the level of coverage varies considerably. Not surprisingly, generally counties with higher average household income have a higher percentage of children with accounts.

More than $460 million contributed.

The total amount contributed into all PA 529 accounts was $463.0 million – an increase of 5.2 percent compared to last fiscal year ($440.3 million) and the highest amount contributed in one year since the

program’s inception in 1993. The graph below shows the gross contributions made into all PA 529 accounts by fiscal year. Fiscal Year % Changes $500,000,000 $450,000,000 $400,000,000 $350,000,000 $300,000,000 $250,000,000 $200,000,000 $150,000,000 $100,000,000 $50,000,000 9.7% 2009-10 6.8% 2010-11 8.0% 2011-12 10.8% 2012-13 10.3% 2013-14 5.2% 2014-15 N/A 2005-06 34.0% 2006-07 12.9% 2007-08 -7.7% 2008-09

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MERCER

VENANGO

ALLEGHENY

ARMSTRONG

ELK

MCKEAN

CENTRE

CLEARFIELD

CAMBRIA

INDIANA

WESTMORELAND

WASHINGTON

SOMERSET

FULTON

CUMBERLAND

YORK

BERKS

CHESTER

DELAWARE (1)

BUCKS

MONTGOMERY NORTHAMPTON

LEHIGH

MONROE

MIFFLIN

LYCOMING

DAUPHIN

LEBANON

SCHUYLKILL

LUZERNE

LACKA-WANNA

BLAIR

LAWRENCE

BEDFORD

WARREN

FOREST

CLARION

BEAVER

JEFFERSON

POTTER

TIOGA

CLINTON

CAMERON

GREENE

FAYETTE

FRANKLIN

ADAMS

PERRY

CARBON

PIKE

SUSQUEHANNA

BRADFORD

SULLIVAN

HUNTINGDON

JUNIATA

SNYDER

UNION

COLUMBIA

NORTH-UMBERLAND

WYOMING

WAYNE

ERIE

MONTOUR (2)

BUTLER

PHILADELPHIA (3)

LANCASTER

3

1

2 CRAWFORD

2,334 accts. | $25,717,497 3.7% 3,327 accts. $36,715,137 8.1% 414 accts. | $3,366,861 4.7% 304 accts. | $3,158,363 2.6% 746 accts. | $6,204,996 3.0% 14 accts. | $142,255 1.5% 254 accts. | $2,744,546 2.8% 427 accts. | $3,722,517 6.4% 136 accts. | $1,956,965 3.5% 34 accts. $584,717 3.5% 345 accts. | $2,458,493 4.0% 552 accts. | $6,931,303 3.9% 380 accts. | $3,522,328 4.1% 614 accts. $6,301,224 6.1% 647 accts. $5,250,738 4.8% 2,991 accts. $34,859,437 6.8% 277 accts. | $2,605,650 4.5% 8,236 accts. | $84,146,723 2.4% 1,725 accts. $15,067,246 4.3% 548 accts. | $3,979,009 4.0% 3,352 accts. | $36,294,117 5.2% 1,312 accts. | $11,278,413 4.4% 1,006 accts. | $8,146,453 4.2% 58 accts. | $449,435 5.7% 569 accts. $5,303,009 4.5% 339 accts. | $3,840,805 3.8% 2,359 accts. | $28,441,138 9.6% 901 accts. | $7,370,246 4.6% 5,075 accts. $56,305,920 8.2% 1,604 accts. _$14,384,996 5.2% 6,066 accts. | $61,780,502 5.9% 16,957 accts. | $271,888,994 13.7% 5,709 accts. $77,267,813 6.9% 16,974 accts. $248,160,694 11.8% 24,550 accts. $422,205,324 13.4% 225 accts. $2,324,933 2.1% 5,722 accts. | $72,165,569 11.7% 601 accts. | $4,052,266 5.6% 161 accts. $1,081,002 2.7% 246 accts. | $2,174,023 3.0% 569 accts. | $5,211,057 3.5% 288 accts. $2,600,235 3.0% 531 accts. $4,140,653 2.7% 1,417 accts. $11,351,006 4.1% 465 accts. $3,340,503 3.3% 325 accts. $2,838,479 3.5% 1,148 accts. $11,610,204 4.3% 1,199 accts. $11,621,511 4.2% 736 accts. $8,039,881 4.4% 61 accts. $251,827 1.8% 1,266 accts. $12,110,494 3.5% 1,110 accts.|$10,465,542 4.9% 295 accts. | $1,906,115 2.7% 419 accts. | $3,585,089 2.8% 738 accts. | $7,045,357 2.7% 183 accts. | $1,779,318 2.4% 3,105 accts. | $40,164,270 7.3% 19,375 accts. | $267,475,001 8.0% 4,779 accts. | $51,698,436 6.6% 234 accts. $1,606,447 3.0% 5,228 accts. | $54,118,217 5.3% 12,660 accts. | $199,625,571 9.7% 265 accts. | $2,837,294 6.8% 453 accts. $6,580,548 5.5% 5,002 accts. $55,634,252 7.7% 6,287 accts. | $62,734,052 4.9%

PA 529 GUARANTEED SAVINGS PLAN (GSP) & PA 529 INVESTMENT PLAN (IP)

OPEN ACCOUNTS AND NET CONTRIBUTIONS BY COUNTY AS OF 6.30.2015

POP 8,590 | AVG $46,457 POP 14,238 | AVG $52,608 POP 9,167 | AVG $51,881

POP 10,042 AVG $54,813 POP 13,358 AVG $65,396 POP 43,947 AVG $59,804 POP 343,837 | AVG $38,794 POP 40,574 AVG $65,407 POP 13,540 AVG $58,815 POP 64,800 | AVG $54,698 POP 29,738 | AVG $55,434 POP 24,212 | AVG $52,203 POP 1,026 | AVG $42,763 POP 12,556 AVG $54,751 POP 8,894 | AVG $52,593 POP 24,512 | AVG $69,459 POP 19,443 AVG $46,535 POP 62,215 AVG $61,924 POP 30,765 AVG $62,276 POP 102,014 | AVG $68,694 POP 124,055 | AVG $112,049 POP 65,177 AVG $75,182 POP 82,680 AVG $64,499 POP 143,514 AVG $98,750 POP 183,499 AVG $103,133 POP 10,784 AVG $48,279 POP 48,712 | AVG $78,189 POP 10,706 | AVG $61,852 POP 5,913 AVG $52,222 POP 8,117 | AVG $49,186 POP 16,296 | AVG $47,272 POP 9,757 AVG $47,424 POP 19,352 AVG $53,838 POP 34,878 AVG $59,501 POP 14,189 AVG $53,387 POP 9,244 AVG $53,420 POP 26,878 AVG $52,389 POP 28,235 AVG $53,996 POP 16,846 AVG $53,965 POP 3,431 AVG $52,560 POP 35,740 AVG $60,840 POP 22,438 | AVG $63,216 POP 10,739 | AVG $47,885 POP 15,131 | AVG $51,372 POP 27,680 | AVG $41,230 POP 7,680 | AVG $48,565 POP 42,684 | AVG $69,614 POP 241,663 | AVG $69,350 POP 72,611 | AVG $64,982 POP 98,136 | AVG $62,329 POP 130,412 | AVG $79,680 POP 3,874 | AVG $57,794 POP 8,310 AVG $55,051 POP 129,015 | AVG $66,177 POP 985 POP 41,266 AVG $76,458 POP 7,755 AVG $54,396 467 accts. | $5,980,657 2.3% POP 19,911 | AVG $48,300 POP 6,149 | AVG $53,970

“AVG” is median income for families with children under 18. TOTAL POPULATION UNDER 18 AS OF 2010: 2,792,155 TOTAL OPEN ACCOUNTS: 186,696* TOTAL NET CONTRIBUTIONS: $2,430,703,673* *Does Not Include Accounts with Non-specified Counties or of Non-Residents

COLOR KEY

ABOVE AVERAGE (OVER 4.5%)

FACT KEY

AVERAGE (4.1% - 4.5%) BELOW AVERAGE (UNDER 4.1%)

COUNTY NAME

ERIE

POP 63,808

TOTAL POPULATION UNDER 18 AS OF 2010

2,334 accts

TOTAL ACCOUNTS

$25,717,497

NET CONTRIBUTIONS

3.7%

PERCENTAGE OF TARGET POPULATION

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The number of students who used their PA 529 accounts continued to grow. This fiscal year, 23,345 students benefited from $82.4 million in earnings. By plan, about the same number of students (15,830 versus 15,926) used their PA 529 GSP accounts, while 11.2 percent more students (7,515 versus 6,756) used their PA 529 IP accounts in this fiscal year compared to fiscal year 2013-14 – reflecting the relative maturity of the plans. The amount of payouts also increased – about $311.8 million compared to $289.5 million in 2013-14 – an increase of 7.7 percent. The year-over-year increase in the PA 529 GSP was 4.2 percent, and for the PA 529 IP it was 14.7 percent. The chart below details the usage for qualified withdrawals this fiscal year and since each plan’s inception.

$312 MILLION TO HELP MAKE HIGHER EDUCATION POSSIBLE FOR 23,345 STUDENTS.

Most significantly, this year alone, families who used their PA 529 GSP accounts for higher education

collectively gained almost $59 million in growth by saving through the plan; since inception, they have gained almost $490 million for an average cumulative growth of 43.20 percent. Families taking withdrawals this year from the PA 529 IP for higher education expenses had collective gains of $23.7 million; since inception, they have gained $79.7 million for an average cumulative return of about 18.37 percent.

PA 529 GSP FY 2014-15 PA 529 GSP SINCE INCEPTION (September 1, 1993) PA 529 IP SINCE INCEPTION (July 17, 2002) PA 529 IP

FY 2014-15 FY 2014-15COMBINED SINCE INCEPTIONCOMBINED

38,917 15,830 1,159 6,932 17.81% $18,876,848 $200,471,285 $58,628,876 41.33%** 19,365 7,515 N/A N/A N/A $111,360,716 $23,742,992 27.10%** 58,282 23,345 1,159+ N/A N/A $311,832,001 $82,371,868 373,443 60,088 2,185 202,500 53.92% -$72,506,516 $1,623,586,802 $489,827,944 43.20%** 91,503+ 19,676 N/A N/A N/A $513,766,908 $79,744,332 18.37%** 467,031 79,764 3,176+ N/A N/A $2,137,353,709 $569,572,275

* Surrender value is the difference between a withdrawal’s Market Value and its Tuition Inflation Value. **Average Aggregate Return.

No. of Payments No. of Beneficiaries No. of Schools Attended Negative Surrender Value Payments Surrender Value* $ Amount of Payments Amount of Gain

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However, from the inception of the PA 529 GSP through the end of fiscal year 2014-15, the aggregate surrender value is still negative. Of 375,527 payments, 202,500 (53.92 percent) had negative surrender values and, therefore, benefited from the guarantee. The total shortfall amount for all qualified withdrawals through June 30, 2015, improved to -$72.5 million on payments of $1.6 billion from -$91.4 million on payments of $1.4 billion last year.

Once again this year, PA 529 GSP qualified withdrawals illustrated the value of the plan’s guarantee.

Of all the qualified payments made this year, 17.81 percent were for amounts higher than the accounts’ market value (i.e., had negative surrender values). Out of 38,917 qualified payments, 6,932 benefitted from the guarantee. From the perspective of the GSP Fund this is the fifth year of significant improvement and the second year in a row since fiscal year 2007-08 that the overall surrender value for the year was positive ― $19.0 million. The chart below shows the surrender value over the last six years.

Fiscal Year Surrender Value

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

-$30.0M 2009-10 -$20.6M 2010-11 -$16.5M 2011-12 -$3.8M 2012-13 $10.1M 2013-14 $19.0M 2014-15

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The PA 529 GSP provides a unique way to save for college. Growth is based on tuition inflation at one of a number of different Tuition Levels initially chosen by the account owner but ultimately determined, in most cases, by where the student attends school.

Tuition Levels.

The PA 529 GSP offers five average Tuition Levels at which families may save:

• Community College Average

• State System of Higher Education Average • State-Related University Average

• Private Four-year College Average • Ivy League Average

Alternatively, families can save at any one of the state-funded schools – the 14 community colleges, 14 State System of Higher Education universities, or four state-related universities (University of Pittsburgh, Pennsylvania State University, Temple University, and Lincoln University).

A Tuition Level can be changed by the account owner at any time and will be automatically changed by the plan if a student attends a state-funded school that is different than the previously designated Tuition Level. Whenever a change is made, the account is recalculated as if the new Tuition Level had been in effect when prior contributions were made. Most often the recalculation will change the dollar value of the account available to pay for qualified higher education expenses.

PA 529 GSP Credit Rates.

Each year the state Treasury Department sets a PA 529 Credit Rate (“GSP Credit Rate”) for each Tuition Level, which determines the number of GSP Credits attributable to a contribution. For example, if the GSP Credit Rate for a Tuition Level were $500, a contribution of $1,000 would be equal to two GSP Credits ($1,000/$500 = 2) at that Tuition Level. The GSP Credit Rate is based on the actual per credit price for the academic year set by schools comprising the Tuition Level. For most Tuition Levels, the GSP Credit Rate has been the same as the actual rate set by the school(s), but for some Tuition Levels in some years it has been higher (that is, included a “premium”). Tuition Levels for which GSP Credit Rates include or have included premiums are those with past and projected future tuition inflation that exceed the average. Given tuition inflation history and projections, premiums help ensure the fiscal soundness of the PA 529 GSP.

The Guarantee.

The PA 529 GSP guarantees the growth on account contributions will be the rate tuition increases, at the appropriate school or Tuition Level, from when the contribution was made until when it is withdrawn for qualified higher education expenses, adjusted for any premiums and fees (an account’s “Tuition Inflation Growth”).

It is important to note, however, that meeting the guarantee is the obligation of the PA 529 GSP Fund. The guarantee is not backed by the full faith and credit of the Commonwealth. Because of the guarantee, the

HOW THE PA 529 GUARANTEED SAVINGS PLAN WORKS.

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investment return the fund actually earns on account contributions (an account’s “Market Value Returns”) is not the growth most account owners will see. Since the vast majority of accounts are used for qualified higher education expenses, they will get their Tuition Inflation Value. A small percentage of accounts are closed and are used for non-qualified purposes. Those accounts get the lesser of the Market Value or the Tuition Inflation Value, but, if that amount is less than the principal, they get the principal, minus any fees.

Actuarial assumptions.

In order to be able to meet the guarantee, the PA 529 GSP Fund’s investment returns must meet or exceed tuition inflation and program expenses over the long term. In any given year, the fund may outperform or underperform tuition inflation and expenses but, because the plan is designed to continue indefinitely, the long-term performance is most significant.

In consultation with its investment advisors and actuary, Treasury annually projects tuition inflation, investment returns, and other actuarially relevant factors – making adjustments from year to year, if warranted, based on actual experience and market factors. The investment and tuition inflation projections made in the actuarial report of June 30, 2015, remained the same as for the previous year. The investment expense assumption was decreased from 50.24 basis points to 35.96 basis points due to a change to more passive investment management. Tuition inflation projections vary by Tuition Level and range from a low of 4.50 percent at community colleges and the Pennsylvania State System of Higher Education universities to a high of 6.75 percent at Penn State. The 2014 projection for overall tuition inflation weighted by the Tuition Level at which families were saving was 5.53 percent – again, over the long term and as an average. In 2015, the weighted overall tuition inflation assumption decreased slightly to 5.45 percent. Additionally, the investment return assumption remained at 7.685 percent gross of fees (an estimated net of fees return of approximately 7.25 percent).

Asset allocations.

To achieve the investment return goal of 7.685 percent, Treasury invests the PA 529 GSP assets in fixed income (including cash and cash equivalents), equities, and alternative investments. The allocation of assets as of June 30, 2015, is illustrated in the following chart.

35.8%

19.2%

44.9%

Fixed Income $626,717,887

Total Assets

$1,749,027,386

Equities $785,627,324 Alternatives $336,682,175

PA 529 GSP ACTUAL ASSET ALLOCATION AS OF JUNE 30, 2015

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PA 529 GSP FUND EXCEEDED A 100 PERCENT FUNDED ACTUARIAL STATUS.

For a third consecutive year, the PA 529 GSP Fund was more than 100 percent funded. Based on the actuarial assumptions, as of June 30, 2015, the PA 529 GSP Fund was 113.2 percent funded compared to 109.5 percent funded as of June 30, 2014. The actuarial status is a projection of the plan’s ability to meet the obligations that existed on June 30 as they come due in the future and assumes no new contributions are received.

The actuarial funded status has fully recovered since hitting a low on March 31, 2009, when it was 70.4 percent funded. Correspondingly, the projected actuarial reserve was $209 million on June 30, 2015 – improved from $150 million on June 30, 2014, and its low point of -$403.4 million on March 31, 2009. In addition to several years of relatively modest tuition inflation, the recovery is due, in large part, to several actions begun in early 2009 to improve investment returns while mitigating risk; cover administrative expenses with fairer, more realistic fees; and include premiums in credit rates to adjust for higher than average tuition increases in some Tuition Levels.

For academic year 2014-15, the strength of the GSP Fund as reported in the 2013-14 Annual Report allowed the plan to reduce Premiums for academic year 2015-16, retroactively eliminate 2014-15 Premiums, and reduce 2013-14 Premiums. The lowered Premiums mean that the same amount of contributions would equal more GSP Credits and thus increase the value available for higher education expenses. The table below shows the affected Tuition Levels and the changes in Premiums.

PA 529 GSP CREDIT RATE PREMIUMS WERE REDUCED OR ELIMINATED.

The estimated increase in value over the expected duration of all contributions made into affected accounts through June 30, 2015, is about $4.4 million.

TUITION LEVEL PREMIUM IN

ACADEMIC YEAR 2012-13 PREMIUM IN ACADEMIC YEAR 2013-14 6% 6% 6% 3% 3% 3% PREMIUM IN ACADEMIC YEAR 2014-15 PREMIUM IN ACADEMIC YEAR 2015-16 NONE NONE NONE 5% 5% 5% University of Pittsburgh Pennsylvania State University State-Related University Average

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Gross contributions into PA 529 GSP accounts totaled $195.6 million for fiscal year 2014-15, which was slightly less than last year’s contributions ($196.8 million). The graph below shows the gross contributions by fiscal year.

PA 529 GSP CONTRIBUTIONS AND ASSETS GREW.

Fiscal Year

$200,000,000

$190,000,000

$180,000,000

$170,000,000

$160,000,000

$150,000,000

$140,000,000

$130,000,000

$120,000,000

$110,000,000

$100,000,000

2009-10 2010-11 2011-12 2012-13 2013-14 2006-07 2007-08 2008-09 % Changes 2.6% 6.0% 12.0% 1.2% 5.7% 2014-15 -0.6% N/A -9.9% 9.1%

PA 529 GSP GROSS CONTRIBUTIONS BY FISCAL YEAR AND % YEAR-OVER-YEAR CHANGES

Contributions included $906,309.81 earned through the Upromise Rewards program. Account owners with linked Upromise accounts earn college savings through their everyday spending on items such as gas, dining out, and online shopping. Since 2006, PA 529 GSP accounts have earned $7.1 million through Upromise Rewards.

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Timothy A. Reese, Pennsylvania State Treasurer As of June 30, 2015, total assets equaled $1,749,027,386 – an increase of 3.43 percent over June 30, 2014

($1,691,060,844) and the highest year-end assets since the plan’s inception in September 1993. The following graph illustrates the change in the PA 529 GSP Fund’s assets as of the end of each fiscal year since the plan’s inception. Year

$1,800,000,000

$1,600,000,000

$1,400,000,000

$1,200,000,000

$1,000,000,000

$800,000,000

$600,000,000

$400,000,000

$200,000,000

$0

1998 1999 2000 2001 2002 1994 1995 1996 1997 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

PA 529 GSP ASSETS UNDER MANAGEMENT AS OF JUNE 30

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THE PA 529 GSP REMAINS A SUCCESSFUL, LOWER-RISK COLLEGE SAVINGS PLAN.

The PA 529 GSP’s long-term investment success, actuarial status, fees, and credit pricing along with continued tuition increases mean the plan continues to be a lower-risk, but not risk-free, way to save for college. It is simply one of the best ways that Pennsylvania families can save for college.

Returns of the PA 529 GSP Fund were strong, and growth seen by account

owners was good.

The investment performance of the PA 529 GSP Fund for the fiscal year was 5.42 percent net of fees. The three-year annualized return is 9.50 percent and the five-year annualized return is 9.81 percent. The graph below shows the one-year returns since the plan’s inception.

20.00%

15.00%

10.00%

5.00%

0.00%

-5.00%

-10.00%

-15.00%

-20.00%

1998 1999 2000 2001 2002 1994* 1995 1996 1997 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

* Partial Year (September 1, 1993 - June 30, 1994) Note: All returns are net of fees.

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This graph approximates the growth that account owners realize depending on when contributions were made. Their growth may be somewhat less, however, depending on whether premiums were in place when contributions were made and whether account maintenance fees were paid or deducted separately from their accounts.

The growth realized by most account owners is not based on the investment performance of the PA 529 GSP Fund. Rather, it is based on tuition inflation. The graph below shows the increase in actual per-credit tuition costs for the five average Tuition Levels from the inception of the PA 529 GSP in 1993-94 through academic year 2015-16. It also provides the annualized and cumulative tuition inflation rates.

Ivy League Colleges: 4.21% Annualized; 157.94% Compounded

COST OF ONE A CADEMIC CREDIT

$2,000

$1,800

$1,600

$1,400

$1,200

$1,000

$800

$600

$400

$200

$0

97-98 98-99 99-00 00-01 01-02 93-94 94-95 95-96 96-97 02-03 03-04 04-05 05-06 06-07 07-08 08-09 09-10 10-11 11-12 12-13 13-14 $1,939.16 $1,358.00 $699.65 $294.17* $123.30

* Excludes Millersville University.

Community Colleges: 3.76% Annualized; 133.52% Compounded State System: 3.86% Annualized; 139.01% Compounded

State-Related: 5.05% Annualized; 210.55% Compounded

Private Four-Year Colleges: 4.66% Annualized; 184.79% Compounded

14-15 15-16

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The following graph compares the growth of $1,000 at various Tuition Levels over five and ten years.

$1,800

$1,700

$1,600

$1,500

$1,400

$1,300

$1,200

$1,100

$1,000

State-Rela ted Average Penn S tate Universit y Universit y of Pittsbur gh _State System Average Communit y College Average Private F

our-Year Average Ivy L eague Average DOLLAR V AL UE

* Used for Fall 2015 Semester.

10-Year - Contributions made June 30, 2005* 5-Year - Contributions made June 30, 2010*

COMPARISON OF RETURN ON A $1,000 INVESTMENT AT SAMPLE PA 529 TUITION LEVELS

Additionally, looking at payments made for qualified withdrawals over the plan’s lifetime, account owners who have used their accounts for higher education expenses achieved an average cumulative return of 43.20 percent.

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PA 529 IP INVESTMENT OPTIONS DESCRIBED.

The PA 529 IP offers 13 different investment options through The Vanguard Group. Ten are individual portfolios (including one socially responsible investment option) with different allocations of equities, fixed income, and short-term reserves. These 10 portfolios are used to create three additional, age-based, options (Aggressive, Moderate, and Conservative), which automatically move assets from the more aggressive individual portfolios to more conservative individual portfolios as the beneficiary approaches college age. All 13 options are invested, in varying percentages, in six underlying Vanguard mutual funds.

This structure along with the current fees for each investment option are illustrated in the following table.

100% Stocks 80% Stocks 20% Bonds 100% Stocks 100% Short-term Reserves 100% Stocks 100% Bonds 80% Bonds 20% Stocks 60% Stocks 40% Bonds 35% Stocks 65% Bonds 75% Bonds 25% Short-term Reserves PA 529 IP Individual Portfolio Investment Option

Asset Allocation Underlying Vanguard

Mutual Fund PA 529 IP Age-based Portfolio Investment Option Inflation-Protected Securities Portfolio (asset-based fee 0.41%)

Blended in other Portfolios

Aggressive Growth Portfolio (asset-based fee 0.38%) Growth Portfolio (asset-based fee 0.38%)

Moderate Growth Portfolio (asset-based fee 0.38%)

Conservative Growth Portfolio (asset-based fee 0.39%)

Income Portfolio (asset-based fee 0.38%)

Conservative Income Portfolio (asset-based fee 0.40%)

Money Market Portfolio (asset-based fee 0.43%)

Total Stock Market Index Portfolio (asset-based fee 0.36%)

Social Index Portfolio (asset-based fee 0.50%)

Aggressive: Ages 5 & younger Aggressive: Ages 6 - 10 Moderate: Ages 5 & Younger Aggressive: Ages 11 - 15 Moderate: Ages 6 - 10 Conservative: Ages 5 & Younger Aggressive: Ages 16 - 18 Moderate: Ages 11 -15 Conservative: Ages 6 - 10 Aggressive: Ages 19+ Moderate: Ages 16 - 18 Conservative: Ages 11 - 15 Moderate: Ages 19+ Conservative: Ages 16 - 18 Conservative: Ages 19+ Blended in other Portfolios Not Used

70% Vanguard Institutional Total Stock Market Index Fund 30% Vanguard Total International Stock Index Fund 55% Vanguard Institutional Total Stock Market Index Fund 25% Vanguard Total International Stock Index Fund 20% Vanguard Total Bond Market II Index Fund 45% Vanguard Institutional Total Stock Market Index Fund 15% Vanguard Total International Stock Index Fund 40% Vanguard Total Bond Market II Index Fund 25% Vanguard Institutional Total Stock Market Index Fund 10% Vanguard Total International Stock Index Fund 65% Vanguard Total Bond Market II Index Fund 20% Vanguard Institutional Total Stock Market Index Fund 80% Vanguard Total Bond Market II Index Fund

50% Vanguard Total Bond Market II Index Fund 25% Vanguard Inflation-Protected Securities Fund 25% Vanguard Prime Money Market Fund

100% Vanguard Prime Money Market Fund

100% Vanguard Institutional Total Stock Market Index Fund

100% Vanguard FTSE Social Index Fund

100% Vanguard Inflation-Protected Securities Fund

PA 529 IP INVESTMENT STRUCTURE 2015

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PA 529 IP CONTRIBUTIONS AND ASSETS GREW.

Contributions into PA 529 IP accounts increased to $267.3 million in fiscal year 2014-15 compared to

$243.4 million in 2013-14 – up 9.8 percent. This year’s contributions exceeded those made in any previous fiscal year. The following chart shows the gross contributions by fiscal year since the inception of the PA 529 IP.

Fiscal Year $280,000,000 $240,000,000 $200,000,000 $160,000,000 $120,000,000 $80,000,000 $40,000,000 % Changes 2007-08 42.2% 2008-09 -21.3% 2009-10 17.6% 2010-11 7.6% 2011-12 4.1% 2004-05 6.3% 2005-06 3.1% 2006-07** 33.0% 2012-13 20.9% 2013-14 14.3% 2014-15 9.8% 2003-04 77.3% 2002-03* N/A * July 17, 2002 - June 30, 2003.

** Investment management transferred to Vanguard November 2006 (Direct Plan) and April 2007 (Advisor Plan).

PA 529 IP GROSS CONTRIBUTIONS BY FISCAL YEAR AND YEAR-OVER-YEAR CHANGES

Contributions included $833,617 earned through the Upromise Rewards program. Since 2006, the total contributions into PA 529 IP accounts earned through Upromise Rewards have totaled $5.5 million.

Assets in the PA 529 IP as of June 30, 2015, were $1,876,328,649 compared with $1,686,518,953 as of June 30, 2014 – a year-over-year increase of 11.3 percent. The following graph shows the annual growth in assets since the plan’s inception on July 17, 2002.

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INVESTMENT PERFORMANCE WAS POSITIVE.

Overall PA 529 IP Fund investment performance.

This fiscal year, the PA 529 IP Fund as a whole saw investment gains of 2.95 percent. No individual account receives the returns of the PA 529 IP Fund as a whole; nonetheless, it is illustrative of how the accounts have performed collectively. The graph below shows the investment performance of the total PA 529 IP Fund under Vanguard’s management. Fiscal Year

$2,040,000,000

$1,840,000,000

$1,640,000,000

$1,440,000,000

$1,240,000,000

$1,040,000,000

$840,000,000

$640,000,000

$440,000,000

$240,000,000

$40,000,000

% Increase 2008 22.5% 2009 2.4% 2010 31.6% 2011 35.1% 2012 13.4% 2005 68.7% 2006 40.1% 2007** 33.6% 2013 21.3% 2014 25.8% 2015 11.3% 2004 179.7% 2003* N/A * July 17, 2002 - June 30, 2003.

** Investment management transferred to Vanguard November 2006 (Direct Plan) and April 2007 (Advisor Plan).

PA 529 IP ASSETS UNDER MANAGEMENT AND % YEAR-OVER-YEAR INCREASE AS OF JUNE 30

* Weighted average of investment portfolios’ returns.

25.00% 20.00% 15.00% 10.00% 5.00% 0.00% 0.00% -5.00% -10.00% -15.00% 2007 2008 2009 2010 2011 2012 2013 2014 2015

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Returns in all but two of the investment options were positive. The Inflation-Protected Securities option had a loss of 2.18 percent, while the Money Market option had no gains or losses. Because the vast majority of the PA 529 IP Fund’s assets are invested in index funds, they have tracked their benchmarks fairly closely, but lagged

Assets and performance by investment options.

The distribution of assets among the IP’s 13 different investment options has remained fairly consistent over time. The age-based options have comprised around 60 percent of total plan assets while the static options have hovered around 40 percent. Among the age-based options, the Aggressive Age-Based Option has garnered the most assets (35-41 percent), followed by the Moderate Age-Based Option (18-21 percent), leaving just 1-3 percent in the Conservative Age-Based Option. Among the static options, the Aggressive Growth Option has consistently held the most assets – about 9-12 percent – while the Social Index Option has held the least at around 1 percent. The following chart illustrates the distribution of assets among the 13 options as of June 30, 2015.

40%

35%

30%

25%

20%

15%

10%

5%

0%

Growth Portfolio - $122,528,065.99 Conservative Income Portfolio - $24,908,345.34 Conservative Growth Portfolio - $45,953,026.81 Moderate Age-Based - $383,984,267.43

Conservative Age-Based - $57,093,661.78

Income Portfolio - $32,250,219.97 Aggressive Growth Portfolio - $220,720,870.06

Moderate Growth Portfolio - $101,887,923.81 Inflation-Protected Securities Portfolio - $23,431,188.59 Money Market Portfolio - $55,665,659.75

Aggressive Age-Based - $672,457,506.49

Social Index Portfolio - $23,880,201.42 Total Stock Market Index Portfolio - $111,567,011.28

DISTRIBUTION OF ASSETS AMONG PA 529 IP INVESTMENT OPTIONS AS OF JUNE 30, 2015

3.04% 2.97% 2.45% 1.72% 1.33%

6.53% 5.95% 5.43% 1.27% 1.25%

20.46% 35.84% 11.76%

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Timothy A. Reese, Pennsylvania State Treasurer The chart below provides the returns by investment options for one-, three-, and five-year returns, as well

as the cumulative since-conversion returns. It also gives the percentage of accounts that have at least some assets in that investment option. The total percentage of accounts exceeds 100 percent because some accounts have investments in more than one option.

% OF ACCOUNTS 1-YEAR RETURNS 3-YEAR RETURNS 5-YEAR RETURNS RETURNS SINCE INCEPTION 5.62% 5.60% 5.60% 5.02% 4.94% 5.60% 5.60% 5.02% 4.94% 3.20% 5.60% 5.02% 4.94% 3.20% 0.90% 5.62% 5.60% 5.60% 5.02% 4.94% 3.20% 0.90% 6.90% 3.91% 5.72% 14.81% 12.51% 10.38% 7.55% 5.69% 12.51% 10.38% 7.55% 5.69% 2.02% 10.38% 7.55% 5.69% 2.02% 0.00% 14.81% 12.51% 10.38% 7.55% 5.69% 2.02% 0.00% 17.13% 2.76% 17.70% 15.01% 12.14% 9.71% 6.09% 4.41% 12.14% 9.71% 6.09% 4.41% 0.26% 9.71% 6.09% 4.41% 0.26% 0.00% 15.01% 12.14% 9.71% 6.09% 4.41% 0.26% 0.00% 17.27% -1.26% 20.54% 3.29% 2.90% 3.09% 2.28% 2.64% 2.90% 3.09% 2.28% 2.64% 0.15% 3.09% 2.28% 2.64% 0.15% 0.00% 3.29% 2.90% 3.09% 2.28% 2.64% 0.15% 0.00% 6.86% -2.18% 10.39% 85.77% 46.56% 12.27% 14.68% 11.85% 4.55% 3.21% 31.33% 8.70% 9.71% 7.05% 3.18% 2.69% 7.88% 1.74% 2.55% 1.57% 0.92% 1.10% 78.14% 18.51% 11.71% 9.11% 4.47% 4.68% 3.30% 5.30% 12.66% 4.73% 3.67%

PA 529 IP RETURNS BY INVESTMENT OPTION AS OF JUNE 30, 2015

Age-Based Options Aggressive Ages 5 or younger Ages 6-10 Ages 11-15 Ages 16-18 Ages 19+ Moderate Ages 5 or younger Ages 6-10 Ages 11-15 Ages 16-18 Ages 19+ Conservative Ages 5 or younger Ages 6-10 Ages 11-15 Ages 16-18 Ages 19+ Individual Options Aggressive Growth Growth Moderate Growth Conservative Growth Income Conservative Income Money Market Total Stock Market Inflation Portfolio Social Index

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The percentage shown above each bar in the graph provides the investment performance of the underlying Vanguard mutual funds for the year shown.

Assets and investment performance by underlying Vanguard funds.

Looking at the underlying Vanguard funds in which the PA 529 IP invests, the largest portion (44.3 percent) of assets were in the Total Stock Market Index, followed by the Total Bond Market II Index at 32.8 percent, with the remaining 22.8 percent distributed among the other four funds (14.9 percent in the Total International Stock Market Index, 4.5 percent in the Prime Money Market Fund, 2.2 percent in Inflation-Protected

Securities, and 1.3 percent in the FTSE Social Index) as of June 30, 2015. The distribution of assets among the underlying Vanguard funds is very similar to last year’s, varying by less than 1 percent. See the graph below.

Prime Money Market Inflation-Protected Securities Total Bond Market Index

Total International Stock Market Index Total Stock Market Index

FTSE Social Index

$850,500,000

$800,500,000

$750,500,000

$700,500,000

$650,500,000

$600,500,000

$550,500,000

$500,500,000

$450,500,000

$400,500,000

$350,500,000

$300,500,000

$250,500,000

$200,500,000

$150,500,000

$100,500,000

$50,500,000

$500,000

PA 529 IP ASSETS AND INVESTMENT PERFORMANCE BY UNDERLYING VANGUARD MUTUAL FUNDS AS OF JUNE 30

3.62% 31.05% 0.20% 7.28% 26.57% 32.02% 2011 Returns 7.50% 3.98% -14.58% 0.10% 11.95% 2.90% 2012 Returns 21.58% -0.85% 13.63% 0.09% -5.03% 24.69% 2013 Returns 25.26% 4.19% 22.47% 0.06% 4.47% 25.23% 2014 Returns 7.25% 1.77% -4.55% -1.80%0.06% 10.74% 2015 Returns 2013 2014 2015 2011 2012 YEAR

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Practical Implications for PA 529 IP account owners.

As with most investments, the PA 529 IP returns realized by an individual depend on the timing of the investment. The chart below illustrates the real-life impact of investing in the different PA 529 IP investment options using a $1,000 investment made over different time frames, giving the value on June 30, 2015.

Additionally, a look at the payments made for qualified withdrawals over the lifetime of the plan shows account owners who have used their accounts for higher education expenses, on average, achieved a cumulative return of approximately 18.37 percent.

INVESTED ON 11/17/2006 INVESTED ON 6/30/2007 INVESTED ON 6/30/2008 INVESTED ON 6/30/2009 INVESTED ON 6/30/2010 INVESTED ON 6/30/2011 INVESTED ON 6/30/2012 INVESTED ON 6/30/2013 INVESTED ON 6/30/2014 INVESTMENT IN $1,602.05 $1,598.94 $1,598.70 $1,524.99 $1,515.05 $1,312.06 $1,079.99 $1,777.17 $1,392.11 $1,614.68 $1,457.73 $1,481.88 $1,511.06 $1,469.16 $1,482.43 $1,297.79 $1,049.55 $1,628.93 $1,392.11 $1,527.60 $1,661.80 $1,623.26 $1,589.09 $1,489.26 $1,442.90 $1,202.66 $1,012.20 $1,868.69 $1,212.64 $1,936.13 $2,275.50 $2,047.25 $1,850.36 $1,610.36 $1,456.74 $1,176.77 $1,000.00 $2,538.63 $1,248.47 $2,660.24 $1,995.00 $1,802.63 $1,638.06 $1,438.72 $1,318.55 $1,105.36 $1,000.00 $2,204.82 $1,145.70 $2,258.46 $1,512.74 $1,432.71 $1,367.67 $1,260.38 $1,214.92 $1,071.09 $1,000.00 $1,670.19 $1,072.46 $1,794.28 $1,521.41 $1,410.00 $1,320.28 $1,194.22 $1,138.20 $1,007.70 $1,000.00 $1,612.62 $962.71 $1,751.54 $1,281.62 $1,232.84 $1,192.34 $1,131.32 $1,106.66 $1,029.84 $1,000.00 $1,333.19 $1,018.31 $1,376.78 $1,032.90 $1,029.00 $1,030.90 $1,022.80 $1,026.40 $1,001.50 $1,000.00 $1,068.60 $978.20 $1,103.90

TOTAL RETURN OF A $1,000 IP INVESTMENT

Aggressive Growth Portfolio Growth Portfolio Moderate Growth Portfolio Conservative Growth Portfolio Income Portfolio

Conservative Income Portfolio Money Market Portfolio Total Stock Market Index Portfolio Inflation-Protected Securities Social Index Portfolio

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PA 529 GSP FEES REFUNDED AND WAIVED.

The strong financial status of the PA 529 GSP Fund enabled the plan to refund fees paid in fiscal year 2014-15 to account owners with e-delivery and to waive the third quarter 2015 fees for all accounts. The refund was given to 82,843 “green” accounts and totaled more than $3.4 million. The refunds were posted to accounts as new contributions on October 5, 2015, and will grow like any other contribution. The waiver of third quarter 2015 fees saved account owners an estimated $1.1 million.

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FINDINGS AND RECOMMENDATIONS

The program’s enabling legislation requires the annual report to present findings and recommendations.

Both plans have grown in size and strength.

The PA 529 has enjoyed another successful year. Details on both plans are given throughout this report, but a few of the more notable and significant year-to-year highlights for 2014-15 are:

• A 2.0 percent increase in the number of new PA 529 accounts – 19,393 compared to 19,022 in fiscal year 2013-14.

• A 6.5 percent increase in the total number of PA 529 accounts, growing to 200,359 – compared to a national increase of only 4.4 percent.

• A 5.9 percent increase in combined program assets to $3.6 billion – slightly better than the national increase of 5.7 percent.

• A 5.2 percent increase in contributions, which totaled more than $460 million – the highest amount contributed in one year since the program’s inception in 1993.

• A 2.9 percent increase in the number of students using accounts for higher education expenses and a 7.7 percent increase in the amount paid on behalf of those students.

• An improvement in the actuarial funded status of the GSP Fund from 109.5 to 113.2 percent funded.

Higher education should be affordable and attainable for Pennsylvania

families of all economic means.

With this annual report, the Treasurer and TAP Advisory Board once again emphasize the importance of higher education to both our Commonwealth and its residents, and we urge the Governor and General Assembly to provide adequate funding to enable those who have the academic ability and desire to advance their education to afford to do so.

A well-educated population is important if Pennsylvania is to enjoy a healthy and vibrant economy. Individuals with a postsecondary degree typically earn more than those with only a high school education, and they are less likely to face unemployment throughout their career or require government assistance. Additionally, those with a college degree are more likely to be involved in their communities.

Pennsylvania stands to gain if more of its citizens earn a postsecondary degree; unfortunately, the cost to earn that degree continues to increase.

The lack of state financial support for public higher education is a major factor in the high cost of Pennsylvania public higher education institutions. According to data from the State Higher Education Executive Officers Association, State Higher Education Finance FY 2014 Report, Pennsylvania ranked near the bottom in its appropriation per full-time student equivalent; only three states appropriated less (Colorado, Vermont, and New Hampshire). In the last five years (from fiscal year 2009 to 2014), the Pennsylvania appropriation per full-time enrollee equivalent dropped 35.3 percent when the national average dropped 13.3 percent. The only state with a larger decrease was Louisiana (-38.4 percent). Because of the low public appropriation, tuition must cover a greater portion of overall higher education expenses in Pennsylvania than in almost all other states: it is

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Given the greater consumer cost of higher education in Pennsylvania, not surprisingly, more students attending our schools take on more student debt − turning to costly loans in order to finance their education. Of 2014 graduates from Pennsylvania schools, 70 percent had student debt – ranking Pennsylvania third highest in the nation. And the average amount of that debt was $33,264 – the third highest amount in the nation − exceeding the national average by nearly 15 percent. The year-over-year increase in the average amount of debt was 2.3 percent, but over the last 10 years that average debt burden is up 70 percent compared to just 25 percent in general inflation. Nationally, students now carry about $1.2 trillion in education debt, which exceeds the total amount of credit card debt.

With the history of limited state funding for higher education and the magnitude of tuition increases, the only thing families can be sure of is what they save. Planning and saving with a Pennsylvania 529 College Savings Program account can help make dreams of a college degree attainable and help students avoid burdensome loans. A student with a dedicated college savings account is seven times more likely to attend college than someone without such an account.

Ensuring college affordability must be a shared public policy goal, which will require the commitment and attention of stakeholders at every level.

The Commonwealth should strengthen the guarantee of the PA 529

Guaranteed Savings Plan.

The guarantee of the PA 529 Guaranteed Savings Plan is provided only by the GSP Fund itself. Increased contributions combined with strong investment performance years have made the risk of the Fund ever being unable to meet its future obligations very low. Nevertheless, express Commonwealth backing would be invaluable to Pennsylvanians and the plan. The GSP Fund is 113.19 percent actuarially funded as of June 30, 2015.

Over 100,000 Pennsylvania students count on the financial success of the PA 529 GSP. These families play by the rules and demonstrate a tremendous amount of responsibility when it comes to their children’s future. The Commonwealth owes it to our current and future participating families to stand behind the program explicitly.

The Commonwealth should eliminate the PA 529 program’s competitive

disadvantage.

Pennsylvania provides a tax deduction for contributions made to any 529 program, while most other states limit such deductions to only those contributions made to their home-state programs. Thirty-four of the 42 states (and D.C.) with income taxes provide a state income tax deduction or credit for 529 contributions; 28 of those 34 limit the deduction to home-state program contributions. Pennsylvania is one of the six states that give a tax deduction for participants in non-home-state 529 programs – and it is the only large state to do so. This puts Pennsylvania’s program at a competitive disadvantage and undoubtedly leads many Pennsylvania families to make uninformed decisions on the best way for them to save for college.

Many Pennsylvanians who are sending their college savings out of state may be unaware of the

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Timothy A. Reese, Pennsylvania State Treasurer subsidize other states’ 529 programs because the savings they put into out-of-state plans help to cover the

expenses of those plans. Many plans waive or reduce account fees for in-state participants, and some use revenues from their programs (generated in part from Pennsylvanians) to provide scholarships only for their own state’s residents.

The current unlevel playing field disadvantages Pennsylvania’s program and, consequently, those families that are loyal to their home-state options.

Increased contributions to the PA 529 College Savings Program will help make the Commonwealth’s plans stronger and able to offer more competitive fees.

The Commonwealth should increase its support of the PA 529 College Savings

Program.

Historically, the PA 529 College Savings Program received support in the General Fund budget to promote the importance of 529 plans. In recent years, that funding has been eliminated, and many Pennsylvania residents are not aware of these plans that could benefit their families.

Additionally, the lack of a budget in the third quarter of 2015 has impacted the ability to utilize even non-tax revenues to support outreach, resulting in lost opportunities and lower program growth than compared to previous years.

Policy makers should consider initiatives and collaborations among Commonwealth entities and institutions to build awareness, increase utilization, and enhance the benefits of the PA 529 College Savings Program. By working together, much can be accomplished with budgetary and nonbudgetary solutions.

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607 South Drive, Suite 529 Harrisburg, Pennsylvania 17120

PA529.com 717.772.5000

The Pennsylvania 529 College Savings Program sponsors two plans – the PA 529 Guaranteed Savings Plan (GSP) and the PA 529 Investment Plan (IP). The guarantee of the PA 529 Guaranteed Savings Plan is an obligation of the GSP Fund, not the Commonwealth of Pennsylvania or any state agency. Before investing, please carefully read the disclosure statements, available at PA529.com or by calling us at 1-800-440-4000, to learn more about the plans,