College Planning Essentials

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College Planning Essentials

A comprehensive guide to saving and investing

INVESTMENTS ARE NOT FDIC INSURED | NO BANK GUARANTEE | MAY LOSE VALUE

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Section 1 College matters

Section 5 Appendix

Section 4 Saving and investing

Section 3 Financial aid

4 Higher education pays

5 More education, less unemployment

6 Return on a college investment

7 “Major” differences in salaries

8 Good intentions, unexpected consequences

41 Sources of financial aid

42 Financial aid: Types of applications

43 Federal aid methodologies

44 Federal student aid: A sample of grant programs

45 Federal student aid: Loan programs

46 College-related tax breaks

47 Comparing college savings options

48 The 529 plan advantage

49 Checklist: Choosing a 529 plan

50 529 plans: State tax benefits

51 Index definitions

52 Disclosures

26 Comparing college savings vehicles

27 Current saving and investing trends

28 Investing for long-term growth

29 Investing versus borrowing

30 The benefits of compounding

31 Performance pays

32 Invest more, pay less

33 Tax-efficient investing

34 Making college savings a family affair

35 Don’t pay for college with retirement funds

36 Staying diversified over 18 years

37 The power of diversification

38 Asset allocation provided a smoother ride

39 College planning checklist

Section 2 College costs

10 Tuition inflation

11 Rising college costs

12 Future four-year college costs

13 The real cost of college

14 How college costs affect behavior

16 Financial aid overview

17 Financial aid reality check

18 Federal financial aid eligibility

19 Estimating Expected Family Contribution

20 The effect of savings on financial aid

21 Student loan landscape

22 Private loans

23 The burden of debt

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Myth:

“ College is too expensive.”

Fact:

The return on an investment

in college is nearly $1 million

more in lifetime earnings.

Page 4

College matters

The value of a college education is growing faster than

the cost. Today, a college diploma has become a necessity

for anyone seeking increased earning potential, job security

and career opportunity.

Common myths and facts

SECTION 1 College Planning Essentials: A comprehensive guide to saving and investing

Myth:

“ Not even college

graduates can fi nd a

job in this economy.”

Fact:

The unemployment rate

among college graduates

is currently just 2.5%.

Page 5

Myth:

“ College just isn’t worth

the student loan debt.”

Fact:

A college graduate earns

38% more than a high

school graduate, even after

factoring in student loans.

Page 6

Source: Georgetown University, Failure to Launch: Structural Shift and the New Lost Generation, 2013.

By 2020, 65% of U.S.

jobs will require a degree

beyond high school, up

from 28% in 1973.

65%

2020 1973

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• Bachelor’s degree holders

earn nearly

$1 million

more

over a lifetime than high

school graduates. Those with

doctorate degrees earn nearly

$2 million more

.

1

• People who attend college

but

don’t receive a degree

earn only 11% more than

high school graduates.

2

Higher education pays

A college diploma opens the door to

a lifetime of higher earnings.

1. Bureau of Labor Statistics, 2014 dollars, based on 2014 earnings projected over a typical work life of ages 25 through 64.

2. Current Population Survey, U.S. Bureau of Labor Statistics, 2014 dollars, U.S. Department of Labor. J.P. Morgan Asset Management. Data are for persons age 25 and over. Earnings are for full-time wage and salary workers.

Average annual earnings

by highest degree earned

2

DEGREES OF DIFFERENCE

$100,000

$60,000

$80,000

$40,000

$20,000

$0

HIGH SCHOOL GRADUATE BACHELOR’S DEGREE PROFESSIONAL DEGREE

$34,736 $57,252 $85,228

65%

GREATER

PAY

145%

GREATER PAY

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More education, less unemployment

College graduates enjoy

much better job security and

opportunity, especially during

economic downturns.

BRIGHT JOB PROSPECTS

• The number of

college-educated Americans with

jobs has increased 18.2%

since the beginning of the

recession.

1

• The unemployment rate for

high school graduates aged

20 to 24 was 18.9% in 2014,

nearly triple the rate for

graduates with a bachelor’s

degree or higher

.

2

• A shortage of 5 million

college-educated workers

is projected by 2020.

3

1. Bureau of Labor Statistics Employment Situation Report, September 2015. 2. National Center for Education Statistics, November 2014.

3. Georgetown University Center on Education and Workforce, June 2013. Based on current production rate. 4. J.P. Morgan Asset Management, Bureau of Labor Statistics, FactSet. Unemployment rates shown are for civilians

aged 25 and older. Data are as of 9/30/15.

Unemployment rates by education level

as of September 2015

4

1993

0%

2%

4%

8%

6%

10%

12%

14%

16%

18%

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

LESS THAN HIGH SCHOOL DIPLOMA

HIGH SCHOOL, NO COLLEGE SOME COLLEGE

COLLEGE OR GREATER

7.9%

Less than high school diploma

5.2%

High school, no college

4.3%

Some college

2.5%

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Return on a college investment

Even students who borrow for college can expect a

signifi cant long-term return on their investment.

Estimated cumulative earnings minus student loan repayment

Bachelor’s degree versus high school diploma

CU

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AGE

18

22

26

30

34

38

42

46

50

54

58 62 64

$0

$200,000

$1,200,000

$1,000,000

$800,000

$600,000

$400,000

BACHELOR’S DEGREE HIGH SCHOOL DIPLOMA

38% RETURN ON INVESTMENT

In this scenario, a college diploma pays

for itself by age

36 .

The college graduate earns 38% more

over a lifetime than the high school

graduate, even when factoring in loan

repayment of full tuition costs.

Source: College Board, Education Pays 2013. Based on median 2011 earnings for individuals working full-time year-round at each education level and each age. Includes only students who complete degrees; excludes bachelor’s degree recipients who earn advanced degrees. Assumes college graduates borrow $14,352 to cover total first-year tuition and fee charges for 2011–2012 (weighted average of $8,256 average public four-year in-state and $27,883 private nonprofit four-year tuition and fees) for the first year and 5% more each of the next three years. Tuition payments and earnings are discounted at 3%, compounded every year beyond age 18.

36

years old

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“Major” differences in salaries

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

Choice of college major has a signifi cant

impact on a graduate’s starting salary.

SALARIES ON THE RISE

• On average, starting salaries

for the class of 2015 are

5.2% higher

than for the

class of 2014.

• If salaries continue rising at

this pace,

the average child

born today would earn

roughly $91,700

in the fi rst

year after college.

All degrees

$48,707

Math and Sciences

$44,299

Humanities and

Social Sciences

$38,049

Engineering

$62,891

Computer Science

$62,103

Communications

$48,253

Business

$57,229

Education

$40,267

Average yearly starting salary

by college major for the class of 2015

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Good intentions, unexpected consequences

Saving for college is one of a family’s top fi nancial priorities,

but common mistakes can keep them from achieving goals.

Why save for college

College degree is

more important now

STRONGLY AGREE SOMEWHAT AGREE

Source: Sallie Mae, How America Saves for College, 2015.

Part of the

American dream

Possible reasons why:

Child will earn

more money

An investment in

child’s future

53% 31%

52% 26% 89%

84%

49% 34% 83%

78%

59%

of parents are not confi dent about meeting

college costs.

• Not having a plan

• Investing too conservatively

• Starting too late

• Using taxable or retirement

accounts

• Overestimating fi nancial aid

• Underestimating college costs

• Not getting others involved

64% 25%

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Myth:

“ I know how expensive

college is.”

Fact:

Many families underestimate

just how much college costs

and how quickly prices rise.

Pages 11 and 12

Common myths and facts

College Planning Essentials: A comprehensive guide to saving and investing

Myth:

“ I’m not concerned about college

infl ation. It has to slow down at

some point.”

Fact:

Tuition continues to rise at a

much faster rate than other

expenses, so your savings need

to keep pace.

Page 10

Myth:

“ I’ll just make a few

compromises to help pay

for college.”

Fact:

Non-savers often don’t realize

the sacrifi ces needed to make

college affordable.

Page 14

Source: Sallie Mae, How America Pays for College, 2015.

College costs

Saving for college starts with a plan. And a plan starts

with a goal. It’s important to understand college costs

so you know how much to save by enrollment time.

SECTION 2 of families have to rule out

colleges because of cost.

62%

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Tuition infl ation

College tuition costs have

increased faster than any

other household expense

in recent decades.

• Colleges are

spending more

to attract the best students.

• Colleges are

hiring more

to reduce student-to-faculty

ratios.

• Colleges are

receiving less

ﬁ nancial support

from

cash-strapped states.

WHY COSTS ARE RISING

Source: BLS, Consumer Price Index, J.P. Morgan Asset Management. Data represents cumulative percentage price change from January 1983–August 2015. 108%

128%

143%

186%

356%

722%

28%

47%

0%

100%

200%

300%

400%

500%

600%

700%

800%

Sweets

Apparel

Cars

Coffee

Gas

Housing

Medical Care

Tuition

Tuition versus other expenses

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Rising college costs

College savings need to grow at a healthy

rate to match or exceed rapidly rising costs.

KEEPING PACE

• During the 2014-15

academic year, families

spent an average of $24,164

on college – up 16% from

the previous year. This has

been the largest increase

since 2009-10.

1

• If prices increase 5% each

year, the

cost of college

will more than double

by 2034.

1. Sallie Mae, How America Pays for College, 2015.

2. J.P. Morgan Asset Management using The College Board, 2015 Trends in College Pricing. Future college costs estimated to inflate 5% per year. Average tuition and fees for the public sector reflect four-year, in-state charges.

2034

Tuition, fees and room and board expenses

2

Private

Public

$105,701

$47,045 $43,921

$19,548

TUITION AND FEES

PROJECTED

ANNUAL COSTS

for 2034

Private

$105,701

Public

$47,045

ROOM AND BOARD

2016

$20,000

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Future four-year college costs

Source: J.P. Morgan Asset Management, using The College Board, 2015 Trends in College Pricing. Future college costs estimated to inflate 5% per year.

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

$400,000

$450,000

$500,000

Projected cost of a four-year college education

based on child’s current age

$124,482 $112,909

$102,412 $92,890

$84,254

$279,690 $253,687

$230,101 $208,709

$189,305

PUBLIC

PRIVATE

$308,358

$137,241

$339,965

$151,309

$374,811

$166,818

$413,229

$183,917

$455,585

$202,768

The younger the child, the more college is likely to cost. Add up four years per child, and it equals one of a family’s largest expenses.

Newborn

Age 18

Age 16

Age 14

Age 12

Age 10

Age 8

Age 6

Age 4

Age 2

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AFFLUENT FAMILIES PAY MORE

Due to fi nancial aid policies, higher-income families paid 37% more than

lower-income families in 2014–15.

1

The real cost of college

Net price is the “sticker price” (full cost) to attend a college, minus any grants and

scholarships received. While most families don’t pay the full sticker price, actual costs

vary considerably based on household income and the college’s fi nancial aid policies.

1. Sallie Mae, How America Pays for College, 2015.

2. The College Board, 2015 Trends in College Pricing. Figures are in 2015 dollars.

NET PRICE STICKER PRICE

REAL COST

On average, families paid

28% below

sticker price

at public colleges and

40% less

at private colleges in 2015–16.

HIGH-INCOME FAMILIES

Income $100,000+ LOW-INCOME FAMILIESIncome <$35,000

$0

$10,000

$20,000

$30,000

$40,000

$14,120 –27.8% $19,548

$43,921 $26,400 –39.9%

Public four-year

institutions

1

Private nonprofi t,

four-year institutions

1

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42%

Student

works

more

45%

Parent

reduces

spending

How college costs affect behavior

To better afford college, many families must choose less expensive schools or change their daily lifestyles.

Source: Sallie Mae, How America Pays for College, 2015.

Actions taken to make college more affordable

Percentage of people taking each action

Parent

works

more

22%

Student

changes

major

16%

Student

accelerates

education

25%

Student

reduces

spending

60%

48%

Student

lives at

home

STUDENT ACTIONS PARENT ACTIONS

Elimination of colleges based on cost

0%

20%

40%

60%

80%

100%

OFF THE LIST

After reviewing their fi nancial

aid package,

62%

of families

ruled out some colleges based

on cost,

up from 56% in 2009.

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Financial aid

SECTION 3 Financial aid can help pay for college, but not all aid

is free, and not everyone qualifi es. The more you

save now, the less you may have to borrow later.

Myth:

“Financial aid is free money.”

Fact:

34% of all aid comes

from loans that must be

paid back with interest.

Page 16

Common myths and facts

College Planning Essentials: A comprehensive guide to saving and investing

Myth:

“ I don’t need to save

because my child will

receive a scholarship.”

Fact:

Only 0.3% of college students

actually get a full ride.

Page 17

Myth:

“ Saving for college will hurt

my chances for fi nancial aid.”

Fact:

Savings generally have

little impact on fi nancial

aid eligibility when the funds

are held in parents’ names.

Pages 18 and 20

Source: Edvisors, MarketWatch, "Class of 2015 has the most student debt in U.S. history," May 2015.

7 in 10 college seniors

graduated with student

loan debt in 2015.

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TOTAL AID IN 2013–14

$184.5 billion

Financial aid overview

Most college students require

fi nancial assistance of some kind,

but 34% of all aid comes in the

form of loans that must be paid

back with interest.

AID IS DOWN, TUITION IS UP

• From 2008 to 2014, state and

local fi nancing per student

declined

23%

nationally.

• From 2003 to 2015, tuition and

fees increased

69%

at state

colleges and nearly

31%

at

non-profi t private institutions.

Undergraduate student aid by source and type

in billions, 2013–14

Borrowed

Free money

$62.9

(34%)

(26%)

(21%) (8%)

(6%)

$47.1

$37.9 $15.6

$10.8

Federal loans

State grants

Private and

employer grants

Federal work study

$0.9 (<1%)

Federal grants

including Pell

Institutional

grants

Education

tax benefi ts

Source: The College Board, November 2014 Trends in Student Aid. Percentages may not total 100% due to rounding.

Average aid package

for full-time undergraduate

students, 2013–14

Federal loans

$4,840

Tax credits,

deductions and

federal work study

$1,260

Grant aid

from all

sources

$8,080

Average total

aid package

$14,180

(5%)

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1. Sallie Mae, How America Pays for College, 2015. 2. Finaid.org. Based on full-time students at four-year colleges. 3. Sallie Mae, How America Saves for College, 2015.

2-year

Public

22%

4-year

Public

10%

Private

13%

2-year

Public 8% Private

26%

4-year

Public 13%

Financial aid reality check

Many families expect more free money

from grants and scholarships than they

are likely to receive.

MORE APPLICATIONS, LESS AID

• Financial aid applicants include

86%

of middle-income families

and

76%

of high-income families.

The more people applying, the

less aid there is to go around.

1

Financial aid

expectations

3

61 %

Grant reality

2014–15 (need-based)

Scholarship reality

2014–15 (merit-based)

45 %

46 %

Percent of total costs covered by grants

Percent of total costs covered by scholarships of parents who

are not yet saving for college expect scholarships or grants to cover

the costs.

of families received

grants averaging

$7,114

1

of families

received scholarships

averaging

$8,843

1

of college students

receive enough grants

and scholarships to

cover all costs.

2

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1. Sallie Mae, How America Pays for College 2015. 2. Based on federal methodology for 2016–17 school year.

3. Protected amount for parents is dependent upon a number of factors, including household size and number of students in college.

Federal fi nancial aid eligibility

The Department of Education processes the Free Application for Federal Student

Aid (FAFSA) to determine the Expected Family Contribution (EFC). This is the amount

colleges use to determine how much federal aid you’re eligible to receive.

FEDERAL AID

In 2013–14,

82%

of families

with a college-bound child

applied for federal aid.

1

TOTAL COLLEGE

COSTS EACH YEAR

CONTRIBUTION (EFC)

EXPECTED FAMILY

AID ELIGIBILITY

FINANCIAL

GRANDPARENTS/

OTHERS

0%

of income and assets considered in federal fi nancial aid formulas. However, withdrawals for college by grandparents

or others may be considered student income and must be reported on the following year’s fi nancial aid forms. Such

income can reduce the amount of aid by 50%.

PARENTS

Income

Up to

5.64%

of non-retirement assets above protected amount, including 529 plans,

investments and savings

Assets

+

50%

of income above protected amount of $6,400

20%

of all assets in bank accounts, CDs, UGMAs/ UTMAs and any

other savings

Income

STUDENTS

+

Assets

EFC is not the amount your

family will pay for college or

get in federal aid. It’s a number

used by schools to calculate

how much aid a student is

eligible to receive.

TOTAL EFC

HOW EFC IS

CALCULATED

2

A family’s

annual

income

,

including the student’s,

counts far more in the

formula than savings and

investments

, especially when

held in the parents’ names.

of adjusted gross _{income above}

the protected amount3

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Estimating Expected Family Contribution

1. Based on two-parent household with one child attending college, one child living at home. Assuming no income or assets for each dependent and age 49 for eldest parent. Protected amounts for assets vary based on age and income. These are estimates provided for illustrative purposes only, and they may not be representative of your personal situation and circumstances.

Expected Family Contribution

Estimates based on income and assets

1

ASSETS (EXCLUDING PRIMARY RESIDENCE AND RETIREMENT ACCOUNTS)

$0

$2,364

$7,200

$15,170

$22,517

$30,257

$37,988

$45,391

$52,741

$60,091

$25,000

$2,364

$7,200

$15,170

$22,517

$30,257

$37,988

$45,391

$52,741

$60,091

$50,000

$75,000

$100,000

$125,000

$150,000

$175,000

$200,000

$225,000

$250,000

$50,000

$2,863

$8,108

$16,236

$23,583

$31,323

$39,054

$46,457

$53,807

$61,157

$150,000

$6,060

$13,666

$21,876

$29,223

$36,963

$44,694

$52,097

$59,447

$66,797

$200,000

$8,299

$16,486

$24,696

$32,043

$39,783

$47,514

$54,917

$62,267

$69,617

$250,000

$11,071

$19,306

$27,516

$34,863

$42,603

$50,334

$57,737

$65,087

$72,437

$300,000

$13,891

$22,126

$30,336

$37,683

$45,423

$53,154

$60,557

$67,907

$75,257

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Example: If you earn $150,000 in

income and have $100,000 of savings,

your estimated EFC is $34,143.

$100,000

$4,282

$10,846

$19,056

$26,403

$34,143

$41,874

$49,277

$56,627

$63,977

The Department of Education provides the Expected Family Contribution (EFC) as guidance

to colleges on fi nancial aid eligibility in order to help determine the amount a family should pay.

Use the chart below to estimate your EFC based on combined income and assets.

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The effect of savings on fi nancial aid

Savings actually count far less than income when calculating your

Expected Family Contribution (EFC) for federal fi nancial aid purposes.

529 PLAN ADVANTAGE

• When a 529 account is

owned by parents, it has

much less impact on federal

fi nancial aid eligibility than

custodial accounts.

Maximum parental savings considered in federal fi nancial aid formulas.

5.64 %

Big difference in college savings, little difference in fi nancial aid

Federal fi nancial aid for two families earning the same income and sending a

child to the same college costing $30,000 per year

EXPECTED FAMILY CONTRIBUTION FEDERAL FINANCIAL AID

$30,000

$20,000

$10,000

$0

Smiths

$75,000 saved in

529 plan

Wilsons

No savings

$18,152

$16,229

$11,848 $13,771

The Smiths have

$75,000

more in savings

but get just

$1,923 less in financial aid.

Source: J.P. Morgan Asset Management and finaid.org. Assumes both families earn $100,000 annually and 529 plan is owned by the parents. Does not include non-federal financial aid opportunities such as scholarships.

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Student loan landscape

Student loan debt has soared in recent years, putting an increased

fi nancial burden on college graduates and their parents.

Subsidized Stafford Loans

For undergraduate

students with

documented fi nancial

need. The government

pays interest while the

student is in college.

Unsubsidized Stafford Loans

For undergraduate

and graduate

students regardless

of fi nancial need. The

government does not

pay interest while the

student is in college.

Grad PLUS

For graduate

students only.

Parents PLUS

For parents only.

Perkins

For students with

high need at some

institutions.

Private Education Loans2

Offered by private

lenders, they can

either supplement

or replace federally

guaranteed loans.

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

$110

$120

2005–06

2009–10

2013–14

t$105.8

t$117.7

t$90.4

Issuance of federal and private loans

Selected years, 2013 dollars in billions

1

1. The College Board, 2014 Trends in Student Aid.

2. Private education includes loans to students from states and from institutions, in addition to private loans by banks, credit unions and Sallie Mae. 3. Edvisors.com, May 2015.

4. New York Federal Reserve, Wall Street Journal, “5 Things About Grad-School Debt,” August 2015.

Americans carrying

at least

$100,000

in

student loan debt have

more than quintupled in

the past decade to just

over

1.8 million

.

4

The class of 2015 is the

most indebted in history

,

with an average of $35,051

owed per student.

3

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Private loans

With college costs rising faster than the

availability of federal aid, many families

are choosing to fi ll the growing gap

with private loans.

PRIVATE LOANS AT A GLANCE

Private loan defaults

as of 2012

2

$8 billion

in defaulted private loans distinct loans in default

850,000

• Americans currently owe

$91 billion

in outstanding

private student loan debt.

1

• Private loans make up 7.2% of the

$1.27 trillion

student loan market.

• Private student loans tend to have

higher interest rates

and

less

flexible repayment options

than

federal loans.

1. MeasureOne Private Student Loan Performance Report – Q1 2015. 2. Private Student Loan Report 2012, Consumer Finance Protection Bureau.

Federal vs. private student loans

Outstanding balances (in billions)

1

Federal $1,174.4 92.8%

Private $91.0 7.2%

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The burden of debt

Debt balances

by type of consumer loan (in trillions)

2

• Student loan debt

more than

tripled

to $1.2 trillion between

2004 and 2014.

2

• The average student borrower

graduates with

$35,051

in loans.

3

• Student loan defaults are at a

20-year high

, affecting over

7 million borrowers.

4

DROWNING IN DEBT

$0.4

$0.6

$0.8

$1.0

$1.2

’04

’05

’06

’07

’08

’09

’10

’11

’12

’13

’14

’15

STUDENT LOAN

CREDIT CARD AUTO LOAN

HOME-EQUITY LOAN

In 2010, student loan debt

surpassed credit card debt for

the fi rst time in history.

The debt impact

on students and their parents

42%

65%

75%

$208,000

of recent college graduates

currently live with their parents5 of parents expect to support _{their children for up to five}

years after graduation6

of student borrowers say loan payments make it harder

to buy a home7

loss in lifetime wealth due to student loan debt8

1. Pew Research Center. Young Adults, Student Debt and Economic Well-Being Report, May 2014. Households headed by a person younger than 40.

2. New York Federal Reserve, Household Debt and Credit Report, Q2 2015.

3. Edvisors.com, May 2015.

4. U.S. Department of Education, FY 2014, Q3. 5. Accenture, 2014 College Graduate Employment Survey. 6. Upromise by Sallie Mae, 2015.

7. American Student Assistance, “Life Delayed: The Impact of Student Debt on the Daily Lives of Young Americans,” 2013.

8. Demos, “At What Cost? How Student Debt Reduces Lifetime Wealth,” August 2013.

Families that don’t save enough

for college often have no other

choice than to borrow. Today,

a record four in 10 households

owe student debt.

1

(24)

• The interest rate on federal

parental college loans is 6.84%.

1

DID YOU KNOW?

How college loans affect retirement

Parents who borrow for college often spend their critical

pre-retirement years paying off loans instead of funding

401(k)s, IRAs and other retirement accounts.

1. Interest rates apply to loans first disbursed between July 1, 2015, and July 1, 2016. 2. Edvisors, U.S. Department of Education, National Postsecondary Student Aid Study, May 2015. 3. J.P. Morgan Asset Management. Assumes a 6.84% interest rate and 10-year loan repayment period.

4. J.P. Morgan Asset Management. Illustration assumes $356 monthly investments over 10 years and an annual investment return of 6%, without the effects of taxes. This example does not represent the performance of any particular investment. Different assumptions will result in outcomes different than this example. Your results may be more or less that the figures shown. Investment losses could affect the relative tax-deferred investment advantage. Each investor should consider his or her current and anticipated investment horizon and income tax bracket when making an investment decision, as the illustration may not reflect these factors. These figures do not reflect any management fees or expenses. Such costs would lower performance. This chart is shown for illustrative purposes only. Past performance is no guarantee of future results.

If this money were invested for retirement instead

Growth of $356 monthly investments made over 10 years

4

$59,687

$42,720

$106,890

$191,424

10 years

20 years

30 years

INVESTMENT GROWTH TOTAL INVESTMENT

Average parental debt at college graduation

$30,867

$356

$42,720

Total debt2 _{Monthly loan payment}3 _{Total cost with interest}3

While in an account, 0% of parents’ retirement assets are considered in federal fi nancial aid formulas. Withdrawals taken to pay for college are treated as student income, half of which may count against federal aid packages.

0 %

50 %

The relationship between retirement

savings and college fi nancial aid

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Saving and investing

SECTION 4 Choosing the right savings plan and following time-tested

investment strategies can help you reduce taxes, increase

growth potential and accumulate more for college.

Myth:

“ All college savings plans

are the same.”

Fact:

College savings plans

differ in a variety of ways,

including investments, tax

benefi ts and fl exibility.

Pages 26 and 33

Common myths and facts

College Planning Essentials: A comprehensive guide to saving and investing

Myth:

“ I’ll just take out a loan

if I don’t save enough.”

Fact:

It costs more to borrow

and pay interest than to

invest and earn interest.

Page 29

Myth:

“ It’s too early to start saving

for college.”

Fact:

Starting early and

saving regularly helps

you maximize the power

of compounding.

Page 30

of families saving for

college invest in 529 plans.

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27%

Comparing college savings vehicles

Understanding the different tax benefi ts and features of college savings

vehicles can help you choose the right one for your needs.

of parents own

529 plans

1. Earnings on non-qualified withdrawals may be subject to federal income tax and a 10% federal penalty tax, as well as state and local income taxes.

529 college savings plan

Custodial account (UGMA/UTMA)

Coverdell Education Savings Account

• Tax-free investing and withdrawals for

any qualifi ed higher education expense

1

• Account owner control for the life of

the account

• No income limits on contributors

• High contribution maximums

• Low impact on fi nancial aid eligibility

• Funds must be used for the child’s

benefi t, not necessarily for college

• Portion of investment earnings taxed at

child’s and parents’ rates

• Child assumes control at age of majority,

usually 18 or 21

• High impact on fi nancial aid eligibility

• Tax-free investing and withdrawals

for any level of education

1

• Income limits on contributors

• Age limits on benefi ciaries

• Maximum contribution of $2,000

annually per benefi ciary

• Low impact on fi nancial aid eligibility

of parents own UGMA/

UTMA accounts

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14%

U.S. Savings Bonds

Current saving and investing trends

Half of U.S. families aren’t saving for college. The other half often

choose vehicles that don’t maximize their growth potential, such

as savings accounts, CDs and taxable investments.

Percentage of families using:

15%

CDs

48%

General Savings

Accounts

27%

529 College Savings Plan

17%

Investments

11%

Trust Fund

12%

Prepaid State Plan

23%

Checking Account

11%

Coverdell Education

Savings Accounts

0%

10%

20%

30%

40%

50%

9%

UGMA/UTMA

FAMILIES DON’T FULLY

MAXIMIZE GROWTH POTENTIAL

More parents—48%—save for college

with low-yielding savings accounts than

any other method.

FAMILIES USING A

529 PLAN FAMILIES USING A TRADITIONAL SAVINGS ACCOUNT

On average, those parents with a

529 plan save 89% more than those

simply using a savings account.

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S&P 500

U.S. 30-DAY TREASURY BILLS CONSUMER PRICE INDEX COLLEGE TUITION AND FEES

Investing for long-term growth

Starting a college savings plan early allows more time to

hold investments with higher return potential.

$100

$10

$1

DEC ’79

DEC ’84

DEC ’89

DEC ’94

DEC ’99

DEC ’04

DEC ’09

DEC ’14

Growth of one dollar

December 1979 to December 2014

Source: J.P. Morgan Asset Management. Past performance is no guarantee of future results. Hypothetical value of $1 invested at the beginning of 1980. Assumes reinvestment of income and no transaction costs or taxes. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index.

STOCKS OUTPACE

TUITION INFLATION

While short-term investments

grew more slowly than

tuition costs, stocks

delivered high returns to

help beat college infl ation

and achieve savings goals.

t

$59.37

t

$12.48

t

_$5.50

t

$3.47

(29)

Investing versus borrowing

It costs less to invest now than to

borrow later. When you borrow for

college, you pay interest. When you

invest, you earn interest and other

forms of investment returns.

IT TAKES A PLAN

• Without a plan, families run

the risk of not saving enough

and borrowing too much. Yet

36%

of high-income families

and

60%

of middle-income

families

don’t have a plan

to

pay for college.

1

529 college savings plan versus student loan

Initial investment of $1,000

_plus

monthly investments of $300

2

$200,000

$150,000

$100,000

$50,000

$0

College savings plan

over 18 years

principal and

College loan:

interest

$119,143

INVESTMENT GROWTH OUT-OF-POCKET COST $167,553

$65,800

lower out-of-pocket cost

with 529 plan

$101,753

Average parental loan debt at graduation

3

$10,000

$17,577

$30,867 $7,799

$0

1994-95

2004-05

2014-15

$20,000

$30,000

$40,000

A BURDEN FOR

EVERYONE

The average parental debt

load has

almost doubled

in a decade to nearly

$31,000

in 2014-15, while

the average debt faced by

students was more than

$35,000

in 2015.

4 1. Sallie Mae, How America Pays for College, 2015.

2. J.P. Morgan Asset Management. The investing illustration assumes an initial lump-sum investment of $1,000, subsequent monthly investments of $300 thereafter for 18 years, and assumes an annual investment return of 6% and federal tax rate of 28%. Investment losses could affect the relative tax-deferred investment advantage. Each investor should consider his or her current and anticipated investment horizon and income tax bracket when making an investment decision, as the illustration may not reflect these factors. The borrowing illustration assumes an interest rate of 7.21% and a payback period of 10 years. This hypothetical illustration is not indicative of any specific investment and does not reflect the impact of fees or expenses. The chart is shown for illustrative purposes only. Past performance is no guarantee of future results. 3. Edvisors, U.S. Department of Education, National

Postsecondary Student Aid Study, May 2015. 4. Wall Street Journal, “Congratulations Class of 2015.

You’re the Most Indebted Ever (For Now),” May 2015, and

MarketWatch, “Class of 2015 has the most student debt in U.S. history,” May 2015.

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(30)

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The benefi ts of compounding

The sooner you start saving, the more time you may

have to grow your college fund through the power of

long-term compounding. Even small contributions add

up over time.

Total

accumulation

in 6 years

Total

accumulation

in 12 years

Total

accumulation

in 18 years

$50,000

$100,000

$150,000

$200,000

$0

$100 MONTHLY CONTRIBUTIONS $250 MONTHLY CONTRIBUTIONS $500 MONTHLY CONTRIBUTIONS

Start early, small savings add up

Total amounts accumulated over 6, 12 and 18 years

If you start saving $500 per month

when a child is born, you’ll earn

$84,214 more

than if you start at age 6.

$8

,3

70 $2

0

,926

$4

1,8

52

$50

,6

10

$10

1,

22

0

$3

7,

0

87

$92

,7

17

$1

85

,43

4

$2

0

,24

4

Source: J.P. Morgan Asset Management. This hypothetical example illustrates the future values of different regular monthly investments for different time periods. Chart also assumes an annual investment return of 6%. Investment losses could affect the relative tax-deferred investing advantage. This hypothetical illustration is not indicative of any specific investment and does not reflect the impact of fees or expenses. Such costs would lower performance. Each investor should consider his or her current and anticipated investment horizon and income tax bracket when making an investment decision, as the illustration may not reflect these factors. A plan of regular investment cannot assure a profit or protect against a loss in a declining market. The chart is shown for illustrative purposes only. Past performance is no guarantee of future results.