How to Pay for College
What you need to know about saving and federal student aid
INVESTMENT
NOT FDIC
INSURED
NO BANK GUARANTEE
• MAY
LOSE VALUE
INVESTMENT PRODUCTS:
NOTPRODUCTS:
FDIC INSURED
• NO
BANK •
GUARANTEE
• MAY LOSE
VALUE
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COLLEGE FUNDING PYRAMID
LOANS
SCHOLARSHIPS,
GRANTS,
WORK-STUDY
SAVINGS
$ BORROWED
3
$ AWARDED
2
$ SAVED
1
HOW TO PAY FOR COLLEGE
Welcome to
College Funding 101
As the cost of college continues to
climb, more and more families can’t
save the entire amount, especially
if there is more than one child to
plan for.
Increasingly, families are looking to
their trusted Financial Professional to
assist them in developing a complete
college funding strategy that includes:
n
Savings, such as 529s, as a solid
foundation
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Scholarships, grants and federal
work-study programs
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Federal and private student loans
It can all seem very complicated…
but you don’t have to be an expert on
all these topics. You just need a basic
understanding, which you’ll find in the
pages that follow.
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HOW TO PAY FOR COLLEGE
Start with a savings goal
529s: The Preferred Choice
First, put a savings plan in place by following these
five steps:
As you think about which savings vehicle you might
choose, consider the three primary advantages of a 529
college savings plan:
1. Determine the cost of college
2. Identify your savings profile:
A: Our child will pay
B: We’ll help as best we can
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Tax benefits
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Professional money management
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C ontrol by account owner
To remember them easily, think “The Preferred Choice.”
C: We’ll fund it all
3. Set your savings goal (it may be less than the
total cost)
For more detail on these benefits, visit scholars-choice.com
to download our Product Overview brochure, Explore.
4. Choose a savings vehicle
5. Establish a savings schedule
For more help with goal-setting, visit scholars-choice.com
to download our How to Save Guide, Five Steps to
Successful Savings.
College Savings 529 App: 4College!TM
Our free Scholars Choice iPhone app 4College!™ lets users calculate savings scenarios
according to multiple variables.
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HOW TO PAY FOR COLLEGE
Sources of student aid
Don’t worry if you can’t save the entire cost of college;
student aid is available.
Aid primarily comes in four forms: scholarships, grants,
federal work-study programs and student loans — federal
and private. The first three provide students with money
at no cost, while the fourth (loans) come at a price.
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Scholarships – A scholarship is money awarded that
the recipient is not expected to pay back. Scholarship
amounts can vary greatly, depending upon the type of
scholarship awarded.
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Grants – Unlike scholarships, which typically require
students to maintain certain requirements, such as a
minimum GPA or number of credit hours, grants
generally come with no strings attached.
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Federal Work-Study Programs – These programs,
administered by participating schools, provide parttime jobs located both on and off campus for students
who demonstrate financial need.
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Student Loans – A loan is borrowed funds that must
be repaid with interest.
– A federal student loan allows students and their
parents to borrow money at low interest rates with
flexible repayment terms through programs
supported by the federal government.
– A private student loan is issued by a lender such as
a bank or credit union.
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HOW TO PAY FOR COLLEGE
Applying for aid
The first step in applying for federal financial aid is to complete the Free
Application for Federal Student Aid form, or FAFSASM.
Most college students and their families are expected to contribute toward
their college education costs. How much they will be expected to contribute
will depend upon their financial situation and what’s called the Expected Family
Contribution, or EFC. The FAFSA is used to determine the family’s EFC based
on financial information such as assets and income.
The fastest and easiest way to
apply is online at www.fafsa.gov.
The difference between a college’s Cost of Attendance (COA) and a student’s
EFC determines a student’s financial need. The FAFSA is what most colleges
use to determine eligibility for federal aid — as well as state and collegesponsored financial aid — including grants, federal work-study programs and
federal student loans.
Crunching the numbers
The EFC calculation takes into consideration both the student’s and parents’
assets and income. Specifically, 20% of the student’s assets, such as a bank
account or UGMA/UTMA custodial account, and 50% of the student’s income,
such as money earned from a summer job, are included.
Up to 5.6% of the parents’ assets are counted, excluding qualified retirement
account assets, private home equity and family business. Between 22% and
47% of parents’ income are also counted. Additional factors, such as how many
children are in the family and how many are in college, also have an impact on
the EFC calculation.
Impact of assets and income on EFC calculation
Owner
Assets1
Income2
Student
20%
50%
Parents
Up to 5.6%
22 - 47%
Source of data: savingforcollege.com.
Note: Student and Parents income is assessed only above a threshold (the income allowance).
Total current balance of cash, savings and checking accounts; net worth of investments, including real estate, excluding the home in which parents and student live; net worth of parent
and student current businesses and/or investment farms, excluding family farms or businesses with 100 or fewer full-time or full-time equivalent employees. Net worth means current
value minus debt. Source: FAFSA 7/1/14 - 6/30/15.
2
Income includes the adjusted gross income from the parents‘ and students’ Forms 1040 along with certain other items representing untaxed income and benefits, e.g., untaxed portions
of IRA distributions and veterans non-education benefits, such as disability. Source: FAFSA 7/1/14 - 6/30/15.
1
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HOW TO PAY FOR COLLEGE
Applying for aid
Factoring in your 529
How, exactly, are 529 plan assets and distributions counted in the EFC
calculation?
529 plan assets owned by a parent or funded with UTMA/UGMA assets will
be treated as parental assets and counted up to 5.6%. Provided the 529 plan
is considered a parental asset, a qualified distribution will not be considered
income to either the parent or student and will not be counted in the EFC
calculation.
If the owner of the 529 plan is a third party, such as a grandparent, another
relative or non-relative, it’s different. The assets will not be counted in the
original EFC calculation. However, the entire distribution will be included as
income of the student, and together with income from all other sources, such
as summer jobs, will be counted 50% in the following year’s EFC calculation.
Please note that the treatment of 529 plan assets for EFC purposes is subject
to interpretation and may change from time to time.
Impact of 529 plans on EFC calculation
Owner
Parent/UTMA/UGMA
Third Party
Assets1
Income2
Up to 5.6%
0%
0%
50%
Source of data: savingforcollege.com.
Rely on a Roth IRA instead?
Some wonder whether it’s better to use a Roth IRA to save for college because
it doesn’t affect the EFC calculation on the FAFSA. But this isn’t necessarily
the case.
It is true that the value of a Roth IRA, like any other qualified retirement account,
is not reported as an asset on the FAFSA form. However, the entire amount of a
tax-free distribution from a Roth, assuming it is parent-owned, must be included
as income of the parent. It will be counted 22-47% in the following year’s EFC
calculation above a threshold (the income allowance).
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HOW TO PAY FOR COLLEGE
Get an early start
Even if college is years away, there
are still steps you can take to plan. For
instance, you can estimate how much
federal financial aid your child may
qualify for without filling out
the FAFSA.
Parents not ready to apply for federal
student aid but seeking an estimate
can use a free financial aid calculator,
FAFSA4caster, which provides an
early estimate of eligibility. It can be
accessed at the website of Federal
Student Aid, an office of the U.S.
Department of Education: http://
studentaid.ed.gov/fafsa/estimate.
Parents need not have high school
seniors to use FAFSA4caster; in fact,
the tool is recommended for juniors,
and even as early as middle school.
Parents of younger students can
use FAFSA4caster to receive early
estimates, create scenarios based
on future earnings, and then create
college funding strategies with their
Financial Advisors. Adult students can
also use the tool to get an idea of how
much aid they may receive.
Just keep in mind that FAFSA4caster
is a planning tool — not an application
for aid.
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HOW TO PAY FOR COLLEGE
COMPETITIVE
JOB MARKET 3
By 2020, 3 out of 4 jobs will
require a two-year or four-year
degree or certificate.
RISING COST
OF HIGHER
EDUCATION4
NOW
In the next 18
years the average
tuition and fees
for public (in-state)
and private
institutions will
increase
by 129%.
NOW
18 YRS
529 PLAN AVERAGE
ACCOUNT SIZE5
$17,174
PUBLIC
PRIVATE
$19,584
The average account size grew by 14%
from 2012 to 2013.
Despite growth, the average 529 plan
holder only has enough to cover 25% of
public college and 12% of private college.
Sources: Grant Thornton LLP, U.S. Department of Labor.
Source: ©2013 The College Board, collegeboard.com. Based on the average annual cost of attendance, adjusted for a hypothetical 5.0% rate of education inflation. Graph numbers are
Now: Public $97,061 and Private $191,090; In 18 years: Public $222,466 and Private $437,982.
Copyright © 2013 The College Board, collegeboard.com.
5
Source: College Savings Plan Network Report.
3
4
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HOW TO PAY FOR COLLEGE
Get the fundamentals
of funding
Coming up with a strategy to pay for
college can feel overwhelming. But
as with any big goal, it helps to break
it down into smaller parts. Now that
you’ve reviewed the fundamentals,
here are the next steps to consider:
1. Read our brochures and check out
the other suggested links.
2. Write down your questions.
3. Call your financial professional now
to discuss how to fund college.
Why Scholars Choice
®
At Scholars Choice — the robust
529 college savings plan from Legg
Mason and CollegeInvest — we are
dedicated to making it easier for our
clients to pay for college.
One of the largest advisor-sold 529
plans nationwide, Scholars Choice
offers significant tax benefits and a
broad range of investment options.
Competitive fees and an active,
multi-manager approach make
Scholars Choice a solid foundation
on which to build a comprehensive
college funding strategy.
8
HOW TO PAY FOR COLLEGE
Resources
Scholarships
n
www.scholarships.com
Private database of >2,700,000 scholarship opportunities
n www.careerinfonet.org/scholarshipsearch
U.S. Department of Labor database of >5,000 scholarship opportunities
Grants
n
n
www.studentaid.ed.gov/types/grants-scholarships
Also see the two websites listed under scholarships
Work-Study
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www.studentaid.ed.gov/types/work-study
Federal student loans
n
n
n
www.studentaid.ed.gov/types/loans
Perkins Loan6: (up to $5,550 for undergraduates; up to $8,000 for graduates)
Direct Subsidized Loan6: $3,500 - $5,500 (undergraduates only)
Direct Unsubsidized Loan6: $5,500 - $20,500 (undergraduates and graduates)
Direct Plus Loan: Student’s Cost of Attendance (COA) minus any other
financial aid (for parent of dependent undergraduate students and for graduate or professional students)
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Private student loans
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Consult with your school’s Financial Aid Office or your bank
As of April 2014.
Federal Student Aid. An office of the U.S. Department of Education; amounts cited are annual awards (subject to change), April 2014
6
9
About Scholars Choice scholars-choice.com
At Scholars Choice — the robust 529 college savings plan from Legg Mason and
CollegeInvest — we are dedicated to making it easier for our clients to pay for college.
We fulfill this goal through expert active fund management, a variety of investment
options, and tools and resources that make college financial planning simple.
About Legg Mason leggmason.com
n A
leading global investment company with $695 billion7 in assets invested worldwide,
focused on long-term, actively managed strategies
n A diverse family of specialized investment managers, each with its own independent
approach to research and analysis
n Over a century of experience in identifying opportunities and delivering astute
investment solutions to clients in equities, fixed income and alternatives
About CollegeInvest collegeinvest.org
CollegeInvest is a not-for-profit division of the Colorado Department of Higher Education,
and a trusted resource providing 529 college savings plans, financial education, and
scholarships for higher education.
Where can I find more information?
Visit scholars-choice.com.
As of February 28, 2014.
7
All information contained herein is intended for general informational purposes only. Such information does not constitute legal, tax or financial
advice on the part of Legg Mason & Co. and it’s affiliates. Investors should consult with their legal, tax and financial advisors concerning their
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