Saving for College

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[00:00:00] Hi, everyone. My name is Jonathan Hughes. I'm the Associate Director of College Planning at MIFA. Thank you for joining me for MIFA's Saving for College presentation. And before we actually get into the Saving for College content, I want to tell you a little bit about MIFA. MIFA is the Massachusetts Educational Financing Authority.

We are A state authority. We were created back in 1982 by the Commonwealth of Massachusetts, and we have a public service mission to help families to plan, save, and pay for college. We do that in a variety of ways. Of course, today we're going to be focusing on the savings part of our mission, but I do want to let you know that we are a free resource available for you to use with any questions that you may have regarding planning, saving, and paying for college.

and career readiness. So, uh, after you watch this presentation, if you do have questions on that, getting contact with us, I will be giving our contact information out at the end of this presentation. That's our email, [00:01:00] phone number and social media channels, uh, as well as our, our address as well. Um, so just to let you know that we are a free resource for you to use, should you have questions.

Now, what we're going to talk about today is of course, savings. So we're going to start off with. Why save? So why is savings important? And I think you have an idea that it is if you're watching this, but just a couple of messages that we like to hammer home. We're going to talk about two particular Massachusetts savings options, the Massachusetts U Fund 529 plan and the U Plan prepaid tuition program.

We're going to talk about strategies for savings. So what have families had success in doing while saving for college? And then finally, how families do pay for post secondary education. And by post secondary education, I mean college and career training. So anything that comes after high school. Of course, the idea being not to That every student has to go to high, has to go to college, uh, but just that whatever our students do [00:02:00] after high school, they have a plan in place, um, to succeed.

So we just want them to be in a good position. And if I've heard one question over and over again from families in my time at MIFA, it is how do families do this? How do they pay for college? We're going to talk about big picture, how families do pay for college and career readiness. All right, starting off with why savings are important.

So this is probably the most important thing that I want to leave you with, which is why it's the first slide in our content here, which is myths that we've heard about saving for college. I've heard this in my work life. I've heard this in my personal life. Uh, particularly this first one, my savings will hurt my financial aid, right?

So people are worried about saving for college, that it's going to hurt their ability to get financial aid. And um, that's just not the case. So there are two ways that you can award financial aid, two metrics. The first being Merit Aid. So that is. Think [00:03:00] about academic scholarships, athletic scholarships.

This is money that is given to students, not based on their family finances, but based on student achievement. So again, grades, athletics, art, whatever it may be. The second though, is. need based financial aid. So that is financial aid that is based even partly on your financial eligibility for it, or your financial need.

And this is going to be determined when you file your financial aid forms in their senior year of your student's high school. And so on these forms, they will ask for student income, student assets, parent income and parent assets. So if you have savings for your child your college savings may go under your parent assets.

Um, But the fact is, is that they take only a very small percentage of parent assets into account when determining how much financial aid you're eligible for, need based financial aid you're eligible for. Um, so a very, very small amount. Whereas [00:04:00] income, parent income in particular, is really the biggest factor in determining financial aid eligibility.

So not your savings. The second thing that we've heard is it's not worth saving for college if I can't save the entire cost. Now, I remember when my son was born, my colleague said, let's see how much college is going to be for him when he turns 18. And we did one of those future college cost calculators where they just take the tuition And take the rate of that it's been increasing every year and factor that out for 18 years.

And I remember seeing that four year figure and thinking I could never save for that. But the fact is, I'm probably not going to be asked to pay that full amount. Most families will be eligible for financial aid, at least some level of financial aid. So don't let that number dissuade you from starting college savings.

The truth is that everything that you have saved towards college will help you. In fact, every Every parent that I have talked to [00:05:00] who has saved, I can tell you this, uh, over my time at MIFA is glad that they have saved what they have. Nobody has regretted saving. Every little bit of saving helps.

Something saved is something that you don't have to borrow. And that most expensive yearly tuition times four is really not worth it. the target that, that your family necessarily should have in mind, uh, when paying for, when saving for college. So again, um, your college savings to recap will help you.

It'll give you more education options so you can put more colleges and more programs, a greater range of costs on your list. Um, it can reduce or eliminate the need to borrow loans. And that really is. The key as far as I'm concerned is it will help to help to reduce it and hopefully even eliminate the need to borrow loans.

And as we've already discussed, it does have a minimal impact on the eligibility for need based [00:06:00] financial aid. In addition to that, there's been a lot of research done on 529 accounts specifically, and it's shown that 529 accounts have an increased, has, it's shown that 529 accounts have an outsized impact on, um, college attendance and graduation.

So if money is set aside for a child and the child knows that money is set aside for them, uh, for college, they're much more likely to attend and much more likely to graduate college. And that's true across all income levels. Now that we know that, we're going to talk about two Massachusetts savings options.

The first one being the U Fund College Investing Plan. So, the U Fund is the Massachusetts 529 plan. And 529 plans have become sort of [00:07:00] the college investment vehicle of choice, uh, since the 90s when they were created. And essentially they were created at the federal level and then every state was tasked with creating their own 529 plan or plans.

The U Fund is the Massachusetts 529 plan. It is a MIFA offering and we have contracted with Fidelity Investments for them to manage the investments and the accounts. So how it works essentially is you would open an account, at Fidelity. com slash uFund. You put money into that account. You can, you can do that whenever you feel like doing it.

You can do it in one lump sum, or you can set up an automatic withdrawal from your checking account. And your money is invested by Fidelity in the market. And it grows with the market, tax deferred. When you take the funds out, as long as you use them for qualified educational expenses, you pay no taxes on the earnings.

And we're going to talk about what qualified expenses are in [00:08:00] just a minute. But an important thing to note when you're setting up an account is that there's no annual account maintenance fee, so there's not a fee that you're going to have to pay out of pocket. There are fees associated with the fund, as there are for all 529 plans, but they are taken out of the earnings.

Of the account and also there's no minimum investment to get started So you can open an account with very little money. You can open an account with no money and choose to fund later So we're just trying to remove barriers that may exist for people to start saving for college since we know how beneficial that that is Now I did mention that this was an investment plan.

So there are multiple investment options to choose from including actively managed portfolios index portfolios individual allocation portfolios, and FDIC insured portfolios. Now, I just threw out a lot of investing jargon at you there, but I, nor MIFA, neither I nor MIFA are, um, investment professionals.

We can't give you investment advice. [00:09:00] We're not qualified to do that. Don't really want to do that, but Fidelity can. So, uh, I personally know very little about investment. When I, Uh, was opening up my account. I had questions and I was able to talk with Fidelity and they were able to advise me. Um, just because this is the Massachusetts Investment, uh, Massachusetts U Fund, it doesn't mean that you have to use the U Fund at a Massachusetts college.

So savings can be used at any accredited college or university in the country. Actually, even some international colleges, as long as they're set up to take U. S. federal funds, you can use your U Fund money there and still get your tax benefit. Um, and there is a maximum on the account of 500, 000. So you're not able to contribute anymore once the beneficiary has a combined account maximum of 500, 000.

So, uh, that is not typically a problem for most people, but that is the account maximum. So if you're, if you've got 500, 000 or, or, you know, if your investment value has exceeded that, [00:10:00] You can't put any more into the you fund at that point and it says combined account maximum. So what that means is that Um, if I have a U Fund for my son and my mother has a U Fund for my son, those two accounts together could not exceed 500, 000, or if they did, you could not continue to contribute to those.

Now, I said we were going to talk about what qualified educational expenses are, uh, what are the eligible expenses that you can withdraw from the U Fund and still maintain your tax benefit. That's tuition. Fees. housing and food, books and required equipment. So a lot of costs there for college. Also, it's not strictly speaking for college per se.

So you can use your U fund up to 10, 000 annually for costs related to apprenticeships. You 10, 000 annually for tuition at private and public K through [00:11:00] 12 education. And you can use a one time 10, 000 withdrawal from the U Fund to pay student loans. So those have come, those last three, uh, are due to a recent expansion in 529.

So one of the benefits of 529 programs is just how flexible they are and how many different costs you can use and still maintain that tax benefit. So, what happens if I take out money for ineligible expenses? There are penalties associated with that and that's very important that we note that. It's also important though to note that the penalties are all on the earnings.

of the 529 account and not what you put into the 529 account, but the earnings that accrued on them. So those penalties are a 10 percent penalty on the earnings. Um, and the earnings will be taxed at the owner's rate of income. Now there are three [00:12:00] exceptions to the 10 percent penalty on the earnings, which are death and disability of the student, but also scholarship.

So if a student is awarded a scholarship and you have to withdraw funds and can't use them as they were intended because of that scholarship, then there is no 10 percent penalty on that scholarship amount. However, even in those three cases, if you withdraw funds and use them for ineligible expenses, the earnings will be taxed at the owner's rate of income.

I do want to mention a program called the Baby Steps Savings Plan, and this is Massachusetts first statewide seeded child savings account. And we're really excited about it because it uses the youth fund as that account. Essentially what it is, um, it was created in, or it kicked off on January 1st, 2020.

It was created by the Uh, Massachusetts State Treasurer's Office, the Office of Economic [00:13:00] Empowerment in particular, and it sets aside 50 in a U Fund account. for every Massachusetts child to open by their first birthday or first anniversary of adoption. So, uh, we're very excited about that. And if this is relevant to you, uh, or to someone in your life, a friend or a family who may be eligible for this, they can visit mass.

gov slash baby steps. to get started. The other program that we want to talk about today is the U Plan prepaid tuition program. And so how this program works, it's different from the U Fund 529 plan. It's not a 529 plan, it's a prepaid tuition plan. So it allows you to prepay up to 100 percent of tuition and mandatory fees at each participating college or university.

And all colleges and universities that participate will are in Massachusetts. So it's a large network of [00:14:00] Massachusetts public and private colleges that participate. Unlike the U Fund, the money that you put in is not invested in the market. It's invested in general obligation bonds that are backed by the full faith and credit of the Commonwealth.

So it's not market, it's not subject to market fluctuation. And also unlike the U fund, while there's not a minimum amount to get started in the U plan, there is a minimum amount to purchase a certificate. So you can open an account online. You can contribute whatever you can, you can contribute throughout the year, but there is a one time bond purchase and that occurs.

in July. Um, so whatever you have in your account at the time of the bond purchase, that is what purchases your U Plan certificate. So first of all, it has to be above 300. If it isn't, your money stays in your U Plan account. And, you know, hopefully you're adding to that. And by next year, if it's over 300, [00:15:00] you'll, you'll purchase a certificate then.

But if it's above 300, then whatever you put in, Purchases a percentage of this year's tuition and fees at a participating college. So let me give you this example. If you have contributed a thousand dollars in a year for the plan, um, that would buy 10 percent at a college that costs. 10, 000 this year.

We're by 5 percent at a college that costs 20, 000 this year. You don't have to pick the college when you put the funds in. What you have to do when you set up your Upland account is you pick an owner. This is just like the fund, you pick an owner. So a person who is in control of the account, a beneficiary, meaning the student, how much money you're putting in, how often you're putting in, whether it's a one time contribution or putting money in But you also have to list what year or years you want to use the money in.

So you [00:16:00] want to pick one or more of the years that your child is going to be in college. And so this is when your bond is going to mature. So to make it simple, let's say you put in a thousand dollars and you want all that money to mature in your student's freshman year in college. And let's say that that is 15 years from now.

Okay, you put in 1, 000 there and want this all to the first year. So that's going to buy 10 percent of tuition at a college that costs 10, 000 this year, or it's going to buy 5 percent at a college that costs 20, 000. Now, if it goes to that college that you purchased 10 percent at, In 15 years, let's say that tuition is no longer 10, 000, but it's 30, 000.

So what that means is that you have 10 percent then of 30, 000 or 3, 000 because you bought 10 percent of tuition this year. So the [00:17:00] value of that 10 percent increases along with the pace that tuition increases. So your 1, 000 became 3, 000 because 10, 000 became 30, 000. That is generally how the U Plan works.

Now you can continue to put funds in year after year and add to your percentage. There is a five year minimum though between when you put money in and when you can select to have it mature. So as your child begins to age towards college, you're going to lose the ability to lock in tuition. If you want to learn more about the U Plan and you should, it's a great plan.

It's MIFA. org slash U Plan. I know some questions that come up with the U plan already. So what happens if my child doesn't go to a participating college? So if that happens just like the U fund funds can be transferred over to other beneficiaries within the family Um, so if there's brothers cousins, what have you you can transfer those funds You can do that for the U fund you can do that for the U plan as well [00:18:00] um And if that's not an option certificates can be cashed out Upon maturity and you get what you put in plus the interest that accrued on those bonds.

So CPI Unlike the U fund though, there are not really tax consequences for cashing out so Distributions whether cashed out or sent to a college carry no, Massachusetts or federal tax Consequences now can the U plan be used for graduate school? It cannot it can only be used for undergraduate school the U fund on the other hand You can be used for graduate school.

In addition to these benefits that we've already discussed, there are other Massachusetts tax benefits associated with these plans. So, uh, if you are a saver in the U plan or U fund or both, you are able to deduct up to 2, 000 for married filers or 1, 000 for individual filers of your contributions on your Massachusetts state income [00:19:00] taxes.

And this is per filer, not per account. So if you have three accounts and you're doing 2000, 2000, 2000, if you're filing, if you're a married filer, filing jointly, the amount that you can deduct on your Massachusetts income tax is still only 2000. But again, it's just another incentive to try to get people to save for college and another benefit if they do so.

Okay, so now we're going to talk about strategies for saving. What are some ways that we know people have had success in saving for college? So the first thing I want to stress is to start saving as early as possible Um, you know, it's kind of like retirement in that it doesn't really um Matter as much how much you're saving early is that you do start to save early So you want to use time to your advantage you can start with the goal in mind Um, whether that's however much you want to put away every month or how much you want to have saved and we have a tool That we can use You I'm going to show you a little bit later on to help you determine what that goal [00:20:00] might be.

You want to take advantage of unexpected funds. So whether that's tax refunds or whether that's, um, some other sources that you weren't planning on, you can save some or all of that in your, You fund or you plan account using automatic transfers is a great way to To do this. We know that people who do use automatic transfers tend to save more That's the story I always tell that I was saving about nine or ten months before I even knew I was saving because My wife had set up an automatic transfer for my checking account to go right in You can get the word out to family and friends that they can contribute.

You know, this is something that if you're parents, you don't really have to take this on all on your own. Um, other people can contribute to your child's account. This image that you have here on the right, is an image from Fidelity's college gifting page that they've set up for the youth fund. You can [00:21:00] create this page with a picture of your child and the year that they're set to enter college and their birthday and maybe what they want to be when they graduate.

And so you can create a link and email this out to people and they can gift money directly in. And then finally involving your child in the process. If they get money for birthdays, for milestones, teach them to save some of that in their, their plan. And kids do like to see their sort of balances go up and they like to see how much money they have saved for college.

So I mentioned earlier having a goal in mind and a tool that we have to help you with what that goal might be. And this is where we are now. This is Mephis College Planning Tool. And this reminds me, you know, I've been talking about questions that I've been getting over the years from families that a call that I would get would be maybe a dad or a mom of a newborn.

And, you know, they wanted to have college paid for their newborn child by the time they got there. they would want to know how [00:22:00] much money that they would need to put away every month in order to make that happen. And you know, that was really tough because I love that they wanted to do it, uh, but it's really, that's a really hard question to answer because there's so many things we don't know yet.

We don't know where the child will be going to college, number one. We don't know what financial aid they might receive. So this tool can help you with that. So you can create. an account as a family. And as part of that account, you put in the child's age and they would calculate what age or what year the child will be entering college.

And then you can look at types of colleges. You can look at specific colleges and see based on the tuition increases of these colleges and college types, what my tuition be by the time they enter college. Then you can put in how much money you have saved and how much money you are saving on a regular basis.

and you can fool around with the rate of return and say, you know, go 6%, 7%, for [00:23:00] example, whatever it may be, and figure out how much money you may have saved by the time you get there. Um, lastly, if you put in your income, you can get an idea of how much financial aid you might be eligible to receive. So if all goes well, you should have some idea of the cost of college by the time your student is ready to go to college, the financial aid you might receive, how much savings you may have.

And then the shortfall. So you can see in this example here, we have a yearly cost of 59, 995, 7, 073 in gift aid, that's grants and scholarships, that's financial aid that does not have to be repaid. About 32, 000 is what that family might have saved based on the calculations, leaving them a shortfall for the year of 20, 920.

So, You know, you know, by this point, then what the picture looks like, you know, if [00:24:00] you should be looking at less expensive colleges, if you should start saving more, if you should start looking at outside scholarships to apply for, there's all sorts of things you can do on this tool. This is, I think, the heart of it.

But it's a great tool to use to give yourself some idea of where you are on this pathway. Now, another thing I like to mention, and it goes towards our point about using time to your advantage, is compound interest. It's not just what you can afford to put away, But the value that grows on that, and 529s grow with compound interest, meaning interest that accrues on interest.

And so what that means is that starting earlier has an outsized impact. Just to give you an idea, this example, Julie starts saving 50 a month in a 529 account when her child is first born, versus Jonathan, who starts saving 100 a month in a 529 account beginning when his child is in second [00:25:00] grade. So I'm seven years later, but I'm doubling up to try to make up for it.

Who is going to have more money? when their child turns 18. Okay. And of course it's Julie. So you see here, Julie starts saving 50 per month in a 529 when her, uh, child is born. She has 21, 536. Whereas I, I make it close, but I'm at, uh, 19, 798. But you can see, uh, She actually had to contribute only 10, 800 and earned 10, 736, almost just as much.

Now this assumes consistent monthly saving until the child turns 18 and an annual investment return of 7%. So it's that hypothetical scenario. But in that hypothetical scenario, this is how it would shake out. Whereas I had to put in 13, 200 of my [00:26:00] own money, um, to, to earn 6, 598 and come up with seven, uh, 19, 798.

So I would never say that it's too late to save. In fact, I tell people to save, you know, when they have seniors in high school. Um, or when they're in college already, I still tell people to save because anything you save is something you don't have to borrow Uh, this really does show the impact that Starting early can can have from parents is how do people pay for college?

So this is what we're going to talk about and I also want to reference something else which is That it's common every summer, essentially, when tuitions get set, for there to be stories in the news about it now costs X amount of dollars to go to this college in the area. It's usually the most expensive college.

Um, so people do have it in their heads that it costs that amount to go to college per se. So what I want to leave you with in this slide, [00:27:00] one of the things is that, There's a lot of different types of colleges and a lot of different costs associated with college. It's not quite as simple as college now costs 60, 000, 70, 000, 80, 000 a year.

Those prices that are often the focus of news stories are, again, the most expensive colleges. And those are typically four year private colleges, right? So that's the first one that we're going to tackle. Now, this data comes from the College Board. The College Board is the organization that does the SAT and the AP programs.

They also do research, um, and they put out research publications. And one of them is the, is the publication that we're going to quote from today, which is strength trends in student pricing. And so that's just what it sounds like. It's a national survey of different costs of colleges throughout the country.

And so for the four year private colleges, They're typically the most expensive in terms of sticker [00:28:00] price. What everything costs before financial aid. So tuition, fees, food and housing, books, supplies, transportation. You take all of those expenses, which You may or may not be paying all of those, um, but all those expenses together is what's called the cost of attendance.

And every college has their cost of attendance. And so, uh, for four year private colleges, the national average of the yearly cost of attendance is 60, 420. Now that varies from region to region, uh, and from college to college, but the national average is 60, 420. And that includes everything. So tuition fees, food, housing.

book supplies, transportation, and other expenses. If you go to a public college or university, they tend to cost less, especially if you go to a public college or university in the state that you live in. So if you're an in state resident going to a public college that is in your state, [00:29:00] you get a tuition discount.

So for in-state residents, the average cost at a four year public college per year is $28,840. If you go to a public college or university outside of your state of residence, you lose that tuition discount in most cases. Um, but even still, the cost tends to be a bit lower. So $46,730. So then again, this includes everything.

Uh, the third option that we have here are vocational schools, and it's tricky to get, uh, uh, costs on vocational schools because there are a lot of different programs, and voc when I say vocational schools, uh, or vocational programs, I mean certificate programs, programs that don't end in degrees, so think about things like HVAC, um, carpentry, plumbing, um, manufacturing, cosmetology, massage therapy, places like that.

[00:30:00] And so this figure is actually not from the college board. They don't do those types of programs. I don't survey those types of programs. It's from a publication called value colleges, university, community college, or trade school, which makes the most economic sense. And the figure that I have is less than 33, 000 for the entire education.

And again, it's tricky because it could be far less than that. There's just so many different types of programs and different costs associated. Uh, but you see here 33, 000 for the entire education or less, um, as compared with anywhere from 28, 000 to 60, 000 for each year for a four year program. And so there's quite a difference in cost there.

And again, A lot of vocational programs can be offered through the two year public community colleges anyways, and talking about the two year public community colleges, they are the lowest sticker price, uh, options, almost [00:31:00] always, for, for colleges. So, um, the national average for a two year public community college is 9, 890, not including, including food and housing.

Um, So, what I would like you to take from this slide is that there are a lot of different types of colleges, a lot of different costs associated, it's a range, it's not quite as simple as colleges now costs this, and There are a lot of different costs that make that up, right? So tuition fees, those are billed expenses, but food, housing, books, supplies, transportation.

Those costs are going to vary by student a lot. And by, by circumstance a lot. Um, and then finally, the important thing is that this This is all sticker price. It doesn't take into account financial aid. So this is before financial aid. And as I said before, the fact is, is that most families will be eligible for some level of financial aid.

And just to go over financial aid [00:32:00] again. To give you a number, over 177 billion in financial aid was awarded to students in the most recent year for which we have data, which is 2022 2023. And I like to say that because, you know, people really do understand that college can be expensive. carry these high costs, but they really don't have an idea of just how much financial aid is granted every year.

And as I mentioned before, this can be awarded using two metrics, merit based or need based financial aid. And you may qualify for both, uh, or you may qualify for one or the other. And once again, most families will be eligible for some level of financial aid. So once you. do apply for financial aid and hopefully you get a good financial aid offer, a lot of families are going to be facing a balance due.

And, and once you take financial aid into account and you do have a balance due, there's only three ways [00:33:00] that you can pay that balance. So past income, meaning any savings that you may have, present income, meaning the salary that you're earning while your student is in college. Um, and when I'm talking about present income, I want to talk about payment plans because not every parent or every student knows that these exist.

And essentially they are plans that you can get on and pay a small fee and set up an amount that you can pay every month. And every dollar of that then goes against tuition. So, um, you know, if you can afford to pay 200 every month and you're paying that over, over 10 months, that's 2, 000. It's 2, 000 that you're paying right off the bill.

2, 000 you don't have to borrow and don't have to pay interest on because once you finish your financial aid, your savings, and your present income, the only thing that is left is, you know, Future income, meaning loans. Um, so [00:34:00] we really want to maximize. every avenue before we get to loans as we know there's a lot of discussion a lot of anxiety and a lot of student loan debt so we want to avoid that what you can do now is start saving if you haven't started saving for college you can talk to your child about college and start to foster an interest in different types of programs or different colleges.

You can go online to MIFA. org and please do to learn more about college costs and use some of our tools to estimate cost and estimate savings. You can sign up for more webinars at MIFA. org. Please join our email community. We'll send you one or two emails a month with information that will be important to you based on the age or grade of your child or children.

All right, I told you I was going to let you know of our social media information, and here it is on Facebook, Instagram, X, formerly Twitter, LinkedIn, [00:35:00] YouTube, and the information for the MIPHA podcast. So you should feel free to keep in contact with us over social media. And if you have any questions, once again, there is our phone number, 800 449 MIPHA, and our email address, collegeplanningatmipha.

org. Thank you.