HOW TO PAY FOR COLLEGE

HOW TO PAY FOR COLLEGE What you need to know about federal student aid INVESTMENT PRODUCTS: NOT FDIC INSURED NO BANK GUARANTEE MAY LOSE VALUE

COLLEGE FUNDING PYRAMID LOANS $ BORROWED 3 SCHOLARSHIPS, GRANTS, WORK-STUDY $ AWARDED 2 SAVINGS $ SAVED 1 When planning for how you ll pay for college, you ll want to consider these three sources. How much you ll need from the top two levels will depend on the bottom level -- how much you re able to save. 2

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 n Scholarships, grants and federal work-study programs n 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 will gain by reading the pages that follow. 3

Start with a savings goal First, put a savings plan in place by following these five steps: 1. Determine the cost of college Your financial advisor can help you estimate what college is likely to cost when your child is ready to attend. In the meantime, you can find the current cost of attendance on the website of most colleges. 2. Identify your savings profile: A. Our child will pay B. We ll help as best we can C. We ll fund it all 3. Set your savings goal it may be less than the total cost 4. Choose a savings vehicle 5. Establish a savings schedule The benefits of a 529 plan 529 college savings plans offer several benefits, including: Tax advantages Your investments will grow tax-deferred as long as the money remains in your Scholars Choice account. Withdrawals used to pay for such higher education expenses as tuition, room and board, books, and required supplies are currently free from federal income tax. Account owner control Account owners always maintain control over the account, including the ability to use the money for purposes other than college, should the need arise. 1 The child cannot use the saved money without the consent of the account owner. Flexibility Any U.S. resident, including parents, grandparents, relatives, and even friends of the family, can open accounts for the benefit of anyone. You may change the beneficiary to another qualified family member of the beneficiary without penalty. You can use your account balance nationwide and internationally at any eligible public or private college, university, graduate school, community college or vocational school. Gifting and estate planning Contributions to your account are considered completed gifts and excluded from your federal taxable estate. Up to $14,000 ($28,000 per couple) can be given in a single year without incurring federal gift tax. Similarly, up to $70,000 ($140,000 per couple) can be given as long as there are no additional gifts for five years. 1 The earnings portion of any nonqualified withdrawal is subject to federal income taxes, applicable state income tax and an additional 10% federal tax penalty. 4

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 student loans come at a price. n Scholarships A scholarship is money awarded that the recipient is not expected to pay back. Scholarship amounts can vary greatly, depending on the type of scholarship awarded. n 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. n 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. n 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. 5

Applying for aid The first step in applying for federal financial aid is to complete the Free Application for Federal Student Aid (FAFSA). 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 (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 college-sponsored 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 Uniform Gift to Minors Act/ Uniform Transfer to Minors Act (UGMA/ UTMA) 2 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 3 Owner Assets Income Student 20% 50% Parents Up to 5.6% 22-47% Source of data: Savingforcollege.com. Note: Student and parental income is assessed only above a threshold (the income allowance). 2 Custodial account managed for the benefit of a minor. The account is an irrevocable transfer of assets in a child s name. 3 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: www.fafsa.gov. 6

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 parents 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 nonrelative, 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 in the following year s EFC calculation. As previously mentioned, 50% of the student s income is counted in the EFC calculation each year. Families can now file the FAFSA beginning October 1 for the following academic year (e.g., Oct 2017 for the 2018-19 academic year). And, you can use income tax returns from the prior tax year. Previously, FAFSA filings started January 1 and you would have to estimate your income taxes for the previous year, then update the information once your taxes were filed. Under the new rule, the look-back will be two years beginning with the 2017-18 academic year, and there will be no need to estimate income taxes and later revise them. Please note that the treatment of 529 plan assets for EFC purposes is subject to interpretation and may change from time to time. 7

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 who are 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: 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. 8

Why save for college now The cost of college continues to climb at a higher rate than CPI 5 400% Consumer Price Index New Car Medical Care College Tuition & Fees 347% Competitive job market 350% A four-year degree or certificate would outpace non-college degree or certificate by approximately 63%. 4 300% 250% 200% 177% 150% 100% 81% 50% 16% 0% 1990 1994 1998 2002 2006 2010 2014 2018 Rising cost of higher education 6 NOW 18 YRS $97,061 $191,090 $222,466 4 years of public (in-state) school 4 years of private school $437,982 In the next 18 years, the average total of tuition and fees for public (in-state) and private institutions will increase by 129%. 4 Source: Georgetown University Center on Education and The Workforce, Help Wanted: Projections of Jobs and Education Requirements Through 2018, June 2010. 5 Source: Advisor Perspectives. Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. The CPI is calculated by taking price changes for each item in the predetermined basket of goods and averaging them; the goods are weighted according to their importance. Changes in CPI are used to assess price changes associated with the cost of living. Investors cannot invest directly in an index, and unmanaged index returns do not reflect any fees, expenses or sales charges. 6 Source: 2016 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 (in-state) $97,061 and Private $191,090; In 18 years: Public (in-state) $222,466 and Private $437,982. 9

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, speak with your financial advisor. Why Scholars Choice Because we re different. Our active, multi-manager approach has resulted in solid, long-term results for our investors. The combination of Legg Mason s award-winning independent investment managers, nonproprietary managers, low fees and competitive pricing have made Scholars Choice College Savings Program one of the 10 largest advisor-sold 529 plans, and a solid foundation on which to build a comprehensive college funding strategy. 10

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 www.studentaid.ed.gov/types/grants-scholarships n Also see the two websites listed under Scholarships Work-study n www.studentaid.ed.gov/types/work-study Federal student loans n www.studentaid.ed.gov/types/loans n Perkins Loan n Direct Subsidized Loan n Direct Unsubsidized Loan n 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) Private student loans n Consult with your school s Financial Aid Office or your bank 11

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 over $754 billion 7 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 7 As of September 30, 2017. 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 its affiliates. Investors should consult with their legal, tax and financial advisors concerning their personal circumstances. The information contained herein is derived from publicly available sources, but its accuracy cannot be guaranteed. An investor should consider the Program s investment objectives, risks, charges and expenses before investing. The Program Disclosure Statement at scholars-choice.com/pds, which contains more information, should be read carefully before investing. If an investor and/or an investor s beneficiary are not Colorado taxpayers, they should consider before investing whether their home states offer 529 plans that provide state tax and other benefits such as financial aid, scholarship funds, and protection from creditors that are only available to state taxpayers investing in such plans. Investments in the Scholars Choice College Savings Program are not insured by the FDIC or any other government agency and are not deposits or other obligations of any depository institution. Investments are not guaranteed by the State of Colorado, CollegeInvest, QS Investors, LLC, Legg Mason Investor Services, LLC, or Legg Mason, Inc., or its affiliates and are subject to risks, including loss of principal amount invested. Legg Mason, Inc., its affiliates, and its employees are not in the business of providing tax or legal advice to taxpayers. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any such taxpayer for the purpose of avoiding tax penalties or complying with any applicable tax laws or regulations. Tax-related statements, if any, may have been written in connection with the promotion or marketing of the transaction(s) or matter(s) addressed by these materials, to the extent allowed by applicable law. Any such taxpayer should seek advice based on the taxpayer s particular circumstances from an independent tax advisor. Scholars Choice is a registered service mark of CollegeInvest. CollegeInvest and the CollegeInvest logo are registered trademarks. Administered and issued by CollegeInvest, State of Colorado. QS Investors, LLC is the Investment Manager and Legg Mason Investor Services, LLC is the primary distributor of interests in the Program; together they serve as Manager of the Program. QS Investors, LLC and Legg Mason Investor Services, LLC are Legg Mason, Inc. affiliates. scholars-choice.com 2017 Legg Mason Investor Services, LLC. Member FINRA, SIPC. Legg Mason Investor Services, LLC is a subsidiary of Legg Mason, Inc. 765658 SCHX377075 11/17