2019-2020 Annual Report
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2019-2020 ANNUAL REPORT Dear Fellow Pennsylvanians: On behalf of the Tuition Account Program Advisory Board, I am pleased to present the annual report of the Pennsylvania 529 College and Career Savings Program (PA 529) for fiscal year 2019-20. Since the program’s beginning it has helped more than 129,710 students pay for higher education expenses. The program has paid more than $4.1 billion to cover these expenses. 31,014 students used PA 529 accounts to pay $464.7 million for their higher education this year alone. PA 529 continues to excel by virtually any metric. The total accounts of both the Guaranteed Savings Plan (GSP) and the Investment Plan (IP) grew to 250,968 which is a 5.12% increase from last year. Total account owner contributions grew by 10.84% to $652 million —bringing the total assets of PA 529 under management to $5.52 billion, an increase of 6.15% from the previous year. The PA 529 IP was awarded the Morningstar Silver RatingTM, an upgrade from it’s first-ever Morningstar Bronze RatingTM last year. These ratings put the PA 529 IP in the “Top 529 College Savings Plans” and among the elite “Best in Class” plans. Nationwide, only 14 plans rate as Silver (11) or Gold (3). It should be noted that the PA 529 IP is one of only three 529 plans across the nation whose rating rose from neutral to silver in just two years. These ratings recognize the hard work of Treasury over the past few years to improve the IP through age-based investment options, portfolio diversification, fee reductions, and overall better oversight of the plan. This designation will help us continue to make improvements that will help Pennsylvania families save for higher education costs. The IP was also able to lower fees again for account owners. The reduction of 0.005% was a result of an increase in assets under management. Treasury anticipates further reductions as assets continue to grow and meet new thresholds. This new reduction continues a multi-year record of working to reduce fees for PA 529 savers. For the eighth consecutive year, the PA 529 GSP is more than fully funded, at 127.30%. Subsequent to the end of the Fiscal Year, the GSP’s actuarial status was 129.38% as of September 30, 2020. While the PA 529 program continues to grow, the addition of Keystone Scholars is making a significant impact across the Commonwealth, and helping families start saving as early as possible. The program, that offers $100 starter deposit into a PA 529 GSP account for every baby born or adopted by a Pennsylvania family, started statewide in 2019, following the passage of legislation in 2018 and currently has more than 200,000 participants. Keystone Scholars started in 2018 with a demonstration project in six counties. Researchers have helped us conclude that the availability of Keystone Scholars has a positive impact on families opening PA 529 accounts during the first year of their child’s life. Families in pilot counties were twice as likely to open a PA 529 account during their child’s first year than those in other counties—this was true across all demographics. This promising finding shows the power of Keystone Scholars and the impact it can have on every new Pennsylvanian. The program helps jumpstart savings for every child without using any taxpayer funds. Keystone Scholars is funded by existing earnings dollars by the GSP and philanthropic donations. We are excited by these accomplishments, but even more so by the bright future for the PA 529 College and Career Savings Program. Helping families save for postsecondary education is important not only for their individual goals, but for the well-being of the commonwealth’s economy, workforce, and next generation. Sincerely, Joe Torsella Pennsylvania State Treasurer TABLE OF CONTENTS INTRODUCTION 1. Brief Program Overview. 2. Program Administration. 3. Advisory Board Members. PROGRAM ACCOMPLISHMENTS 7. PA 529 IP Awarded Morningstar Silver RatingTM 7. Keystone Scholars Program Continues to Help Families Most in Need. 8. PA 529 GSP Enrollment Fee Eliminated. 9. Record Number of Families Saving at Record Levels 13. $465 Million to Help Make Higher Education Possible For 31,000 Students. PROGRAM CHANGES 17. Minimum Contributions Reduced. 17. Qualified Education Expenses Expanded to Include Apprenticeships and Loans. 17. COVID Response. PA 529 GUARANTEED SAVINGS PLAN 21. How the PA 529 Guaranteed Savings Plan Works. 23. PA 529 GSP Fund Exceeded a 100 Percent Funded Actuarial Status. 23. PA 529 GSP Contributions and Assets Continue to Grow. 24. The PA 529 GSP Remains a Successful, Lower-risk College and Career Savings Plan. PA 529 INVESTMENT PLAN 29. PA 529 IP Contributions Surpassed all Previous Years. 31. PA 529 IP Investments saw Growth of Over Four Percent. SUBSEQUENT CHANGES 39. PA 529 IP Fees Reduced Again. 39. PA 529 IP Investment Option Changes. FINDINGS AND RECOMMENDATIONS 43. Findings and Recommendations. APPENDIX INTRODUCTION Joseph M. Torsella, Pennsylvania State Treasurer Brief Program Overview. The Pennsylvania 529 College and Career Savings Program provides one of the best ways to save for higher education. It is an easy and tax-efficient way to make higher education affordable. To meet the needs of nearly anyone who wishes to invest for higher education, Pennsylvania offers two distinct plans – the Pennsylvania 529 Guaranteed Savings Plan (PA 529 GSP) and the Pennsylvania 529 Investment Plan (PA 529 IP). The PA 529 GSP is a lower-risk way to save for not only two- and four-year colleges and universities but also many trade and vocational schools. When used for higher education, growth is based on college tuition inflation. For example, if a family has saved enough for one or 120 credits at a Pennsylvania State System of Higher Education university, they will have enough for that many credits at that university in the future – no matter how much tuition has increased. It can be used at any college, university, or trade school that is eligible to participate in federal student aid programs, elementary and secondary school tuition expenses up to $10,000 per year, and to pay for certain eligible apprenticeship costs. And, even if the account is not used for education, the minimum amount refunded is the remaining principal, minus any fees. The Pennsylvania Treasury oversees the investments. Administered through the PA 529 GSP by the Pennsylvania Treasury Department, Keystone Scholars is Pennsylvania’s statewide Child Development Account (CDA) program. It provides a $100 starter deposit for higher education to every Pennsylvania child at birth.1 Research shows that a child with even a modest amount of higher education savings is three times more likely to continue on to a 2- or 4-year college and four times more likely to graduate.2 Keystone Scholars sets the expectation at birth for every child in Pennsylvania to pursue some form of postsecondary education and it encourages families to start saving on their own early. The starter deposit and its earnings can be used on qualified expenses at any type of postsecondary institution, both in and outside the state. The program’s second plan, the PA 529 IP, offered 17 different investment options during the period covered by this Annual Report, including three age-based options, provided by The Vanguard Group. These options include varying asset allocations, ranging from 100 percent equities to inflation-protected securities. Both plans provide the same great advantages: • Tax deferral and exemption. Earnings grow tax free and, when used for qualified higher education expenses, are tax exempt. • Pennsylvania income tax deduction. Contributions to both plans are deductible from taxable state income up to $15,000 per beneficiary each year. For a married couple with two incomes of $15,000 or more each, the deduction could total $30,000 per child. • Federal gift and estate tax advantages. Contributions up to $75,000 can be made in a single year ($150,000 for a married couple filing jointly) for each beneficiary and prorated over five years for federal gift and estate tax purposes. And, while contributions are considered completed gifts and are no longer part of the contributor’s estate, the contributor (if the account owner) retains complete control – including the ability to take back contributions at any time for use toward any other purpose (subject to applicable taxes and penalties). • Pennsylvania inheritance tax exemption. Assets in a PA 529 account are not subject to Pennsylvania inheritance tax, which, depending on the heirs, could be a savings of up to 15 percent of the assets. • No income restrictions. Unlike most other tax advantages for saving (like the American Opportunity Credits, formerly the Hope Credit or the Lifetime Learning Credit, and Roth IRAs), there are no income restrictions to limit who can benefit from a 529 plan’s tax advantages. • Federal bankruptcy protection. Assets in a PA 529 account are protected in federal bankruptcy proceedings, depending on when contributions were made and the value of the account. 1 Includes babies born after December 31, 2018 who are adopted by PA residents. 2 Elliott, W., Song, H-a, & Nam, I. (2013). Small-dollar children’s saving accounts and children’s college outcomes by income level. Children and Youth Services Review, 35 (2013), p. 560-571. https://csd.wustl.edu/publications/documents/wp13-06.pdf. 1 The Pennsylvania 529 College and Career Savings Program • Protection from creditors. Assets in a PA 529 account are protected in state court proceedings from creditors of the account owner and/or the beneficiary. • State financial aid advantage. Assets in a PA 529 account are not counted in determining state financial aid eligibility.