The gift of education

My grandfather was the eldest son of a poor tenant farmer in County Kerry in the southwest of Ireland. In 1912, when he was 13 years of age, he won a small prize in an agricultural contest sponsored by the local squire. This landowner then took an interest in my grandfather’s education and paid for him to attend University College Cork.

While there is much more to the story, the end result of this gift of a college education was his financial success, which led in turn to a college education for each of his three sons and each of his thirteen grandchildren. Almost everything that we, his grandchildren, have achieved and enjoyed in life since has been, to some extent, a dividend from that original gift of a college education.

The hour-glass economy

In America, one hundred years later, a college education is a gift of even greater potential value, largely because of a changing economic landscape.

As the economy slowly recovers from the financial crisis and deep recession of 2008-2009, most Americans believe we are still in recession. While corporate profits have rebounded strongly to new record highs, the unemployment rate, at 8.2%, remains very high and is only slowly falling. Moreover, as highlighted by the “Occupy” movement of the last year, the gap between economic winners and losers has continued to widen.

One measure of this can be seen in Exhibit 1, which displays the share of taxable income received by the poorest 90% of families.1 In 2007, this share fell to just over 50% of total income, the smallest percentage for any year since 1917, before rebounding slightly in the last three years. The causes of this trend are well known. For many years, a manufacturing job represented a road to a middle-class income. But the manufacturing sector, as a source of employment, has been in decline for decades, accounting for less than 9% of U.S. payroll jobs today compared to over 30% in the 1950s.

The reasons behind the long-term decline in manufacturing jobs are also clear. In the last two decades, communism has relaxed its icy grip in East Asia and collapsed altogether in Eastern Europe. This reality, combined with today’s extraordinary information technology, has flooded the world economy with hundreds of millions of workers quite willing to work for very low wages. This doesn’t hurt Americans in high-skilled service jobs which are difficult to outsource. But it has been devastating to unionized manufacturing jobs. Other factors have also contributed to rising income inequality. Many jobs which required some skill or expertise have been made simpler by automation, and large numbers of illegal immigrants in the United States have eroded wages for jobs in the low-skilled service sector.

Dr. David Kelly, CFAManaging DirectorChief Market StrategistJ.P. Morgan Funds

Dr. David Kelly is the Chief Market Strategist for J.P. Morgan Funds. With over 20 years of experience, David provides valuable insight and perspective on the markets to thousands of financial advisors and their clients.

Throughout his career, David has developed a unique ability to explain complex economic and market issues in a language that people understand. He is a keynote speaker at many national investment conferences. David is also a frequent guest on CNBC and other financial news outlets and is widely quoted in the financial press.

The gift of education

EXHIBIT 1: A GROWING INCOME GAP

Percent of income received by poorest 90% of U.S. households, 1917-2010

45%

50%

55%

60%

65%

70%

75%

’17 ’37 ’57 ’77 ’97 ’07 ’10

1 See Income Inequality in the United States 1913-1998 by Thomas Piketty and Emmanuel Saez, Quarterly Journal of Economics, 118(1), 2003, 1-39, with updated data from March 2012.

2 See Educational Attainment in the United States: 2007, U.S. Census Bureau. Full-time workers only.3 See Health, United States, 2010, U.S. Centers for Disease Control and Prevention.4 See Voting and Registration in the Election of November 2008, May 2010, U.S. Census Bureau.5 See Consumer Expenditures in 2009, Table 13.

Despite a tough last decade, on average, the American economy is growing. But this is an “hour-glass economy,” where the middle is getting squeezed and the gap between rich and poor is rising. A critical question facing all parents in America is how to ensure that their children end up as winners rather than losers in an increasingly competitive economic rat race.

The financial benefits of a college education

For Americans, education, and particularly a college education, provides the best opportunity to rise rather than sink in this economic tide. In 2010, according to the Census Bureau, the average earnings of an adult lacking a high school diploma were $20,911. Getting that diploma boosted earnings to $31,003. Adding a bachelor’s degree increased annual earnings to $57,621, and those with an advanced degree such as a master’s, professional or doctorate degree had average annual earnings of $83,841.2

In addition, the economic advantages of a college education have generally risen over time. In 1975, someone with a bachelor’s degree could expect to earn 57% more than someone with a high school diploma, but by 2010, they could expect to earn 86% more. Over the same time period, someone with an advanced degree has seen their average earnings rise from 113% to 270% above those of a high school graduate.

Moreover, the financial benefits of a college degree tend to increase over the course of a career. Looking at 2009 data, as shown in Exhibit 2, someone aged 25-34 with a bachelor’s degree could expect

to earn just over $18,000 more than someone with a high school diploma. But in the same year, the earnings gap between high school and college graduates aged 35-44 was almost $32,000, and it rose to over $33,000 for those aged 45-54. In financial terms, the roads traveled by those with and without a college education split off at the college gates and grow further apart for the rest of their lives.

The social benefits of a college education

While a college education confers benefits in terms of income, it also increasingly defines differences among Americans over a very wide spectrum of social measures, some mundane, some very important. For example:

• College graduates are less likely to smoke. In 1974, according to the Centers for Disease Control and Prevention, 36% of high school graduates and 27% of college graduates smoked.3 By 2009, the incidence of smoking had fallen to 29% among high school graduates but had collapsed to just 9% of college graduates.

• College graduates are more likely to vote. In the 2008 presidential election, 77% of those with a bachelor’s degree and 83% of those with an advanced degree voted, compared to just 55% of those who had only completed high school and 39% of those who didn’t finish high school.4

• College graduates are more likely to own a home. In 2009, 80% of those with an advanced degree and 75% of those with a bachelor’s degree owned their own home compared to 65% of those who had just completed high school.5

EXHIBIT 1: A GROWING INCOME GAP

Percent of income received by poorest 90% of U.S. households, 1917-20101

EXHIBIT 2: COLLEGE EDUCATION, A LIFELONG ADVANTAGE

Average earnings by education level completed2

Age 25-34 Age 35-44 Age 45-54 Age 55-64$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000 High school diploma

Bachelor’s degree

Advanced degree

• College graduates are less likely to be unemployed. In March 2012, the unemployment rate among those with just a high school diploma was 8.0%, compared to just 4.2% among those with a college degree.6

And there are many other aspects of the college advantage. People who have attended college have lower divorce rates7 and are less likely to have a gambling problem.8 College-educated mothers are more likely to breastfeed their infants.9 College-educated parents are more likely to talk with their children about community, national and world events and to save for the college education of their own children.10

This is a long list and could easily be extended further. By almost every important measure of financial success and social fulfillment, people with a college education fare better in the American economy and society of the 21st century.

The cost of a college education

While the benefits of a college education have never been clearer than in today’s society, many parents assume that a college education is financially unattainable. Sending a child to college is expensive.

However, the idea that college costs have soared out of the reach of most middle-class families is probably exaggerated.

First, while college costs have risen fast, they have not risen quite as fast as many people think.

As shown in Exhibit 3, over the past 15 years, according to the College Board, in-state tuition and fees at four-year public institutions have risen by a jarring 7.0% per year. However, room and board costs (which are actually a bigger share of education costs for the average student) have risen by a more manageable 5.2%.11 Once other expenses, such as books, transportation and sundry items are included, along with grants and federal tax breaks, total net costs have risen by an estimated 4.1% per year over the last 15 years — high but not ridiculously high, given an annual increase in per capita disposable income of 3.7% per year over the same period.

Overall, the all-in net average cost of a year of education for an in-state student at a public four-year institution in the 2011-2012 college year is approximately $16,295 — certainly a considerable expense, but not beyond the means of most households in America given some financial planning.

A plan for a college education

The stock market and college savings plans can provide most Americans with the tools to finance a college education for their children. The future is, of course, unpredictable. But as an example in Exhibit 4 shows, a lump sum of $18,250 invested at the start of 1993 and allowed to grow tax free over the next 18 years in line with the S&P 500 should have been roughly enough to finance the total costs

6 See Employment Report, November 2011, Bureau of Labor Statistics.7 See Cohabitation, Marriage, Divorce and Remarriage in the United States, July

2002, Centers for Disease Control and Prevention.8 See National Survey on Gambling, conducted by the National Opinion Research

Council.9 See Health, United States, 2010, U.S. Centers for Disease Control and Prevention.10See Education Pays, 2010, College Board.11 See Trends in College Pricing, Table 7, The College Board, 2011 and J.P. Morgan

Asset Management estimates.

EXHIBIT 3: GROWTH IN GROSS TUITION, NET TUITION, FULL COST

OF COLLEGE AND CPI

Overall college costs have not grown as fast as tuition11 Average annual percentage change, four-year public universities, 1986-87 to 2011-12

Tuition and fees

Room and board

Other expenses

Total netcost*

Consumerprices

After-tax income per head

7.0%

5.2%

4.1%

2.5% 2.5%

3.7%

EXHIBIT 4

Two ways of paying for the class of 2015

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

’96’92 ’00 ’04 ’08 ’10

One-time initial investment of $18,250

Monthly payments of $200

$69,343

$69,517

Assumes fund grows tax free in line with the S&P 500 from 12.31.1993 to 12.31.2011 and is used to cover the cost of a 4-year public institution at $16,295 for the first year, $16,963 for the second, $17,659 for the third and $18,383 for the fourth, for a total cost of $69,299. The above example is hypothetical and is shown for illustrative purposes only.

Source: J.P. Morgan Asset Management.

*Net of Grants and Federal Tax Breaks

The gift of education

of four years of college at the average public institution from the summer of 2011 to the summer of 2015. As an alternative, the same result could have been achieved for monthly payments of $200.

Starting today to plan for a child born this year would involve bigger numbers. But even these bigger numbers pale in comparison with the current $27,000 gap in the annual earnings of those with a bachelor’s degree and a high school diploma.

Given tax breaks and compounding stock market gains, the most financially efficient way to pay for college is probably to invest a lump sum in a college plan early in the child’s life and let it grow. For families who can’t afford this, another option might be a three-way plan where a college education is paid for one-third from a college savings plan, one-third from financial aid or loans and one-third from family income as the child goes through college.

J.P. Morgan is the investment manager and distributor for New York’s 529 Advisor-Guided College Savings Program.

INVESTMENTS ARE NOT FDIC INSURED, MAY LOSE VALUE AND ARE NOT BANK GUARANTEED.

The information in this brochure is intended solely to report on various investment views held by J.P. Morgan Asset Management. Opinions, estimates, forecasts and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views presented are subject to change. The views and strategies described may not be suitable for all investors. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations. This brochure is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. The information in this brochure is not intended to provide, and should not be relied on for, investment recommendations.

Before you invest, consider whether your or the beneficiary’s home state offers any state tax or other benefits that are only available for investments in that state’s qualified tuition program.The Comptroller of the State of New York and the New York State Higher Education Services Corporation are the Program Administrators and are responsible for implementing and administering the Advisor-Guided Plan. Neither the State of New York nor its agencies insures accounts or guarantees the principal deposited therein or any investment returns on any amount or investment portfolio.

Upromise Investments, Inc. and Upromise Investment Advisors, LLC serve as Program Manager and Recordkeeping and Servicing Agent, respectively, and are responsible for day-to-day operations, including effecting transactions. J.P. Morgan Investment Management Inc. serves as the Investment Manager. J.P. Morgan Asset Management is the marketing name for the asset management businesses of JPMorgan Chase & Co. JPMorgan Distribution Services, Inc. markets and distributes the Advisor-Guided Plan. JPMorgan Distribution Services, Inc. is a member of FINRA/SIPC.

New York’s 529 College Savings Program includes two separate 529 plans. The Advisor-Guided Plan is sold exclusively through financial advisors who have entered into Advisor-Guided Plan selling agreements with JPMorgan Distribution Services, Inc. You may also participate in the Direct Plan, which is sold directly by the Program and offers lower fees. However, the investment options available under the Advisor-Guided Plan are not available under the Direct Plan. The fees and expenses of the Advisor-Guided Plan include compensation to the financial advisor. Be sure to understand the options available before making an investment decision.

For more information about New York’s 529 Advisor-Guided College Savings Program, you may contact your financial advisor or obtain an Advisor-Guided Plan Disclosure Booklet and Tuition Savings Agreement at www.ny529advisor.com or by calling 1-800-774-2108. This document includes investment objectives, risks, charges, expenses, and other information. You should read and consider it carefully before investing. JPMorgan Distribution Services, Inc., its parent and affiliates do not provide legal or tax advice. This information is provided for general educational purposes only. This is not to be considered legal or tax advice. Investors should consult with their legal or tax advisors for personalized assistance, including information regarding any specific state law requirements.

May 2012

CPI-GIFT

But maybe the most important thing is the plan itself. Our experience, as parents of two sons (now aged 20 and 23), is that children don’t do what you say, or even what you do, but rather do what you expect of them. Bringing a child up in the full knowledge that you expect them to go to college and that you have planned for them to do so is a powerful motivator of educational effort. A college education is more valuable today than ever before. But the real gift of education isn’t just money — it is the self-confidence it inspires in a child whose family believes they will get to college and demonstrates that belief in a plan to finance it.