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What Is a Prepaid College Fund?

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  • Written By: Jim B.
  • Edited By: M. C. Hughes
  • Last Modified Date: 21 November 2016
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In the United States, a prepaid college fund is a savings fund that allows parents or grandparents to pay some or all of their descendants' college tuition well before they actually enter college. This allows them to lock in the prices for the college at current levels, which is beneficial considering the college costs are constantly on the rise. Those endowing a prepaid college fund may pay for all aspects of the tuition or may pay for just a portion and can increase the amount paid by making installments. The money saved must be used for college education and usually must be spent on a publicly-owned college in the state where the students reside.

Affording college education for their children is one of the biggest concerns for parents. There are great benefits for children who receive such an education, but the cost of college tuition has become increasingly prohibitive. As a result, parents are often looking for novel ways to save money for the future when their children will make the journey to college. One method of saving is a prepaid college fund.

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A prepaid college fund is usually administered by the state where those endowing the fund reside. The parents of grandparents can put as much money into the fund as they can afford, and it goes toward tuition credits at current prices. These credits may be used for actual college classes or for room and board at the university in question when it comes time for the children to go to college.

What makes a prepaid college fund so attractive is that it locks in college prices at their current amount. If these funds are begun when the children in question are very young, the difference in tuition between that time and the time when they are old enough for college could potentially be huge. Another way to look at the fund is as an investment. Whatever the tuition price differences in the two time periods turn out ot be represents the return on the investment.

One other positive aspect of a prepaid college fund is that it generally given tax relief in the state where it is initiated. The downside, however, is that it is generally only useful if the children in question go to state colleges in their home state. If those children decide to go elsewhere, the money in the fund may not be able to be used for its intended purpose.

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