Significance

• With the cost of attending college going up so fast, many families have to rely on loans to pay for school. However, loans are becoming harder to get, and the federal government is not increasing student aid programs as quickly as the need grows. So, college funds are becoming a critical component of paying for college.
  
  

Function

• A college fund allows a student (and their family) to save for college over a long period of time, thus lessening the burden of coming up with so much money all at once. In addition, certain college savings accounts provide tax advantages for the family and student. Once a student begins attending school, they use the money in the college fund to help with expenses.
  
  

Types

• There are several types of college funds. For many families, a college fund is just a savings account that has been earmarked by the family as the college fund. Such accounts provide no tax advantages and can actually be used for anything. One type of college fund is called a 529 plan. These are run by each state and provide a way to save for college in which the funds inside the account grow without being taxed. As long as the money is used for college, those earnings are tax-free.
  
  

Benefits

• Many students graduate with very large student loans. These loans have to be repaid, and sometimes the amount of the payments can be hard on the budget of someone just starting out, especially if there is a family involved. A college fund allows the student to graduate with less loan amounts due, and thus, lower payments and lower repayment times.
  
  

Misconceptions

• Although a 529 plan is offered by all 50 states, you do not have to use the 529 plan administered by their state. For example, a student from Alabama could use Florida's 529 plan. Likewise, a student does not have to go to a school in the same state as their 529 plan. A student with a 529 plan administered by Arizona could go to Notre Dame and use the 529 plan assets without penalty.
  
  

Warning

• If using a 529 plan for a college fund, keep in mind that any monies used for something other than college expenses including tuition, books, and room and board can result in a 10% tax penalty on withdrawals. For example, if a young person decides to tour Europe before attending college, any money withdrawn to help pay for the trip would be subject to a tax penalty.