Saving for College Glossaries

529 Plan: A tax-advantaged investment program designed to help students finance the cost of education. There are two types of 529 Plans: Prepaid tuition plans and college savings plans. All states offer at least one type of 529 Plan. Fees, investment options, restrictions, tax advantages, and other features vary depending on the state.

Administration Fee: The cost of administering a plan. Typically expressed as a percentage; a plan with an expense ratio of 2% charges that amount to your plan, reducing your total return by that amount.

Age-Based Fund Portfolios: College savings plan portfolios that shift or revise asset allocation according to the age of the beneficiary. Typically, age-based portfolios invest mostly in stock funds. As the beneficiary grows older investments are made in more conservative vehicles like bond funds.

American Opportunity Tax Credit: An educational tax credit designed to reduce education costs. This credit is an expanded version of the Hope Credit, is available for four years of college, and can be used to cover expenses for books as well as tuition and fees.

Annual Maintenance Fee: Cost of administering a college savings plan. An annual charge to the account of between $10 and $50 is common.

Annual Rate of Return: The rate of return on the investment, expressed as a percentage of the total amount invested.

Annual Report (Form 10-K): A report contains financial information concerning a company's assets, liabilities, earnings, profits, and other year-end statistics. Public companies are required to file an annual report with the Securities and Exchange Commission (SEC) detailing the preceding year's financial results and plans for the upcoming year. The regulatory version is called Form 10-K.

Asset Allocation: A strategy for maximizing gains while minimizing risks in an investment portfolio. Asset allocation divides assets on a percentage basis among different categories of investments like stocks, bonds, and cash.

Beneficiary: The individual who receives or may become eligible to receive the benefits of a college savings plan.

Bond Fund: Mutual fund that invests in bonds. Some bond funds focus primarily on short-term, intermediate-term, or long-term maturities. Bond funds are sometimes also called fixed-investment funds.

College Savings Plans: A type of 529 Plan allowing investment in various mutual fund portfolios or other investments on a tax-deferred basis. Fund proceeds are used to pay college or graduate school expenses with tax-free withdrawals.

Compounding: The process through which the value of an investment increases over time as interest or dividends are reinvested; additional interest or dividends are paid based on the value of the initial investment plus the accumulated interest or dividends already received.

Coverdell Education Savings Accounts (ESA): College savings plan in which contributions grow on a tax-deferred basis and withdrawals are tax-free only when used to pay for a broad range of educational expenses, including private high school tuition. Unlike a 529 plan, an ESA plan has annual contribution limits and income restrictions.

Custodial Accounts: Accounts created for the benefit of a child. An adult controls the funds until the child reaches the age of majority, at which point ownership of the account transfers to the child.

Custodian: An adult who has control over a custodial account.

Enrollment Fee: A fee assessed at enrollment in a college savings plan. Enrollment fees typically range between $20 and $100, although some college savings plans do offer free enrollment.

Exchange-Traded Fund (ETF): A form of pooled investment. An ETF is a "basket" of securities that track a particular market index, like the Standard and Poor 500 Index.

Gift Tax: A tax assessed against a person who gives money or assets to another person without compensation in return.

Hope Credit: An education tax credit designed to reduce education costs. (Now called the American Opportunity Tax Credit.)

Lifetime Learning Credit: An education tax credit designed to reduce the cost of college education. This credit can only be claimed once per tax return regardless of the number of children a parent has enrolled in college at the same time.

Modified Adjusted Gross Income: Adjusted annual adjusted gross income; does not include any IRA deductions, student loan interest deductions, or and other specific deduction types.

Mutual Fund: Types of investment fund that invests in a group of assets like stocks, bonds, and money market funds.

Non-Age Based Investment Options: A college savings plan portfolio that does not adjust asset allocation based on the age of the beneficiary.

Non-Qualified Withdrawal: Withdrawals from a college savings account used for non-college related expenses. Non-qualified withdrawals are subject to income tax plus a 10% penalty on earnings (not on contributions).

Pre-Paid Tuition Plans: A type of 529 plan allowing parents, grandparents, and others to prepay educational expenses for a future student at eligible colleges or universities. Most pre-paid plans do not have residency requirements.

Qualified Education Expense: Expenses approved to be paid for by the proceeds of college savings plans. Withdrawals from a college savings account used to pay qualified expenses are tax-free. Qualified expenses include tuition, fees, books, supplies, and room and board.

Qualified Withdrawal: A withdrawal from a college savings account used at eligible schools for college-related expenses. Qualified withdrawals are made tax-free and cover expenses like tuition, room and board, book and supplies, and other items, like computers, used for educational purposes.

Sales Charge (Front-End Load): Fee charged when mutual fund shares are purchased.

Stock Fund: Mutual fund that invests primarily in stocks. Different stock funds may focus on small, mid-sized, or large corporations, others on specific market sectors. Stock funds are often also called equity funds.

Tax Deductible: An expense that can be deducted from reported income on tax returns, reducing the amount of tax paid.

Tax-Deferred: Taxes that can be paid at a future date, typically when shares of certain investments are sold. Tax-deferred mutual funds, for example, can enjoy increased interest and earnings because more money is compounded in the fund.

Uniform Gift to Minors Act (UGMA): A tax-advantaged custodial account for college savings. An adult acts as the custodian for the account, making all investment decisions until the beneficiary reaches the age of majority. At majority the beneficiary controls the account and any assets held in the account. UGMA accounts can only hold money and securities.

Uniform Transfer to Minors Act (UTMA): A tax-advantaged custodial account for college savings. An adult acts as the custodian for the account, making all investment decisions until the beneficiary reaches the age of majority. Similar to UGMA accounts, UTMA accounts can also hold real estate and other asset types.

U.S. Series EE and I Savings Bonds: Tax-advantaged provided by the government. Interest from these bonds is usually exempt from state and local taxes and can also be tax free if used to pay for qualified higher education expenses.