Glossary of College Savings Terms
A tax-advantaged investment program designed to help finance education expenses. There are two types of 529 plans: prepaid tuition plans and college savings plans. Every state offers at least one of these. Tax advantages, investment options, restrictions and fees can vary a great deal from one plan to another.
Administration/Management Fee (Expense Ratio)
Total annual college savings plan operating expenses, expressed as a percentage of the plan’s assets. An expense ratio of 1 percent represents an annual charge to the fund’s net assets—including your proportional interest in those assets—of 1 percent every year.
Age-Based Fund Portfolios
College savings plan portfolios that change their asset allocation according to the beneficiary’s age. Initially age-based portfolios invest primarily in stock funds. As the beneficiary grows older, the stock funds are replaced by more conservative investments such as bond funds.
American Opportunity Tax Credit
An educational tax credit designed to reduce education costs. This is an expanded version of the Hope Credit, available for four years of college and can be used for course materials, in addition to tuition and fees.
Annual Maintenance Fee
Total annual college savings plan upkeep expense. An annual charge of $10–$25 is a typical maintenance fee.
Annual Operating Expenses
The sum of all of a fund’s annual expenses, expressed as a percentage of the plan’s assets.
Annual Rate of Return
The rate of return on your investment, expressed as a percentage of the total amount invested.
Annual Report (Form 10-K)
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. Its regulatory version is called "Form 10-K." The report contains financial information concerning a company's assets, liabilities, earnings, profits and other year-end statistics. The annual report is also the most widely read shareholder communication. Form 10-Ks are available without charge on the SEC’s EDGAR website.
A strategy for maximizing gains while minimizing risks in your investment portfolio. Asset allocation involves dividing your assets on a percentage basis among different broad categories of investments, including stocks, bonds and cash.
Mutual funds that invests in bonds. Some bond funds may focus primarily on short-term, intermediate-term and long-term maturities. Also known as fixed-investment funds.
College Savings Plans
This type of 529 plan allows you to invest in various mutual fund portfolios or other investments on a tax-deferred bases, and to pay college or graduate school expenses with tax-free withdrawals. Many states now offer at least one college savings plan that has no residency restrictions.
The process through which the value of an investment increases exponentially over time as interest or dividends are reinvested, so that additional interest or dividends are always paid based on the value of the initial investment plus the accumulated interest or dividends already received.
Contingent Deferred Sales Charge (CDSC)
A common type of deferred sales charge. The CDSC normally declines each year and is eliminated after a number of years.
Coverdell Education Savings Accounts (ESAs)
College savings plan in which contributions grow on a tax-deferred basis and withdrawals are tax-free if used to pay for a broad range of educational expenses, including private high school tuition. Unlike 529 plans, ESAs have annual contribution limits and income restrictions.
Uniform Gift to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA) accounts, created for the benefit of a child. An adult controls the funds until the child reaches the age of majority, at which point the account transfers into the child’s name.
The adult who has control over a custodial account.
Exchange-Traded Fund (ETF)
A type of pooled investment. ETFs are baskets of securities that track a particular market index, such as the Standard and Poor's 500 Index.
Lifetime Learning Credit
An education tax credit designed to reduce the costs of college education. It can only be claimed once per tax return regardless of the number of children you have enrolled in college at the same time.
Modified Adjusted Gross Income
Your annual adjusted gross income without taking into account any IRA deduction, student loan interest deduction, or certain other deductions as specified under the Internal Revenue Code.
Types of investment funds that raise money from shareholders to invest in a group of assets such as stocks, bonds, and money market funds. Mutual Funds often have a minimum investment amount and a series of fees associated with them.
Withdrawals from a college savings account that are used for non-college related expenses. Non-qualified withdrawals are subject to income tax and an additional 10-percent penalty on earnings.
Pre-Paid Tuition Plans
This type of 529 plan allows parents, grandparents, and others to lock in today’s tuition rates for a future student beneficiary at any of a state’s eligible public colleges or universities, avoiding future tuition increases. There are usually residency requirements and no investment options.
Every mutual fund has a prospectus that provides information about the fund, as required by securities regulators. You can get a prospectus from the fund company (via website, phone or mail) or your financial adviser. Mutual fund prospectuses are available without charge on the SEC’s EDGAR website.
Qualified Education Expenses
Approved expenses for college savings plans. All withdrawals from a college savings account that are used to pay qualified expenses are tax-free. These expenses include: tuition, fees, books and supplies, equipment, and room and board.
Any withdrawals from a college savings account that are used at eligible schools for college-related expenses. These withdrawals are tax-free and cover expenses such as tuition, room and board, book and supplies, and other equipment intended for college use.
Quarterly Report (Form 10-Q)
A report that the SEC requires publicly held companies to file quarterly, that provides unaudited financial information and other selected material. Form 10-Qs are available without charge on the SEC’s EDGAR website.
A set of documents, including a prospectus, which must be filed with the Securities and Exchange Commission before a firm can release its initial public offering and begin trading.
Sales Charge (Front-End Load)
The fee charged when you purchase mutual fund shares. For example, suppose you want to spend $10,000 to purchase mutual fund shares, and the mutual fund imposes a front-end sales charge of 5 percent. You will be charged $500, and you will receive shares with a market value of $9,500. A mutual fund may offer you a discount if you:
- Want to make a large purchase.
- Already hold other mutual funds offered by the same fund family.
- Commit to regularly purchasing the mutual fund's shares.
- Have family members (or others with whom you may link according to fund rules) who hold funds in the same fund family.
You should ask your financial adviser whether these discounts or breakpoints are available to you. Not all mutual funds have a sales charge or load. Many mutual funds, called no-load funds, have no sales charge or load. You can find the sales charge in the fee table in the front of a fund's prospectus.
Mutual funds that invest mainly in stocks. Some stock funds may focus primarily on smaller, mid-sized or larger corporations, or on specific market sectors. Also known as equity funds.
Taxes that can be paid at a future date, typically when shares of certain investments are sold. Tax-deferred mutual funds can increase interest payments because more money is compounded in the fund.
Underlying Fund Expenses
Expenses or fees charged by an investment firm for managing funds for college savings plans. These fees come in addition to any administrative or management fees that a state government charges for running a college savings plan.
Uniform Gift to Minors Act (UGMA)
A tax-advantaged custodial account for college savings. An adult acts as the custodian for the account and makes all the investment decisions until the beneficiary reaches the age of majority. At that point the beneficiary controls the account and any assets in the account. UGMA accounts are limited to holding 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 and makes all the investment decisions until the beneficiary reaches the age of majority. These accounts are very similar to UGMA accounts, but in addition to money and securities, UTMA accounts can also hold real estate, fine art, and patents and royalties.
U.S. Series EE and I Savings Bonds
Backed by the full faith and credit of the United States government, U.S. government savings bonds offer a tax-advantaged way to save for college. The interest from these bonds is usually exempt from state and local taxes and is tax free if used for qualified higher education expenses.