In some countries, college tuition fees are quite costly and the burden for covering these costs often falls upon the parents of the student. Consequently, baby college fund savings plans are popular for many parents. People who establish such plans split the cost of college over a lengthy period of time but in many places there are also tax benefits for individuals who start a baby college fund.
In many instances, a baby college fund takes the form of a mutual fund or a brokerage account that contains a variety of stocks and bonds. People wishing to start such a fund must contact a licensed investment broker or a securities agent employed by a local bank. Securities laws in some areas enable individuals to create investment accounts online although people who administer their own accounts do not receive any investment advice from licensed brokers. Typically, a baby college fund has to be opened under the name of the account beneficiary as opposed to the name of the parent or guardian who intends to fund the account.
Conventional bank products such as certificates of deposit (CDs) have relatively low interest rates and over periods of a decade or more CDs and other types of fixed interest accounts are sometimes outpaced by inflation. Consequently, many people prefer to invest in securities because while these vehicles have no principal protections, historically stocks and bonds have grown at a faster rate than CDs over periods of 10 years or more. Some investment companies market portfolios of investments that are specifically designed to hold college funds. Investors who use online brokerage accounts typically have to make their own decisions about which securities to buy.
In some areas, local education authorities operate pre-paid college tuition plans. Generally, people who invest in these plans are able to pay for future tuition costs based upon the current tuition rates rather than the costs that are in place when the classes commence. Anyone wishing to open such a baby college fund must provide the plan operator with the name and date of birth of the fund beneficiary. Many of these plans have to be paid for with single premium payments although some authorities allow donors to set up recurring monthly plan contributions.
Under national and regional tax laws, many people are able to claim tax deductions for educational expenses such as college tuition fees. Anyone claiming such a deduction must detail the amount of the tuition fees on their tax returns. In many instances, parents and guardians can claim tax deductions but extended family members and other donors are not eligible to claim such deductions. Many nations afford preferential tax treatment to college savings accounts which mean that the funds inside a baby college fund grow on a tax-deferred basis. Either the donor or the beneficiary may have to pay taxes on the account proceeds if funds are withdrawn for any purpose other than tuition or other types college fees.