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College Savings Plan Mechanisms

When individuals pay for college, few are able to pay the full cost out of pocket, so they rely on a combination of financial aid (grants, scholarships, loans, and/or work-study), earnings, and savings to help defray the costs. College savings plans (CSPs) are federal and state policy instruments designed to encourage individuals to set aside money for paying their children’s future educational expenses. There are two basic types of CSPs: (1) college savings accounts and (2) prepaid tuition plans. These two savings mechanisms are informed by the economic principle of time value of money. In addition, behavioral economics suggests that savings have nonfinancial benefits that promote financial responsibility, teach financial literacy, and encourage children to prepare for college. This entry describes the different types of ...

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