Oregon Tax Consultants Practice Exam

How is a College Savings Plan primarily set up?

1. By taking out a loan

2. By saving using a designated trust

3. By investing money for a designated beneficiary to go to college

4. By making small monthly payments

The correct answer is: By investing money for a designated beneficiary to go to college

A College Savings Plan is primarily designed to help individuals save for future education expenses, typically for a child or a designated beneficiary. The plan operates by allowing contributions to be made into an investment account, which can then grow over time due to the potential return on those investments. The funds accumulated in the plan are specifically earmarked for qualified higher education expenses, such as tuition, fees, and room and board. The structure of the College Savings Plan encourages individuals to invest money for future educational needs, making it a strategic vehicle tailored for education savings. This focus on investment for the benefit of future college expenses distinguishes it from simpler saving mechanisms or financing options, emphasizing the proactive nature of planning for educational costs. The other choices do not accurately describe the primary setup of a College Savings Plan. Taking out a loan would imply borrowing money rather than saving, while saving using a designated trust may involve more complex arrangements that are not the core function of a typical College Savings Plan. Lastly, making small monthly payments may be a method of contributing to the plan, but it does not encapsulate the overarching purpose of the plan itself, which is investment for educational attainment.