Free CFP Exam General Principles of Financial Planning Practice Questions

The debt avalanche method (highest interest rate first) is mathematically optimal — it minimizes total interest paid over the repayment period. The debt snowball method (smallest balance first) may generate greater psychological motivation because early complete payoffs create 'wins' that help clients stay committed to the repayment plan. Neither is universally superior; the choice depends on both the mathematical outcome and the client's behavioral tendencies and motivation.

A prepaid tuition plan allows families to purchase future tuition credits at participating public institutions at today's prices, hedging against tuition inflation. If the student attends a non-participating institution, value may be limited. By contrast, 529 savings plans invest in portfolios with returns depending on market performance but can be used at any eligible institution for qualified expenses.
Choice A is incorrect because prepaid plans lock in tuition rates rather than investing in equities, and savings plans are market-linked, not fixed-rate.
Choice C is incorrect because both plan types have contribution limits and neither has MAGI-based phase-outs for contributions.
Choice B is incorrect because savings plans cover a broader range of qualified expenses including room, board, and supplies, not just tuition.

Present value of a lump sum:
$$PV = \frac{FV}{(1 + r)^n} = \frac{50{,}000}{(1.06)^5}$$
$$(1.06)^5 = 1.33823$$
$$PV = \frac{50{,}000}{1.33823} = \$37{,}363$$

Choice B is incorrect because \$42,000 understates the discount, as if using roughly 3.5% instead of 6%.
Choice C is incorrect because \$39,604 results from discounting at 4.75% for 5 years, not 6%.
Choice D is incorrect because \$35,000 over-discounts, as if using approximately 7.4% per year.