For long term investors, a market downturn Usually not a big deal. With decades before retirement, you’ll endure a lot more peaks and valleys before reaching the finish line.
For college savers, it may be a different story.
If your 529 plan takes a hit, and your child is off to college this year or next, it can be a really big deal. Presumably you were planning on using those funds over the next few years. There is not necessarily a lot of time for a return to the market.
In fact, total 529 plan assets fell from $452 billion in December 2021 to $432 billion in March 2022, according to ISS Market Intelligence – all a result of market performance.
“Market volatility affects people in every way, and we experience it in the 529 space as well,” says Chris Lynch, head of education savings business for financial giants. TIAA, “It’s a real issue, because even in enrollment-date strategies, you can have some equity exposure.”
To be sure, the 529 location is a little different than other investment areas. Most college savers nationwide are in some version of target-date funds, where allocations are automatically shifted over time to safer sectors like bonds and cash.
Ideally, by the time your child is entering college, those assets are not in serious danger. “Two-thirds of parents using a 529 are in age-based investment options, and 10% of 529 investments are in money-market, FDIC-insured, or fixed-value investment options,” said an associate of 529 Solutions. Director Paul Curley notes. ISS Market Intelligence. Those parents should be “well prepared for the fall semester.”
But savers who aren’t into age-based options are probably eyeing what happened in the stock market at the moment. After all, the S&P 500 is down about 18% year to date, and Nasdaq down more than 26%. For such investors, there is relatively little runway to adjust course or take action. If you’re in that boat the experts have some bits of advice:
Delay withdrawal if possible
It’s natural to think that you should start taking out 529 assets as soon as your child moves onto a college campus. That’s not necessarily the case, TIAA’s Lynch says. “There’s probably a misconception that the 529 is to be used in your child’s new year,” he says. “It’s not.”
You have the flexibility to tap those assets when you want—so in some cases, having more time to recover after the market (possibly), more in the back half of your student’s college career. It makes sense to start distribution. But it requires you to cover immediate costs in other ways, such as out of current income, or shouldering a larger portion of your child.
Having more than one child can also affect your ability to make decisions. “If you can avoid withdrawing 529 plan assets during a market downturn, maybe you can make a little more cash flow to cover college expenses, and keep those funds out,” says Catherine Velega, a financial planner in Winchester, Mass. Can pass on to the next child.” ,
Consider the total timeline
Different students will have different perspectives on how they want to pursue their college career. Some may lead to a two-year or four-year program, while others may consider a master’s or even a PhD. In that case, your timeline can be significantly longer—and can take the pressure off of making quick decisions and withdrawals.
reallocate if necessary
If you don’t have the stomach for market volatility, consider devoting more assets to safe buckets—if only to help you sleep through the night. As an example, the “guaranteed” option in TIAA’s plans will protect your principal, and add a specified rate of interest between 1% and 1.5% on top, Lynch says.
“The first year or two of college can be a prudent time to reallocate a 529 to add in some cash or shorter-term bonds to prepare for,” says Kyle Newell, a planner in Winter Garden, Fla. “I hate selling short, but it can go down from here.”
Most parents are probably not where they want to be in terms of 529 property. So even after your child starts college, it makes sense to continue to trickle in, at least to take advantage of state tax exemptions, which may be substantial. As an example, New York’s state plan provides a tax deduction of up to $5,000 per year or $10,000 for married couples filing jointly.
Change your college choice
If your college savings have really taken a hit, and the math isn’t working out, you can always change the equation by changing the estimated college.
“You have to work with what you have, so this may mean going to a slightly less selective school to maximize the qualifying aid discount,” says David Haas, a financial planner in Franklin Lakes, NJ.
A classic money-saver is to do two years at a community college and then transfer to a state university. “This can be a way to save on your 529 plan funds for the past two years,” Haas says. “You’ll get the same degree—but pay significantly less for it, and end up with far less debt.”
Use 529 assets to cover student loans
For those who really hate the idea of cashing out a 529 in a down market, remember that the federal SECURE Act of 2019 allows 529 distributions to be used to pay off qualified student loans — $$ of it. up to 10,000.
“It may be worthwhile to take out a $10,000 student loan to the child,” says Ashton Lawrence, a financial planner in Greenville, S.C. “This 529 plan will allow assets to be recovered in time.” Provide the funds you need for school now, and you can use those 529 plan assets to pay off the loan later.”