For long-term investors, a market crash is normally not a big deal. With decades before retirement, you will endure many more ups and downs before you reach the finish line.
For college savers, it may be a different story.
If your 529 plan has taken a hit and your child is going to college this year or next, that might seem like a really big deal. Presumably, you intended to use these funds over the next few years. There isn’t necessarily a long time for a market rebound.
In fact, the plan’s total 529 assets have grown from $452 billion in December 2021 to $432 billion in March 2022, according to ISS Market Intelligence, all due to market performance.
“Market volatility impacts people in all sorts of ways, and we experience that in the 529 space too,” says Chris Lynch, head of the education savings business for the financial giant. TIAA. “That’s a real problem, because even in date-to-list strategies, you might have some equity exposure.”
Admittedly, the 529 space is a bit different from other investment areas. The majority of college savers across the country are in some version of a target date fund, where allocations automatically shift over time to safer areas like bonds and cash.
Ideally, by the time your child enters college, these assets are not at serious risk. “Two-thirds of the 529 parent users are in age-based investment options, and 10% of the 529 investments are in money market, FDIC-insured, or stable-value investment options,” Paul notes. Curley, Associate Director of 529 Solutions at ISS Market Intelligence. These parents should be “well prepared for the fall semester.”
But savers not into age-based options are likely wide-eyed right now about what’s happened to the stock market. After all, the S&P 500 is down about 18% year-to-date and the Nasdaq is down more than 26%. For these investors, there is a relatively short track ahead of them to adjust course or take action. The experts have some advice if you’re in this boat:
Delay withdrawals if possible
It’s natural to think that you should start withdrawing 529 assets as soon as your child sets foot on a college campus. Not necessarily, says TIAA’s Lynch. “Maybe there’s a misconception that a 529 should be used during your child’s first year,” he says. “This is not the case.”
You have the ability to mine these assets whenever you want. So in some cases, it may make sense to start receiving more distributions in the latter half of your student’s college career, once the market has (likely) had more time to recover. But this requires you to cover the immediate costs in other ways, such as from your current income or by having your child pay more.
Having more than one child could also affect your decision making. “If you can avoid taking 529 assets out of the plan while the markets are down, you might be able to cash in on some more college expenses right now and pass those funds on to the next child,” says Catherine Valega, financial planner at Winchester. , Mass. .
Consider the Total Timeline
Different students will have different visions of how they want their college career to unfold. Some may head for a two- or four-year program, while others might consider a master’s or even a doctorate. In this case, your timeline could be stretched considerably and ease the pressure to make immediate decisions and withdrawals.
Reassign if necessary
If you just don’t have the stomach for market volatility, consider putting more assets into safer buckets, if only to help you sleep at night. As an example, the “secured” option in TIAA’s plans will secure your capital and add a stated interest rate between 1% and 1.5% on top, Lynch says.
“It may be prudent to reallocate 529s to add cash or short-term obligations to prepare for the first year or two of college,” says Kyle Newell, a planner in Winter Garden, Florida. “I hate to sell low, but it could go lower from here.
Continue to contribute
Most parents are probably not where they would like to be in terms of 529 assets. So it may be a good idea to keep contributing, even after your child has started college, at the very least to take advantage of state tax breaks, which can be substantial. As an example, the New York State plan offers a tax deduction of up to $5,000 per year, or $10,000 for married couples filing jointly.
Adjust your university choice
If your college savings have really taken a hit and the math just isn’t working out, you can always tweak the equation by changing the projected college.
“You have to work with what you have, so that may mean going to a slightly less selective school to maximize the merit aid rebate,” says David Haas, a financial planner in Franklin Lakes, NJ.
A classic way to save money is to spend two years at a community college and then transfer to an in-state university. “This can be a way to save your 529 plan funds over the past two years,” says Haas. “You’ll get the same degree, but you’ll pay a lot less and end up with a lot less debt.”
Use 529 assets to cover student loans
For those who really hate the idea of cashing in a 529 in a bear market, remember that the Federal Secure Act of 2019 allows the use of 529 distributions to pay off qualified student debt, up to 10,000 $.
“It may be worth the child taking out a $10,000 student loan,” says Ashton Lawrence, a financial planner in Greenville, South Carolina. “This will allow the 529 plan assets to recover. Provide the necessary funds for the school now, and you can use those 529 plan assets to pay off the loan later.
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