Nowadays, many people worry about financing their studies. According to a recent report by Edward Jones, less than half of Americans are confident they are currently saving enough for future education spending.
Checking your 529 college savings balance might not be a great convenience either.
Last year, these popular savings plans suffered a setback during a prolonged period of market volatility. According to the College Savings Plans Network (CSPN), the average bank balance at the end of 2022 was $25,630, down from a peak of more than $30,000 in 2021.
Total investment in 529s also declined to $411 billion in 2022, down nearly 15% from $480 billion a year earlier.
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Benefits of a 529 plan
Overall, a 529 plan offers many benefits. In some states, contributions may be tax deductible or credited. Income grows tax-deferred and when you withdraw the money, it’s tax-free if the funds are used for qualifying educational expenses such as tuition, fees, books, room and board, or even apprenticeship programs.
Some states also offer residents additional benefits such as scholarships or grants if they invest in their home state’s 529 plan.
Additionally, you can now transfer a portion of the funds to your student loan tab: up to $10,000 for each plan beneficiary, plus an additional $10,000 for each beneficiary’s sibling.
And from 2024, savers will be able to transfer money from 529 plans to individual Roth retirement accounts with no income tax or tax penalties.
How to take risks into account
The downside is that like any other investment account, these plans are prone to losses.
In general, 529 plans offer age-based portfolios that begin with higher equity exposure early in a child’s life and then automatically adjust so that the portfolio is weighted toward more conservative investments, such as bonds, as college entry approaches.
“An enrollment-based strategy is designed for market volatility,” said Chris Lynch, President of TIAA Tuition Financing.
During a downturn, for example, a beneficiary in third grade with a portfolio heavily oriented towards stocks might see a larger decline, he said, compared to a beneficiary in high school whose portfolio would be more subdued due to a higher allocation to cash and bonds.
Still, the time horizon for college is much shorter compared to most retirement accounts, he added. “We’d love for people to start when their kids are newborns, but most people don’t — that could increase the urgency of a market downturn.”
According to Rachel Biar, Chair of the CSPN and Assistant Treasurer of Nebraska, plan owners have twice a year the opportunity to change their asset allocation if, for example, they feel an overly aggressive portfolio is too unnerving in the current climate. “All plans have options,” she said.
“Long-term thinking about your money is critical, but investing right now can feel risky,” added Mary Morris, CEO of Virginia529. one of the largest 529 plans in the country.
“Fortunately for 529 plans, there are safe investment options that manage market turbulence and provide security.”
Here are Morris’ recommendations for some ways to preserve capital in a volatile year:
- FDIC Insured Accounts. An FDIC-insured portfolio item can be attractive to risk-averse investors or those who have less time before the funds are needed for college education or other qualifying educational expenditures. These interest-bearing deposit accounts are insured by the FDIC up to $250,000 per account holder, similar to other checking and savings accounts.
- Fund with stable value. Stable value funds are a good investment option for those looking to balance low-risk portfolios that offer a stable return that is often better than a money market fund. In recent years, a growing number of 529 plans have begun offering a stable value fund portfolio for college savings investors. In recent market movements, these funds have been among the few investments to post a positive return.
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