These days, many people are worried about paying for college. Less than half of Americans are confident that they’re currently saving enough for future education expenses, according to a recent report by Edward Jones.
Checking your 529 college savings balance may not provide much comfort, either.
Last year, these popular savings plans took a hit during a prolonged period of market volatility. The average account balance was $25,630 at the end of 2022, down from a high of more than $30,000 in 2021, according to the College Savings Plans Network, or CSPN, a network of state-administered college savings programs.
Total investments in 529s also fell, to $411 billion in 2022, down nearly 15% from $480 billion the year before.
Advantages of a 529 plan
Overall, there are many advantages to a 529 plan. In some states, you can get a tax deduction or credit for contributions. Earnings grow on a tax-advantaged basis and, when you withdraw the money, it is tax-free if the funds are used for qualified education expenses such as tuition, fees, books, and room and board, or even apprenticeship programs.
Further, you can now put some of the funds toward your student loan tab: up to $10,000 for each plan beneficiary, as well as another $10,000 for each of the beneficiary’s siblings.
How to account for risk
On the downside, these plans are susceptible to losses, just like any other investment account.
Generally, 529 plans offer age-based portfolios, which start off with more equity exposure early on in a child’s life and then automatically adjust so as the start of college draws near, the portfolio will be weighted toward more conservative investments, such as bonds.
“An enrollment-based strategy is designed for market volatility,” said Chris Lynch, president of TIAA Tuition Financing.
For example, during a downturn, a beneficiary in third grade with a portfolio heavily weighted toward equities could see a more pronounced reduction, he said, compared with a beneficiary in high school, whose portfolio would be more muted due to a higher allocation in cash and bonds.
Still, the time horizon for college is much shorter compared with most retirement savings accounts, he added. “We’d love it if people started when their children were newborns, but most people don’t — that could drive a little more urgency around a market drop.”
Plan holders have two opportunities a year to change their asset allocation if, for example, they feel that an overly aggressive portfolio is too nerve-wracking in the current climate, according to Rachel Biar, chair of CSPN and assistant state treasurer of Nebraska. “All plans have options,” she said.
“Thinking long-term about your money is critical but right now, investing can feel risky,” added Mary Morris, CEO of Virginia529, one of the largest 529 plans in the country.
“Fortunately, there are safe investment options for 529 plans that can handle market turbulence and provide peace of mind.”
Here are Morris’ recommendations for some ways to preserve capital in a volatile year:
- FDIC-insured accounts. An FDIC-insured portfolio element may appeal to risk-averse investors or those with a shorter time before the funds are needed for higher education or other qualified education expenses. These interest-bearing deposit accounts are insured by the FDIC up to $250,000 for each account owner, similar to other checking and savings accounts.
- Stable value funds. Stable value funds are a good investment option for those looking to balance with low-risk portfolios that boast a steady return, which 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. During recent market changes, these funds were one of the few investments that produced a positive return.