529 Advice on a college savings plan in the 2022 market

for long-term investors, market stagnation Usually not a big problem. With decades to go before you retire, you’ll endure a lot of peaks and valleys before you reach the finish line.

For college savers, it can be a different story.

If your 529 plan is a hit, and your son is going to college this year or next, it might seem like a pretty big deal already. Presumably you were planning to use this money within the next few years. There is not necessarily much time for a market recovery.

In fact, the plan’s total assets of 529 fell from $452 billion in December 2021 to $432 billion in March 2022, according to ISS Market Intelligence — all as a result of market performance.

says Chris Lynch, head of educational savings for the financial giant TIAA. “It’s a real problem, because even in record date strategies, you may have some exposure to stocks.”

The 529 area is definitely a little different from other investment areas. The majority of college savers across the country are in some version of the target date fund, where the allocations automatically shift over time to safer areas like bonds and cash.

Ideally, by the time your child enters college, these assets will not be in severe danger. Paul Curley, associate director of 529 solutions at ISS Market Intelligence, notes. These parents should be “well prepared for fall.”

But savers who aren’t into age-based options may now be very familiar with what has happened to the stock market. After all, the S&P 500 is down about 18% year-to-date, and Nasdaq by more than 26%. For these investors, there is a relatively short way in the future to adjust course or take action. The experts have a few tips 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. It’s not necessarily the case, says TIAA’s Lynch. “There may be a misconception that 529 should be used in your baby’s first year,” he says. “no.”

You have the flexibility to click on those assets when you want – so in some cases, it may make sense to start getting more distributions in the back half of a college student’s career, after the market has (probably) had more time to recover. But this requires you to cover the immediate costs in other ways, such as outside of current income, or having your child bear a larger portion.

Having more than one child can also affect your decision making. “If you can avoid taking out 529 of your plan assets while markets are slow, you could probably get a little more cash flowing from college expenses currently, and pass that money on to the next kid,” says Catherine Vallega, a financial planner in Winchester, Massachusetts.

Consider the overall schedule

Different students will have different visions of how they want their college life to go. Some may head for a two- or four-year program, while others may consider a master’s degree or even a Ph.D. In this case, your schedule may be lengthened considerably – and the stress of making instant decisions and withdrawals is relieved.

Re-customize if necessary

If you don’t have the guts to market volatility, consider dedicating more assets to safer dredges – if only to help you sleep at night. For example, the “guaranteed” option in TIAA plans will secure your principal, adding a specified interest rate of 1% to 1.5% on top, Lynch says.

“This might be a wise time to reallocate the 529 to add some cash or short-term bonds to prepare for the first or second year of college,” says Kyle Newell, a planner in Winter Garden, Florida. “I hate selling low, but it could go down from here.”

Keep contributing

Most parents are probably not where they would like to be in terms of 529 origins. So it might make sense to keep participating, even after your kid starts college—at least to take advantage of the state tax breaks, which can be significant. For example, the New York state plan offers a tax deduction of up to $5,000 per year, or $10,000 for married couples who file jointly.

Edit your college choice

If your college savings have already taken a big hit, and the math isn’t working, you can always change the equation by switching up your projected college.

says David Haas, financial planner in Franklin Lakes, NJ

One classic saver is spending two years at a community college and then transferring to an in-state university. “This could be a way to save 529 of your plan money over the past two years,” Haas says. “You’ll get the same grade – but you’ll pay a lot less for it, and end up with a lot less debt.”

Use 529 assets to cover student loans

For those who really hate the idea of ​​cashing out a 529 in a bear market, remember that the 2019 Federal Security Act allows the 529 to be used to pay off eligible student debt — up to $10,000.

“It might be worthwhile for a child to get a $10,000 student loan,” says Ashton Lawrence, a financial planner in Greenville, South Carolina, and that would allow the assets in the 529 plan to recover. Save money for the school now, and you can use the 529 plan assets to pay off the loan later.”

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