What to Do if Market Drops Took a Bite Out of Your College Savings

Many families saving for college are seeing red — on their 529 plan statements.

Investors in the state-sponsored, tax-favored college savings accounts known as 529 plans often choose age-based or target enrollment date portfolios, which gradually shift the proportion of holdings from mostly stocks to investments that are less volatile, like bonds, as the child nears college age.

But many portfolios keep some exposure to stocks, even after students enroll. And this year both stocks and bonds have performed poorly, as the Federal Reserve has raised interest rates to fight inflation and slow down the economy. Many age-based 529 portfolios for students who are nearing college age or are already on campus were down about 5 to 7 percent midyear, based on results from leading money managers.

That’s better than the double-digit declines in some age-based portfolios for younger children, which are more heavily weighted to stocks — but they have years for their accounts to recover. If your child is entering college soon, the drop hurts.

What’s a family to do?

Your options depend on your overall financial picture, how long you have before your child enrolls in college and whether you have multiple children. “There’s not really a silver bullet,” said Rita Assaf, vice president of retirement and college leadership at Fidelity Investments.

People who are fortunate enough to have other resources, like cash savings, could tap into them to pay educational expenses while waiting for the 529 to recover, said Rachel Biar, chair of the College Savings Plans Network. This is particularly worth considering if your child expects to attend graduate school, she said. Other children, or even grandchildren, can use the 529 funds in the future. Each account is permitted just one beneficiary, but you can change it to a sibling or another family member.

What to Know About Student Loan Debt Relief

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What to Know About Student Loan Debt Relief

Many will benefit. President Biden’s executive order means the federal student loan balances of millions of people could fall by as much as $20,000. Here are answers to some common questions about how it will work:

What to Know About Student Loan Debt Relief

Who qualifies for loan cancellation? Individuals who are single and earn $125,000 or less will qualify for the $10,000 in debt cancellation. If you’re married and file your taxes jointly or are a head of household, you qualify if your income is $250,000 or below. If you received a Pell Grant and meet these income requirements, you could qualify for an extra $10,000 in debt cancellation.

What to Know About Student Loan Debt Relief

What’s the first thing I need to do if I qualify? Check with your loan servicer to make sure that your postal address, your email address and your mobile phone number are listed accurately, so you can receive guidance. Follow those instructions. If you don’t know who your servicer is, consult the Department of Education’s “Who is my loan servicer?” web page for instructions.

What to Know About Student Loan Debt Relief

How do I prove that I qualify? If you’re already enrolled in some kind of income-driven repayment plan and have submitted your most recent tax return to certify that income, you should not need to do anything else. Still, keep an eye out for guidance from your servicer. For everyone else, the Education Department is expected to set up an application process by the end of the year.

What to Know About Student Loan Debt Relief

When will payments for the outstanding balance restart? President Biden extended a Trump-era pause on payments, which are now not due until at least January. You should receive a billing notice at least three weeks before your first payment is due, but you can contact your loan servicer before then for specifics on what you owe and when payment is due.

Student loans are another option, said Akeiva M. Ellis, a certified financial planner in Waltham, Mass. That can buy time for the 529 to recover, and you can now use money from your 529 fund to repay up to $10,000 of student debt. But don’t borrow now expecting to have your debt canceled: Student loans obtained after June 30 aren’t eligible under the forgiveness plan President Biden announced this week.

Losses may tempt you to drain your 529. But that’s typically a bad idea. You’ll risk owing income taxes and a 10 percent penalty on your earnings unless you spend all of what you withdraw on education costs this year.

For those who can’t afford the possibility of more losses, moving at least part of your balance into a less-risky investment within the 529 plan may make sense. You’re allowed to change investment choices twice each calendar year.

Some exposure to stocks and bonds during an account’s drawdown is “appropriate for the typical investor, and occasional short-term losses are to be expected,” Amanda Muir, principal of the education savings group at Vanguard, said in an email. Investors who want to preserve savings should consider a money market or stable-value option while “actively spending” from the portfolio, she said.

Some plans offer federally insured bank savings options, Ms. Biar said.

Jeff Brooks, who works for a family publishing business in Seattle, said he was shocked to find that his children’s accounts through Utah’s my529 plan had lost about $19,000 combined in the first half of the year. One child is in college, and the second is a high school senior. He paid all upcoming college expenses as soon as he could, he said, and moved remaining balances to a stable value fund within the 529.

“I wanted to stop the bleeding,” he said.

The plan, which has a top rating from Morningstar, had been “solid” until now, Mr. Brooks said. But he cautioned that age-based portfolios should not be viewed as a “set it and forget it” option.

Brad Ledwith, a certified financial planner in Morgan Hill, Calif., suggested that families with students in college might consider moving an amount equal to several tuition payments into a low-risk option within the 529 plan, such as a money-market fund or even a certificate of deposit.

Mr. Ledwith, a father of four, including twins who are juniors in high school, said he had accrued $1 million in a 529 plan as of Jan. 1, but the balance had fallen about 23 percent by July. (He chose a more aggressive investment option with greater stock exposure, rather than an aged-based portfolio.)

More on Student Loan Debt Relief

  • A Hard Sell: At the White House and aboard Air Force One, advocates of debt cancellation made a sustained push to win over President Biden. Here’s how he finally gave in.
  • ‘Imperfect’ Tools: The student loan plan is the latest example of Democrats practicing the art of the possible on the nation’s most pressing economic challenges — and ending up with risky or patchwork solutions.
  • Targeting the Middle Class: The big winners from Mr. Biden’s student loan plan are not rich graduates of Harvard and Yale, as many critics claim. It’s the middle class — and disproportionately young and Black people.

“It was an eye opener,” he said, adding that he has a high tolerance for risk.

He said he was confident that the market would rebound. Even so, he has moved $100,000 into a more conservative option within the 529 plan.

Despite the current market gyrations, Mr. Ledwith said, people whose children are just starting high school should stay invested in a growth portfolio: “A lot can happen in five years,” he said. And people with very young children, he said, should consider contributing even more to their 529, since they will be investing when prices are generally lower.

College financial aid offices are aware of the current market turmoil, so it may be worth contacting yours to see if additional help is available. “You never know unless you ask,” said Ms. Assaf of Fidelity.

Here are some questions and answers about college and 529 plans.

How much does college cost these days?

The average published price of tuition, fees, room and board for the 2021-22 academic year was about $52,000 for a four-year, private nonprofit college, and $23,000 for an in-state public college, according to the College Board.

Do I get a tax deduction for contributing to a 529 plan?

There’s no federal tax deduction, but some states may offer a tax break.

Do I have to invest in my home state’s 529 plan?

You can invest in any state’s plan, but you may miss out on tax breaks offered by your in-state plan. Forty-nine states (all but Wyoming) and the District of Columbia offer 529 savings plans, named for a section of the federal tax code.

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