Parents: before you look at your 529 plan balance, you may want to brace yourself. The coronavirus pandemic has rocked the stock market, and since many 529 plans invest heavily in equities, some balances have taken a hit—and a hard one at that.
While the S&P 500 has made up more than half of the losses it incurred in late March, the future of the market is still precarious at best. This is certainly not what parents, grandparents, and other guardians who have worked hard to save for their students’ educations want to hear, but it doesn’t mean you have to say goodbye to their educational dreams either. Here’s what you need to know about alternative ways to fund your student’s college education, including information about student loan options and changes you might want to make to your 529 plan for the long term.
First off, don’t panic
It can be a huge blow to see your 529 plan balance dwindled down, but no matter how low it has dipped, don’t panic! Don’t make any knee-jerk reactions such as selling stock immediately. Remember, investing in the stock market is a marathon, not a sprint. No matter how painful this leg of the race may be, history has shown that the stock market rebounds even after taking significant hits. In fact, you may want to consider investing more in the stock market now if you’re able to. There are no guarantees, but “buy low, sell high” has long been held as sage stock market advice.
Instead of hastily selling stock to cover education expenses, take a look at your overall financial picture, consider some of the options below, and come up with a tentative plan that could help—but make sure to account for multiple potential outcomes. This isn’t the time to start selling all your assets and stockpiling cash under your mattress. It is a time for you to set your emotions aside and try to objectively make decisions that will be in your—and your student’s—best financial interest, both now and in the future.
Take out loans if necessary
If you haven’t already, you may want to consider student loans to help fund the cost of your student’s education. Even if you’re not eligible for government loans, there are a host of private student loans that may be able to help. You can use them to pay for tuition, room and board, computers, and other related expenses. The rates and terms vary by lender, so you’ll want to make sure to do some research, but they can be a good option.
If you’re worried about your family or student being saddled with debt, know that current tax laws allow you to use up to $10,000 in 529 funds to repay qualified student loans without penalty. So if you take out a loan now, you may be able to pay it back later with 529 funds when your plan’s stock upticks again.
Pay out of pocket for some expenses
Many colleges don’t know when they'll be resuming in-person classes, when dorms will open back up, and a host of other factors—so don’t get too far ahead of yourself. All these factors could affect the college costs you’re responsible for in the near future. You may not need as much as you would have previously or need it as soon as you thought.
In the short term
You can pay out of pocket for educational expenses and then reimburse yourself from your 529 plan later in the year when the market hopefully rebounds in your favor. You can do this as long as the expenses are incurred in the same calendar year that you request reimbursement.
In the long term
You may want to pay out of pocket for the first couple of years of your student’s college experience, saving your stock money for their junior and senior years. Having an alternative plan to give the market more time to rebound is just smart. What you should not do: tap into your retirement savings plans. Doing so not only subjects you to hefty tax penalties, but it could also jeopardize your future financial security. Your student’s education is important but not enough to put your family’s overall well-being at risk.
Other 529 vs. out-of-pocket factors to consider
If you pay out of pocket and don’t end up using all the money in your 529 account, the remainder can also be used for advanced degrees, apprenticeships, or the education expenses of siblings and/or other relatives without tax penalty. Just be sure you don’t keep too much money in your 529 plan, as using the funds for non-educational purchases comes with a 10% tax penalty.
It’s also important to note that you shouldn’t just pocket any refunds you may receive from colleges that canceled classes if you paid for those expenses with your 529 plan. If you don’t recontribute the amount of the refund to your 529 plan within 60 days of receiving it, you could be subject to the 10% tax penalty.
Rebalance for safer assets
When you set up a 529 plan, you select one of two types of portfolios: age based or static. With a static plan, the makeup of your investments remains the same unless you elect to change it. With an age-based portfolio, adjustments are made as your student ages, moving your portfolio away from riskier assets like stocks and into more dependable investments such as bonds and certificates of deposit. There’s much less risk potential to the principal balance with age-based accounts as students get closer to college. Of course, there’s less potential for gain too.
This may be a good time to reconsider the type of portfolio you have. If your student is younger, then now may be the time to invest more aggressively based on the aforementioned “buy low, sell high” philosophy. If your child is heading to college soon or currently in college, you may want to make sure your portfolio is as low risk as possible to protect the principal balance.
Contact a financial planner
This isn’t an easy time, and those plummeting 529 balances can be devastating and overwhelming to families who thought they had their education goals covered but now aren’t so sure. If you need help getting organized and want an objective, professional opinion, consider contacting a financial planner. They can give you a fresh perspective and help you come up with a plan to keep your student’s education goals on track.
The topic of money and how best to use and invest it is stressful for most families, but just because your financial plan is taking a hit now doesn’t mean you’re doomed later. With a level-headed approach and some careful planning, you can still come out on top and help provide your student with the best college education possible.
For more expert advice on how to give your student a bright educational future, check out our Parents section.