How to Protect Your 529 College Savings Plan Right Now

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Kristen Kuchar

By Kristen Kuchar

February 9, 2021

The uncertainty of the economy and the scary trends of the stock market over the past year have many investors concerned. As you watch your 529 plan balance decline, you may also be experiencing some market jitters. 

Here are some tips that will help calm your nerves and protect your 529 college savings during a volatile market. 

Consider your child’s age before reacting

About two-thirds of families who have a 529 college savings plan are enrolled in an age-based plan. This type of plan bases the investments on your child’s age or year in school. So, if you have a five-year-old , your investments might be more aggressive (more stocks).

But if your child is in high school, the mix of investments should be more conservative (less stocks). That way, your 529 plan balance won’t be as affected by a sudden drop in the market. 

For example, if your 529 plan is invested 20% in stocks and the stock market drops by 20%, your loss is only 20% of 20%, or 4%. Plus, the stock losses will be offset by gains in the rest of your portfolio. Some 529 plans also offer FDIC insured investment options. 

If you have a younger child, don’t panic – markets go down, but they do come back up. There should be enough time to recoup any losses before it’s time for college. 

You may be tempted to sell your investment now, but that’s akin to closing the barn door after the horse has already escaped. Liquidating your investment will just lock in the losses, causing you to miss out on the eventual recovery.

Consider alternatives 

If your child is ready for college now and you were anticipating using your 529 plan to pay for tuition or other qualified expenses, you might want to consider holding off and exploring other options.

If you have other savings, you could use that money to pay for a qualified expense, and later reimburse yourself with the money in your 529 savings account. So as long as the expense is for qualified higher education expenses and the 529 plan distribution are within the same tax year, it won’t be penalized.

You could also borrow a student loan and later use the money in your 529 plan to pay for it, since student loans are now considered a qualified expense.

As your child should be doing anyway, encourage them to apply for as many scholarships as they can. Fill out the Free Application for Federal Student Aid (FAFSA) to see if they qualify for any grants, which don’t need to be repaid.

Be calm 

Don’t make any rash, fear-based financial decisions. Stocks haven’t suffered this bad since 2008, so it’s understandable to feel overwhelmed right now. Talk to a financial professional before making any big moves.

Still prioritize saving for college 

It’s likely that saving for college may have taken a back seat to more immediate issues. However, it shouldn’t fall off your radar. Saving for college is important to reduce the chances of having too much student loan debt down the road. If possible, when the stock market is down, try to save even more to compensate for the losses.

You could even make the best of a terrible situation. Many people are forgoing travel right now and are also able to telecommute to work, saving money on trips as well as commuting costs. You could apply that savings to your college savings. 

Have an emergency fund 

Before protecting your 529 college plan, you of course want to have a solid foundation. With the uncertainty of the economy, your job could be impacted. If your child needs to stay home from school due to the coronavirus, you may have to take time off from work. If you don’t have an emergency fund, start one today.

A good place to start:

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