Parents who've seen the value of their 529 college-savings plans plummet over the past year may have another shock coming: Experts say the plans can't be counted on to pay the entire cost of a child's higher education.
"They should be covering about a third of the cost of going to college," says Beth Walker, a certified college planning specialist based in Las Vegas, Nevada. "They're an incentive to save for college, but they were not meant to be the only way to pay for a higher education."
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Unfortunately, as the value of many 529 portfolios shrinks, the cost of a college education continues to skyrocket, says Seth Varnhagen, president of North Castle Advisors, LLC.
"There's a six percent inflation rate each year for colleges," says Varnhagen. "For money put away in a 529 today, you need a 4 percent return over and above inflation just to stay even."
A four-year college education now costs between $15,000 to $160,000, depending on if it's a private or public school. Some of the most expensive colleges per year in total costs for 2008-2009 according to CampusGrotto include:
- Harvard University: $54,000
- Sarah Lawrence College: $53,166
- George Washington University: $50,312
- New York University: $50,182
- Georgetown University: $49,689
Those figures contrast with a public school like the University of Texas where a resident student is charged around $17,500 a year for total costs. But analysts say costs for nearly all higher-education schools, private or public, will continue to rise over the next decade.
That's a daunting prospect considering the sharp decline in stock prices over the past year, which has left some parents with less money in their 529 plans than they put in. Many plans offer a mix of stock and bond funds, usually managed by a big fund company such as Vanguard.
529 plans were set up in 1996 to help parents save for college. The main advantages are the tax breaks: withdrawals from 529s are exempt from federal tax as long as the money is used for education. Some states also offer tax breaks.
The 529 plan gets you in the habit of saving for college, says Beth Walker. "There are quite a number of 529s that are doing well. I think they're a good way to help save for college."
Some 529's are even aged based, meaning the older a child gets and closer to college, the fund allocation becomes more conservative, increasing holdings in bonds.
But for families who have a college savings 529, they can't just be on automatic pilot when it comes to investments, especially for those needing funds in the next few years, says Varnhagen.
"I would ask a 529 holder how come they had so much risk if they needed the money now?" Varnhagen says. "Within four years of college, 529s should reduce their risk in equities."
No matter how 529s reflect market fluctuations, families should be looking for additional ways to pay for college, says Margaret McGrail, assistant vice president of student financial services at Mercy College in New York.
"Families willing to do the homework can find plenty of scholarships and other funds" says McGrail. "And that's for any income level, even in a down economy."
Experts suggest several steps to find extra funding or to cut the cost of a college education:
- Find out what the college offers in financial aid; some give help regardless of income.
- Look online for scholarships available in academic subjects or sports your child excels in.
- Contact private organizations and major companies for scholarship funds.
- Check out available funds from the government, either state or federal.
- Students can take on a heavier academic load to finish school sooner.
One online source is collegenet.com which offers a college and scholarship search engine and give students a social network. There's also educationconservancy.org, which gives advice on choosing and funding a college education. To find government funding, findtution.comis a free search service that allows users to search for scholarship opportunities.
But whatever funding you find, make sure you don't pay an organization anything up front to get it, says McGrail.
"Run away from those types of scams," McGrail says. "No legitimate funding should ask you to pay any fees. Even if it's just $25."
A conservative 529 Plan
Another option for parents is the 529 pre-paid tuition plan. This differs from the college savings plan in that it allows users to purchase credits at participating colleges, locking in prices at today's costs—ahead of when your child goes to school. It's not considered an investment plan as many of the pre-paid plans are backed by states with guarantees.
Links For 529 pre-paid plans:
For the pre-paid, you will usually deal directly with a state agency when setting it up. What you do is buy tuition units or years at a school with a one-time lump sum or monthly installments. That money is then pooled with other prepaid sums from other account owners and invested by the program in order to grow and meet future tuition cost increases, caused by inflation.
The amount in any of the pre-paid plans, however, can be counted against any type of financial aid needed by the student.
Some prepaid plans cover just tuition and fees while other plans will also pay for room and board. And most prepaid tuition plans do not allow enrollment of students beyond the 9th or 10th grades.
Kyle Kappmeier, a 27 year old public relations executive in New Jersey, says his 529 fund for his two year old daughter was down 25 percent in 2008. Despite the loss, Kappmeier says he's not worried for now.
"We are not in panic mode. We may be losing money but we're gaining shares through dollar cost averaging," Kappmeier says. "I'll likely see another recession before my kids go to college. It's just part of the economy."
The long term philosophy expressed by Kappmeier is what will make 529's work rather than bailing out on them in rough times, says Varnhagen.
"Look at risk when creating your 529 portfolio," Varnhagen says. "They were intended for long term investing so stay the course if your investment policy is valid. Just don't depend on them alone for college."