Personal Finance

With colleges in crisis, is a 529 plan still your best savings bet?

Key Points
  • In a tumultuous year, some families are questioning the value of a 529 college savings plan, or even its necessity.
  • Experts say taking a longer-term view is still the best approach.
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Amid coronavirus and an economic crisis, saving for college may no longer be a priority — or even a necessity.

With many families struggling to stay afloat, regular contributions to a 529 college savings plan could take a back seat to paying more pressing bills or daily expenses.

At the same time, market volatility as a result of Covid-19 has taken a toll on account balances and even those people who continue to make payments toward future college costs may see less value in these accounts.

The average account size is now $25,657, down from a high of $26,054 in 2019, but still roughly double what it was a decade ago, according to the mid-year data collected by the College Savings Plans Network.

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And yet, through the pandemic, 529 college savings plans have gained momentum. Total investments in 529s rose to a record $373.5 billion.

There's a reason these accounts have proved popular: Not only can you get a tax deduction or credit for contributions, but earnings grow on a tax-advantaged basis and, when you withdraw the money, it is tax-free if the funds are used for qualified education expenses such as tuition, fees, books and room and board.

But as the economy continues to crater, many would-be college students are rethinking their plans altogether. Some are opting to defer college or enroll in a local and less-expensive in-state public school or community college

Spending upwards of $50,000 a year on college and graduating in the red is not sustainable, said Steve Muszynski, founder and CEO of Splash Financial, a student loan refinancing marketplace.

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As long as colleges and universities remain remote, the sentiment among would-be undergraduates is that a degree may not be worth the cost

And yet, "going to college is not always a money decision," Muszynski said. "People think with their heart."

Certified financial planner Tom Henske, a partner at Lenox Advisors in New York, said that "the question you have to ask is: What is college going to look like in 10 years? Are we going to have this colossal shift on how we educate people?"

Henske advises clients to put about 75% of their college savings in a 529; that way, if the cost of college goes down or your child decides to spend two years at community college or other alternative to a four-year degree, "you don't have every dollar locked in."

The current economic challenges are likely to make college even more important and perhaps more expensive in the future.
Michael Ferichs
chair of the College Savings Plans Network and Illinois state treasurer

"Don't put all your eggs in one basket," he said. (One way people work around the restrictions of a 529 plan is by saving in a Roth individual retirement account.)

On the flipside, "the current economic challenges are likely to make college even more important and perhaps more expensive in the future," said Michael Frerichs, chair of the College Savings Plans Network and Illinois state treasurer.

Generally, 529 plans offer age-based portfolios, which start off with more equity exposure early on in a child's life and then automatically adjust so as the start of college draws near, the portfolio will be weighted toward more conservative investments, like bonds.

You can change your asset allocation if you feel that an overly aggressive portfolio will be too nerve-wracking in the year ahead.

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Alternatively, with yields on safe investments like U.S. Treasurys near zero, savers may want to add some risk to generate better returns.

However, if you chose to reallocate your investments to rely more heavily on stocks, "what will that roller coaster feel like with your kid's college fund?" Henkse said. With so much uncertainty ahead, "I try to tell people not to overanalyze."

"Do not try and time the market," Frerichs cautioned, "very few people are able to do that successfully."

"When it comes to 529 college savings, staying the course is an essential component of a successful long-term savings strategy."

The biggest advantage to a 529 plan is the tax implications. If your child decides not to go to college and doesn't use 529 funds towards other qualified educational expenses, such as high school tuition, others in your family can.

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