In recent months, the financial markets have been eerily reminiscent of a turbulent rollercoaster, largely influenced by the erratic tariff policies of President Donald Trump. This market volatility has left many families in distress, particularly those who had steadfastly saved for their children’s college education through 529 college savings plans. While the S&P 500 has seen a bounce-back from its earlier lows, the reality is that some savings accounts have not been so fortunate. As tuition bills loom like dark clouds on the horizon, families may find themselves grappling with an uncomfortable decision: to withdraw funds or to hold on in hopes of a better tomorrow.
Smitha Walling, Head of Vanguard’s Education Savings Group, suggests that—if approached thoughtfully—making withdrawals from these accounts can be a liberating experience rather than an occasion for anxiety. The key lies in understanding one’s risk appetite and asset allocation within these plans. Most 529 plans offer age-based portfolios designed to shift from higher-risk equity investments to more conservative options like bonds as college approaches. Yet, this strategy deserves scrutiny as the market continues its unpredictable pendulum swing.
Assessing Risk and Navigating Investment Waves
Mary Morris, CEO of Commonwealth Savers, emphasizes that families need to take a close look at their asset allocation. The innate design of 529 plans caters to those who wish to ride upwards on stock investments during their child’s younger years, but once that graduation date draws near, many investors find themselves with little to gain (and potentially much to lose) if they haven’t adjusted their portfolios adequately. The problem is exacerbated for those steering clear of equities altogether. As Morris humorously put it, “You don’t want to get seasick” on a financial journey that is fraught with unpredictability.
This statement rings especially true for families who can no longer afford to take on more risk. Richard Polimeni, head of education savings at Merrill Lynch, advocates for a diversified approach, recommending that investors consider reallocating a portion of their funds to safer cash equivalents. However, a word of caution must accompany such strategies: completely liquidating 529 accounts during market downturns can cement losses that could have been recouped over time. The ‘panic sell’ strategy has historically backfired; after the 2008 crisis, only 10% of investors chose to withdraw their funds completely, with many opting to switch to less risky assets instead.
Strategic Withdrawal Techniques
As families calibrate their withdrawal plans amidst this uncertainty, Polimeni proposes leveraging other income sources—such as savings outside the 529—to cover immediate tuition payments. By doing so, families can allow their 529 accounts to rebound, potentially enjoying the benefits of compounded growth in the coming months. Indeed, these plans allow for reimbursement for eligible educational expenses within the same year, which could afford families some bonus time for market recovery. This short-term sacrifice could mean maximizing long-term benefits.
Among the discussions about mitigating immediate tuition costs, taking federal student loans can also provide a lifeline, especially if the borrower plans to use 529 funds later to repay this debt. In these trying times, the decision must be made with a keen eye on accruing interest, especially if private loans are involved.
529 Plans: Resilience Amid Change
Despite the financial upheavals, it is crucial to remember that college remains a significant goal for many students. Recent trends indicate that the narrative around education is indeed shifting. Many students are reconsidering their educational pathways, with a growing percentage opting for community colleges or even skipping college altogether in favor of technical or vocational training. The cost factor is a daunting reality, leading 69% of students to plan on living at home during their studies—an all-time high.
Still, the evolution of 529 plans continues to make them more attractive. Recent legislative changes allow unused funds in these accounts to roll over into a Roth IRA, offering a route towards retirement savings without tax penalties. Moreover, students can now utilize 529 funds for a range of continuing education classes, apprenticeship programs, and even student loan payments. This expansion of permissible uses marks a significant evolution in how 529 plans can assist families.
As we look ahead to 2024, evidence shows a growing affinity for 529 plans. According to the Investment Company Institute, the number of 529 accounts increased by over 3%, accompanied by an impressive 11% surge in total investment, reaching $525 billion. The soaring average account balance underscores the realization that, amid uncertainty, the steadfast pursuit of education remains paramount. While families navigate the financial implications of education funding, the resilience shown suggests a brighter horizon for future scholars.
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