Market volatility can be scary for a number of reasons, not least of which that it can cause ebbs and flows in what parents have set aside to help pay for their childrens’ college.
But as with almost every investment, the best course for parents worried about their college savings accounts is not to panic. In fact, in a down market, parents may be getting more for their money if they stick with the usual college investing strategy.
Typically, parents with 529 accounts, the tax-advantaged college savings plans, are making a flat monthly contribution into those accounts. That means that when the market is down, they’re getting more shares for their buck than if the market was higher, said Mark Kantrowitz, a financial aid expert.
“If you think that the market is going to go down and continue going down forever until it hits zero, then maybe you should be worried,” Kantrowitz said. “But if you think this is a momentary blip and then eventually the market is going to recover then you should continue investing.”
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That’s a pretty safe bet, given the lifetime of a college savings account. Kantrowitz notes that in a 17-year period, the market will go through between one and three bear markets. “You can’t avoid this,” he said.
The last time the market crashed in 2008, the average value of the assets of college savings accounts dropped by less than the market overall because 529 accounts tend to have more of a mix of investments, according to Brian Boswell, the founder of 529 Expert, a college savings plan consulting service.
“In a down economy you’re going to lose less,” he said. “Nobody likes to lose anything, but it helps to know that your risk is lower.”
Fortunately, about two-thirds of families are protected from the severest consequences that can come from a down market — namely, needing to pull their money out to pay for college during a down market, according to Kantrowitz. That’s because they’re using an age-based asset allocation strategy. In other words, when the children are young, the investment mix in the 529 plan is more stock-focused and aggressive and as they get closer to college age, the mix becomes more conservative, hopefully locking in gains made in earlier years.
For parents considering starting a college savings account, it’s hard to say whether a down market is necessarily a good time to do so, but both experts agreed that regardless of the market, parents should start saving as early as possible.
“My advice isn’t ‘this is a great time to invest,’ it is: If you need to save for college, you should always start right away,” Boswell said.
Still, if you’ve been sitting on the sidelines, now may be a good time to jump in, according to Matthew Masterson, a wealth advisor at Regent Atlantic, a New York and New Jersey-based financial planning and wealth management firm.
“If you’ve been thinking about starting a plan, I’d take this opportunity to do that. You’re getting into equity markets 10% lower than when the were a couple of weeks back,” he said. “For a 20-year time horizon thats kind of a no-brainer for folks.”
A down market may be a good time for parents to review their college savings strategy, Boswell said. Families may want to consider adding other options to their college savings mix, like a prepaid tuition plan, which allow families to pay for portions of their child’s college education up front.
Though Boswell said he doesn’t recommend investing in a prepaid plan exclusively, because they come with their own risks, including the possibility of default or that a child may choose to attend a college not covered under the plan, using one can be helpful. “That way you’re guaranteed a return that’s not correlated with the market.”
If families haven’t already used their twice-yearly option to reallocate their assets in their 529 plan, they may want to consider doing so, Boswell said. But by and large when it comes to saving for college, the best tactic is to stay the course. “It’s kind of a boring answer: Keep investing regularly, stick to your strategy,” he said. “All you’re doing is locking in losses if you pull your money out.”