Need to tap into your 529 college savings? How to handle a market downturn

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Months of stock market volatility could deliver a costly surprise to parents sending their kids to school this fall: lower-than-expected 529 college savings plan balances.

The average size of 529 accounts was $30,287 in 2021, according to the College Savings Plans Network, but families can now have lower balances, according to financial experts.

And it could be a “rude awakening” for parents scrambling to make their first payments in August, said certified financial planner Lisa Kirchenbauer, founder and president of Omega Wealth Management in Arlington, Va.

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Many 529 plans offer portfolio allocations based on age, shifting to more conservative assets as college approaches, such as stocks to bonds. But as bond values ​​and market interest rates move in opposite directions, bond prices have fallen in 2022 amid the Federal Reserve’s rate hikes.

“You might only have a 4% or 5% spread between what your stocks and your bonds are doing, and those are both double-digit losses,” said Byrke Sestok, CFP and co-owner of Rightirement Wealth Partners. in Harrison, New York.

Smaller 529 accounts mean less money to cover college bills, and the solution may depend on several factors – how much you need, when the bills are due, and other sources of funding.

Some advisors suggest waiting to operate 529 accounts until the market rebounds. But there’s no guarantee the six-to-10-month wait will pay off, Sestok warned, especially with more rate hikes on the horizon.

Alternative financing

While savings account yields are beginning to rise, returns are still quite low, making them an attractive option for covering short-term college expenses, Sestok said.

Of course, paying cash can be tricky with the average 2021-22 tuition for full-time undergraduates ranging, according to the College Board, from $10,740 for in-state public schools to $38,070. $ for private schools.

With house prices soaring, you might want to consider a home equity line of credit, or HELOC, allowing you to borrow money when needed, Sestok said.

HELOC rates can range from around 2% to over 7%, depending on your credit, according to Bankrate.

Another option, portfolio loans or lines of credit, allow you to borrow against assets in your investment account, with limits based on the risk of your assets. “With title loans, you’ll probably get a better rate,” Sestok said.

Both options can provide temporary access to cash with the ability to repay the loan with your 529 account later. However, you will need detailed record keeping for the IRS, as withdrawals for non-qualifying expenses may incur taxes and a penalty.

And you’ll need to crunch the numbers by comparing the difference between interest rates and the amount in your 529 account, taking into account repayment times, Kirchenbauer said.

“Unfortunately, it’s not easy evidence,” she added.

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