Is It Time to Check in on Your Education Savings Plan?
The recently passed SECURE Act offers options for safeguarding 529 account balances amid market turmoil
By Megan Ryan | April 9, 2020
You set up an educational savings plan for your child or grandchild, and you’ve been consistent about funding it. Good job.
But the market volatility caused by the COVID-19 pandemic now has you wondering whether your best-laid plans will get the job done. Now what?
Saving for education is a long-term effort and all states offer at least one type of educational savings plan, such as a 529 plan.
Today, looking at their 529 account balances may give some investors heartburn, so it’s best to consider your options.
Some choose “age-based” investment options, which reduce equity exposure as the child nears college age. Others choose a customized allocation — often with a more aggressive allocation when the child is young — and they may forget to change that allocation as the child gets older.
“As students are approaching high school graduation and considering higher education, it’s a wise practice for 529 account owners to dial back their equity exposure,” said Kimberly Bridges, director of financial planning at BOK Financial, “What’s scary is when an event like the pandemic reminds you that you haven’t made those changes.”
If you are among that group, consider this: A provision of the SECURE Act, passed late last year, allows 529 plan beneficiaries to repay up to $10,000 in student loans using 529 funds.
“With the current low rate environment, it might make sense for families to consider taking out a student loan and letting the markets recover to revive the funds in a 529 account,” Bridges said. “If you take out a federally subsidized student loan, the government essentially pays the interest while you are in school.”
“That 529 account will likely look a lot better if you can give it time to recover,” she said.
History shows that past pandemics tended to be followed by relatively steep market recoveries. Of course, we have no way of knowing what the future will look like in the wake of COVID-19, but parents who are nervous about withdrawing funds from their child’s 529 plan to make tuition payments may want to consider the student loan option and hold-out for an eventual market recovery, she said.
Another provision of the SECURE Act allows 529 funds to be used for qualified expenses related to apprenticeships. The world has been turned upside down for so many during this pandemic, especially students. This interruption may prove to be a time for many to rethink their future plans.
“Some students may change course and dial back expectations,” Bridges said. “Families should be factoring in the return on investment of private or out-of-state colleges versus in-state college or trade school. They may even want to consider a gap year. When you encounter something unprecedented like this crisis, we’re all going to have to flex and adjust our expectations in a lot of ways.”
Learn more about the SECURE Act and what it might mean for you here.