Protect your college savings amid growing market turmoil

Second semester college bills are arriving just as stock market volatility is producing stomach-churning daily swings. This combination is a nightmare for parents with college savings.  

What should students and parents do? For those with bills in hand, there may be viable options to pay without cashing out of this fickle market. For everyone saving for college, there are good strategies and options to build a nest egg to pay future college expenses.

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In the near term, parents with financial wherewithal may view the current turmoil as temporary and decide against selling to pay today’s college bills. Alternatives include paying with cash, other savings or a tuition payment plan.  

For a fee, tuition payment plans pay the college directly and send a monthly bill to the parents, who generally pay with current income. The Bursar’s Office will have information about the plans they offer.

Those with very good credit scores may consider a no-fee private credit student loan to be a palatable alternative to selling securities. Banks, credit unions, finance companies and some state agencies offer credit-based loans to undergraduates, who usually need a credit worthy cosigner to be approved.

Many lenders also offer a cosigner release permitting the cosigner, often a parent, to be released from the payment obligation once the student establishes his or her own good credit. 

No matter how the current college bill is paid, there are viable strategies for parents to protect and grow their college savings.

Parents will rest easier if they eliminate the risk of suffering big investment losses concurrent with the arrival of a bill. This can be accomplished by determining the amount of savings needed for a future academic period.

Moving this amount to a liquid, risk-free investment option, such as a stable value or money market fund, ensures funds are available when the bill arrives. Although reallocating to a conservative option sacrifices market gains, it also avoids precipitous declines.

This strategy worked well for our family. Prior to the start of each academic year, we reallocated funds needed for that school year to a no-risk option in our 529 plan. The stock market’s recent swoon shows how quickly and steeply markets can fall.

We were willing to forego potential gains to avoid such big losses that could have suddenly left us short when the bill arrived. 

These type of plans also help parents manage investment risk. Most 529 plans provide investors with options to either select an “age-based” portfolio or choose among mutual funds or other investments. Age-based portfolios automatically reallocate the ratio of stocks and bonds to reduce market risk as students near college age.

For example, portfolios for the youngest children may have allocations of 80 percent or more in stocks, and 20 percent or less in fixed income securities. As students age, portfolios automatically adjust to reduce risk. By late high school, age-based portfolios may have 15 percent or less in equities and 85 percent or more in fixed income.

529-plan investors not using age-based portfolios choose the investments themselves — just as college savers do in traditional brokerage accounts. The primary differences between these investment vehicles are the tax advantages afforded to all 529 savings plans and the restrictions on their use.

In 529 accounts, no taxes are due on gains during the life of the investment or at withdrawal as long as distributions are made for "Qualified Educational Expenses." For many families, the state and federal tax advantages and other 529 benefits outweigh the restrictions. Brokerage accounts are not tax advantaged but have no restrictions on how they are used. 

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Finally, stock market volatility and risk of loss can be avoided entirely with 529 Prepaid Tuition Plans offered by some states. Prepaid investors purchase “tomorrow’s tuition at today’s prices.” They protect their college investment from tuition inflation and market risk by purchasing a defined amount of future tuition.

Although there are significant restrictions in these plans, parents who understand the fine print can successfully incorporate them into a college financing strategy. Investors with 529 Prepaid Plans open their college bills without concern about stock market conditions because they have already paid some or all of the tuition bill.

There is no foolproof way to fully insulate college (or any other) savings from a rainy day when markets are volatile and trends are unfavorable. However, parents can plan ahead to stretch their hard-earned college savings as far as possible. Saving as dollar today is better than borrowing one tomorrow.

John Hupalo is the founder and CEO of Invite Education and My College Corner, co-author of "Plan and Finance Your Family’s College Dream" (Peterson’s 2016), and host of the podcast "My College Corner" (iTunes, SoundCloud).