Saving and Paying for College in a Market Downturn

Families with college savings in the stock market are likely concerned after watching the recent dramatic fall in stock prices. Worry is understandable. Like a number of things in the college admissions process, the stock market is out of our immediate control. No matter how badly we want to push that line in an upward trajectory, the market does what the market does, and we need to accept and remember that this is the ebb and flow of investing. That reality does not mean, however, that we need to be passive observers of—or blind reactors to—what happens to our college savings. Tough economic times remind us more than ever that we need to take control of what we can in our finances, pay attention to our goals, and implement strategies most likely to make our goals a reality. As the stock market rises and falls, college savers should keep these points in mind:

1. Don’t panic! (Yes, you can add us to the list of voices echoing that chorus this week.) Panic can cause you to make illogical decisions, and logic is your friend in times like these. Gather your facts, weigh your pros and cons, evaluate your timeline and options, and then decide what to do. This exercise is essential to slowing down the feelings of needing to act urgently and allow your brain to think things through rationally.

2. Remember, this has happened before and this will happen again. The stock market goes up and down on a daily, weekly, and yearly basis, but, over the stock market’s existence, the trend has been undeniably upward. There are no guarantees, but if history is any indication, the market will recover. We just don’t know when. Your timeline and risk tolerance may dictate your best course of action.

3. So what is your timeline? Is your child starting college in the fall, or do you have a kindergartener? Age-based mutual funds designed for college savings gradually adjust to grow more conservative as your child ages in order to reduce your exposure to market fluctuations as your child nears college. If you own these target date funds, make sure you understand how your portfolio is balanced and is due to adjust. If managing your investments on your own, weigh the pros and cons of selling when prices have dropped to shift into more conservative investment options. Remember that you don’t actually realize the gains or losses of the market until your stocks are sold. Selling now would allow you to preserve some of the remaining gains if prices drop further, but you also lose the opportunity to rebound when prices go up. Consider that while a down market creates losses for those that bought when the market was high, it simultaneously creates opportunity to buy when prices are low. Reflect upon your saving strategy and look at your asset allocation (the portion of your savings in stocks, bonds, cash, etc.); think about why you chose the assets you did in the first place. What has changed since then? Have you learned something new about investing or have your options to pay for college changed? Or are you evaluating the need to act solely based on the market performance? What would you gain by shifting allocations right now? Conversely, what would you lose?

4. As you consider these questions, get real with yourself about your risk tolerance. While a dramatic drop in stock prices can make even the most daring investor a little queasy, is investment stress keeping you up at night and having a substantial negative impact on your quality of life? Do you feel the need to shift your current allocation now or direct future contributions to a more conservative choice? If you can’t bear the highs and lows of the stock market, there are other options. Many investment firms offer less volatile bond funds and money market funds in their investment menus, including the menus of their 529s Plans. A number of states offer prepaid tuition plans, often guaranteed by the state or protected through a contractual agreement. CDs and high yield savings accounts are insured by the FDIC and are immune to the whims of the stock market.

5. Note, however, that even the safest investment is not risk-free. In general, the safer the investment, the lower its rate of return (as you’ve likely noticed if you’ve checked out the interest rates on savings accounts these days). The risk you take by keeping your money complete “safe” from market downturns is that you may not make enough to keep pace with inflation, particularly college cost inflation, which has averaged around 3% lately. If you’re making less than inflation on your investment, you’re losing purchasing power.

6. Make sure you understand the type of account(s) your money is held in, its advantages and its limitations. A 529 plan can be used tax-free for college expenses, but is subject to taxation at your ordinary income tax rate and a 10% penalty if withdrawn for anything else (a good reason to stop and evaluate your options before acting!). 529s funds can be transferred to siblings or other family members, and, since the recent passage of the SECURE Act, can also be used to repay up to $10,000 in student loans down the line. Make sure you look at your entire portfolio of assets available to pay for college, and the benefits and restrictions on each, to make sure you’re utilizing your total resources in the most advantageous way. Consider also your timing. Liquidating assets close to or during college years can affect financial aid eligibility.

Stock market downturns can be stressful—there is no denying that—but don’t let fear override your judgement when it comes to saving and paying for college. Think through what is best for your family and act (or don’t act) accordingly. If you’re just not sure what to do, ask for help. While even the most experienced pro can’t predict definitively where the top or bottom of this market lies, a finance expert can help you think through some of the above questions, lay out your options, weigh the pros and cons, and approach your finances in a holistic and unemotional way. If feeling overwhelmed, don’t hesitate to seek the guidance of a professional.