OK, so the damage has been done to your college fund. Now what? Tough times are certainly good times to review strategies for your beaten-down 529 account, the Coverdell education savings account or the stock portfolio that a year ago appeared to have more than enough money to cover four years at State U. That's sound advice if junior is still in diapers -- it's critical if the tuition checks are just over the horizon.
Last week, my column focused on options for trimming your prospective college students' tuition bill, including taking the community college route for two years or taking high school Advanced Placement courses to earn college credit. Today, I'm continuing that thread with investment tips and other college-smart strategies -- especially for families trying to make up lost ground quickly.
Help from the Fed
Under a Treasury Department ruling issued in early January, families with 529 college plans can now change their asset allocation twice this year instead of once. This rule provides 529 investors with more flexibility to take quick action in the wildly gyrating bear market of the past year.
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Most state-sponsored 529 savings plans offer one or more "age-based" investment funds that automatically shift from stock-heavy portfolios to more fixed-income-based plans as the student beneficiary approaches college. The idea, said Savingforcollege.com's Joseph Hurley, is that "your college savings should be less exposed to swings in the market as the time for taking withdrawals gets closer." With current market conditions, some families may want to reallocate their 529 funds into an age-based portfolio.
Suppose you want to help a grandchild or even a younger brother pay the tuition tab. Under current law, you can make a direct gift and give as much as $13,000 a year to anyone you want without any tax consequences. You can give away even more by paying directly for a grandchild's tuition.
For families with multiple 529 accounts, it might make sense to change beneficiaries if one fund is more conservatively invested than another, said financial planner Stewart Koesten, president of KHC Wealth Management Services in Overland Park, Kan. That way, for example, the oldest child closing in on college would be positioned more conservatively to preserve his principal while little sister is in the more aggressive fund that could recover from the faltering markets in a few years.
Also, look at how much you are socking away in your 401(k) retirement account or IRAs. Can you afford to cut back on your contributions for a few years to prop up the college account? While not the standard advice, it's worth considering if you're comfortable with your retirement nest egg. But consult an expert before trying this angle.
Two key areas that should be addressed annually: Your time horizon for needing the funds and your tolerance for risk, said Todd Minear, a financial planner.
His advice: "It makes sense to invest in stocks only if investors have long time horizons. When time is short (within a couple years of needing the funds for college), high-quality short-term bonds and money markets are the way to go." Whatever your comfort zone, this is not the time to close your eyes and wish 2008 never happened.
E-mail Steve Rosen at firstname.lastname@example.org.