Need to tap into your 529 college savings plan soon? Here’s how to handle a stock market downturn

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

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

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

More on Personal Finance:
Medicare Part B premium reduction will not occur this year
Choosing between pre-tax Roth 401(k) plans can be tricky
Money moves before the Fed raises interest rates again

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

“You may only have a 4% or 5% spread between what your stocks and your bonds are doing, and they’re 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 can depend on a number of factors: how much you need, when bills are due, and other funding sources.

Some advisors suggest waiting to tap into 529 accounts until the market recovers. But there’s no guarantee that waiting six to 10 months will be worth it, Sestok said, especially with more rate hikes on the horizon.

Although the returns on savings accounts are starting to creep higheryields remain fairly low, making it an attractive option to cover short-term college expenses, Sestok said.

Of course, paying cash can be difficult with the 2021-2022 average tuition and fees for full-time undergraduates varying, depending on the Higher Education Councilfrom $10,740 for state public schools to $38,070 for private schools.

With rise in house pricescan consider a home equity line of creditor HELOC, which allows you to borrow money as needed, Sestok said.

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

Another option, portfolio loans or lines of credit, allow you to borrow against the assets in your investment account, with limits that depend on the risk of your assets. “With equity-based loans, you’re likely to 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 a detailed record for the IRS, as withdrawals for non-qualified expenses may incur taxes and penalties.

And you’ll have to calculate the numbers by comparing the difference in interest rates to the drop in your 529 account, taking payment terms into account, Kirchenbauer said.

“Unfortunately, it’s not an easy no-brainer,” he added.