- The bumpy stock market might present opportunities when investing for a long time horizon.
- Consider redirecting refunds from canceled programs toward college savings.
- New tax rules give college savings plans increased flexibility.
Families around the world are even having trouble making weekend plans, so the idea of thinking long-range about saving for college is a hard ask right now.
Put more money into the market while it is bouncing around like a playground ball? Save for college tuition at institutions that are not even sure they are opening for regular classes in the fall?
"For those who have other top-line priorities under control—like saving for retirement and stashing away a robust emergency fund—there are opportunities to think strategically about the future," says Melissa Ridolfi, vice president of college and retirement leadership at Fidelity Investments.
For many parents and grandparents, that can mean making lump-sum contributions to a college savings plan, like a 529 savings account, or setting up automatic monthly contributions for long into the future.
So far, people seem to be heeding advice to save more for college. Fidelity has seen a rise in new accounts in the 529 college savings plans it manages, up 36% in the first quarter of 2020 over the same time period in 2019. Contributions are up 30% in the same time period.
If you are wondering what to do about college savings, here are 3 reasons to consider contributing now:
1. Market volatility can be your friend
The stock market has made headlines nearly every day since the start of 2020, and it could be a bumpy ride for those with kids very close to college. But if it's still a number of years before your child might attend college, it can make sense to take advantage of the lower market to invest.
With college planning, your time horizon matters, because you need that money for a specific goal with a known time frame. Many people who invest in 529 college savings plans put that money into age-based portfolios that shift the allocation of assets as your child ages and generally get less risky over time. You can consult your individual plan prospectus for the exact trajectory of the funds available to you.
If you have a newborn right now, for instance, you might start out with a fund that is mostly invested in stocks for growth potential and is pegged to a college start date of 2038. By the time your child nears the end of high school, the mix of investments in that fund would have reduced stock market exposure, with some even in ready cash to start withdrawing tuition payments.
Today's high school seniors are likely already in conservative investments and would generally have fared much better in the market volatility so far in 2020 than a 100% stock portfolio. Even a growth portfolio, because it would still be diversified with a mix of stocks and bonds, generally fared better over the first part of 2020 than an all-stock portfolio.
2. Repurpose cancellation fees
Tai-chi lessons on hold? Camp canceled? Parents can take money that was designated for their kids and pay it forward into their college funds. Families might also think about setting aside the $500 credit for each child under 17 included in the stimulus checks that many received from the CARES Act for Covid-19 relief.
"While the future of college might seem unclear now, the cost is likely to keep going up," says Ridolfi.
Education cost inflation was indeed up 2.2% for the 2019–2020 academic year. Average annual cost, including tuition, fees, room and board came to $21,950 for a 4-year, in-state public college, and $49,870 for a private 4-year for that year, according to The College Board.*
Fidelity's rule of thumb on saving for college is to multiply your child's current age by $2,000 and use that amount to determine whether your college savings to date are generally on track to cover 50% of the cost of attending a 4-year public college. To assess your needs more specifically, you can use Fidelity's college savings calculator, which can help you calculate what you might need by the time your child is ready to enroll.
You might also want to reassess your overall savings goal if you were planning on your child working over the summer and their job is canceled. That might mean you have to save more now, or over time, to compensate.
Families of current college students may have refunds from tuition or room and board to consider reinvesting. If you paid your spring semester bill with funds from a 529 account and have received a refund from the school, there are new tax rules in the CARES Act that require the funds to be returned to the 529 account by July 15, 2020. You may also have to consider this for fall tuition payments, depending on what happens with enrollment at your child's school.
3. Invest for flexibility
If you have more than one child, you might have a college savings account for each and think of those as defined buckets that can't be mixed. But 529s are actually very flexible when it comes to moving funds from one child to another.
If you end up with unused funds in your 529 and you want to use them for nonqualified expenses, you can always cash out the account, although it is subject to a 10% penalty and you will owe income tax on the growth portion of the account.
If you would like to take classes to advance your career, you can use the money you have saved for yourself for qualified courses. Since 2018, you can use the funds from a 529 plan for K–12 education. The SECURE Act, which went into effect at the start of 2020, expanded the definition of qualified distributions so that 529 funds can be used for certain apprenticeship costs and to repay up to $10,000 in student loans. You can even hold onto the 529 and designate the funds for grandchildren, way down the line.