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.
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.
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.
However, some age-based funds still leave investors significantly exposed to the whims of the stock market, according to a November study by Savingforcollege.com, so be careful what you pick and review the asset allocation.
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 and without any tax consequences. You can give away even more by paying directly for a grandchild's tuition.
Another approach: Loan a grandchild money at rates well below current bank rates to provide tuition assistance, or make a low-interest loan but forgive repayment on part of it each year. With these more complicated strategies, advisers recommend making sure the loan is structured properly and fully documented.
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.
A home equity line could also be a good back-up credit source for education funds, particularly if you're tapped out of emergency funds and the cost of borrowing is not too expensive, said Koesten.
Finally, how much are you 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 with Blue Ridge Bank & Trust Co. in Independence, Mo..
His advice: "It only makes sense to invest in stocks 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.
Questions, comments, column ideas? Send an e-mail to srosen(AT)kcstar.com or write to him at The Kansas City Star, 1729 Grand Blvd., Kansas City, MO 64108.