Planning for college expenses in uncertain times

With the stock market now in bear market territory, many families with college on the horizon have experienced painful losses in their 529 plans and Coverdell accounts.

An old adage is to prioritize saving for retirement over saving for college because you can’t take a loan out for retirement. That said, it’s much easier to delay retirement. And this is the unfortunate situation facing many families with high school-age children.

Here are some considerations if you are worried about managing college expenses:

• No one knows when the stock market will bounce back. Paper losses are only losses if you sell your holdings.
• If you need to tap your 529 plan in the next year or two for college expenses and have the bulk of your assets in an age-based fund, you may wish to split your investments into separate accounts between a conservative fund (like stable value) and an equity fund. Then plan to tap the conservative fund in the early years of college so the equity fund has more time to recover from investment losses.
• Coinciding with the drop in the stock market is a significant drop in interest rates.
  • Consider refinancing your mortgage to free up extra cash to pay college tuition.
  • Consider using a home equity loan or line of credit to pay for some of the tuition due. This approach can also buy time to let your equity accounts recover.
  • Keep in mind there are federal and private loans for students and parents. For federal loans, the rates vary based on the type, so subsidized loans for undergraduate students are lowest (currently 4.53% until July 1), 6.08% for unsubsidized graduate, and 7.08% for Direct Plus for parents or graduate students. According to Bankrate, the current national average for a home equity loan is 5.61% and HELOC (Home Equity Line of Credit) is 5.97%.
  • With a HELOC, you can typically choose to only pay interest and not principal, which can lower your monthly payments. And then plan to pay the principal off when you sell the house. You also might be able to consolidate older student loans on which you are paying higher rates on into a new aggregate loan at a lower rate.
  • The steep drop in interest rates makes potential losses in bond funds more likely as market gains in these funds have already been largely realized. Keep in mind that bond funds can suffer market losses in a rising interest rate environment and interest rates are at historically low levels.
• Whenever your child’s college decision is due, give plenty of consideration to selecting a college that is affordable and embrace the realization that borrowing always carries risk. While the interest rate on new loans will be lower than in the past the next academic year, we all know that any money borrowed needs to be repaid and our ability to do this—whether student or parent—is contingent on our ability to earn wages. If the economy falters, income may be reduced and our ability to repay student loans may be affected.
• In addition, depending on the ages of our children and when we wish to retire, college might be coming much sooner, so we will want to have less equity risk there as our retirement accounts can wait.
• Finally, don’t check your balances daily as this may encourage you to act impulsively.

For additional creative ideas to pay for college, download Winning the College Savings Race.