You did everything right 17 or 18 years ago — right? — in shoehorning that new 529 college savings plan alongside the mortgage, budget sundries, and a little mad money besides. And if you kept up with your contribution schedule, that plan did right by you in the historic bull market of the past several years — right up until this spring, when COVID-19 clawed anywhere from $10,000 to $25,000 or more from many accounts that were on track to cover $40,000 in each of the coming four years, about the average cost of a private college education these days.
Perhaps your matriculating freshman will complete their four-year program in 3½ years, rendering superfluous that $10,000 to $20,000 that evaporated, if your plan did not recoup it in time. Maybe tuition and fees will actually drop over the next year or two as trustees absorb the scope of the economic duress many families have endured who have students in their institutions (under the new Pledge to Advance Connecticut, the state’s public community colleges are free to incoming freshmen for the coming year). And it could be that by this time in a few years, the stock market losses of 2020 will be just another set of faded scars, alongside those from 2001 and 2009.
It will all play out — but what about the parent analyzing today’s options for a 529, whether to benefit the baby in the bassinet or a kindergartner masking up for the morning, or otherwise in a last-ditch sprint to catch up for the middle school tweener or beyond?
Whether you are a closet day trader or you buy stocks to hold, in the course of your investment life you’ve seen that falling markets will eventually rise again. But for the parents getting that first tuition bill, an outright cure to the market turmoil would be a nice development, given that time is no longer on their side with campus registrars getting out the invoices. Like pension plans, 529 plan administrators adjust for risk as teens arrive at the doorstep of college by putting stocks onto a “glide path” into relatively stable investments like bonds. But a wipeout market like the 2020 pandemic is beyond the risk-mitigation efforts of any portfolio manager.
Investment giant TIAA administers the Connecticut Higher Education Trust’s 529 college plans, which were created in 1997 under the sponsorship of former state Sen. Toni Boucher. If you are thinking about investing for the first time in a college 529 plan, you are not restricted to the plan in your state, though CHET is the only one through which you will be able to take a deduction on your state income taxes. In the most recent installment of its annual 529 plan ratings (the update is due in October) Morningstar lumped CHET into a “bronze” tier of state-sponsored 529 plans that placed it in the top half of plans nationally, though outside the top third.
Morningstar lumped the Connecticut Higher Education Trust, or CHET, into a “bronze” tier of state-sponsored 529 plans that placed it in the top half of plans nationally.
CHET did not make a portfolio manager available for an interview, but Gabrielle Farrell forwarded some of TIAA’s advice from the height of the pandemic and other thoughts, in her role as spokeswoman for Shawn Wooden, Connecticut’s state treasurer who oversees the program. CHET also offers ongoing webinars to learn more about its plans, online at aboutchet.com/buzz.
“529 accounts are unlike self-directed brokerage accounts, in that they are not meant for frequent purchases or sales,” Farrell relays in an email. “If you think back to the creation of the 529 accounts in the late 1990s, most plans launched with just one option: an age-based track. The concept was to create a program that provided more aggressive growth opportunities when a child was young, and the account became more conservative as the time neared to use the money for college.”
Plans now offer options that allow for more active investment intervention on the part of the account holder, with CHET offering an interesting exercise in risk tolerance at aboutchet.com/tools. There is only so much you can do on your own, with account holders allowed to change investment strategies only two times a year. But it’s an important option — if you are bearish on the market outlook, you could designate any new investments for the safest possible vehicles, and readjust again once you are confident the market is on a sustained upward path.
And 2020, of course, carries an accompanying wrinkle most families would not have encountered — how to handle any refunds from colleges of tuition money that had been pulled from a 529 plan? The consensus of plan experts is that to avoid any chance of the standard tax penalty of 10 percent, it’s best to reinvest the funds back into the 529 plan within the allotted 60-day window allowed under the rules — again, with accompanying considerations for how best to preserve that principal for another withdrawal in a year or two or three.
CHET offers an online calculator to help people guesstimate how much they should put aside, factoring in contributions, tax rates, assumed rates of investment returns, and other inputs. Put aside $13,000 or $14,000 a year for that baby in the bassinet, every year, and you’ll just about cover that average cost of a college education in 18 years — adjusting the 2038 sticker shock for 6 percent annual inflation, as assumed by CHET’s calculator.
Savingforcollege.com is another website where you can shop around for plans, and which, like CHET, offers webinars, blogs and other guidance on investment philosophies during the pandemic and beyond. At the height of the virus crisis back in April, savingforcollege.com guru Mark Kantrowitz ran one such session focused primarily on student loans, financial aid and rebates, but which touched on the topic of 529 plans as well.
“In 2008, some families panicked when the stock market went down almost 40 percent,” Kantrowitz said. “Well, then they missed out on the economic recovery which started in March  and in the next two years … doubled the value of investments, so you don’t want to try timing the market, just stay in. What goes down comes up — hopefully — and, if anything, you should increase your contributions if you’re able to, because you can think of this as a buying opportunity.”