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How Safe is Money in a 529 Plan during a Pandemic?

529 plans, like other investments in the stock market, can lose money. Investing in the stock market is never really safe. But, stock market investments generally grow to a greater extent than other investments over the long term. 

During an economic downturn, such as the one triggered by the coronavirus pandemic, investments in the stock market will drop significantly, but only temporarily. 

For example, the S&P 500 dropped by a third from February 19, 2020 to March 23, 2020, but has since increased by 43% off of the bottom. As of July 14, 2020, the S&P 500 is just 5.9% short of a full recovery.

(For reference, the S&P 500 closed at 3,386.15 on February 19, 2020, 2,237.40 on March 23, 2020 and 3,197.52 on July 14, 2020.)

Investing in the stock market is like riding a roller coaster. It has its ups and downs, and watching it too closely can cause nausea. 

See also: What to Do With College Savings in a Volatile Market

The best advice is to remain invested. Set up a direct-sold 529 plan with automatic investment and don’t pay too much attention to the ups and downs.

If you are invested in an advisor-sold 529 plan, follow their advice to stay the course. Pulling out of the stock market will just lock in losses and cause you to miss out on the economic recovery. Trying to time the market, especially during a period of increased volatility, just doesn’t work very well.

See also: Should You Dip Into Your 529 Plan in Case of Coronavirus?

If you can’t handle the stress of stock market gyrations, 529 plans offer many investments that are safer, with a lower risk of investment loss. Several 529 plans offer FDIC-insured investment options and money market accounts. All 529 plans offer age-based asset allocations, which shift to a lower-risk mix of investments as college enrollment approaches. 

Consider what happens to an age-based asset allocation that starts off with 80% invested in stocks when the baby is born and gradually shifts to 20% in stocks when the baby is a high school senior. 

  • If the stock market were to drop by 30% when the baby is one year old, the 529 plan will experience a 24% loss. But, there will be very little money in the 529 plan, so the losses are the equivalent of just three months of contributions. You also have 16 years to recover from the losses.
  • If the stock market were to drop by 30% when the baby is a high school senior, the 529 plan will experience just a 6% loss, which may be partially offset by gains in the low-risk portion of the portfolio. That’s not too bad. Although that’s the equivalent of about 1-2 years of contributions, there’s a good chance the stock market will recover before you need to use most of the money. You also have the option of borrowing to pay for college costs while you wait for the stock market to bounce back, and then using the 529 plan to pay off the student loans.

See also: How Will Coronavirus Impact Your College Savings?

Of course, if you invested all of the money in the 529 plan in an all-stock fund, all bets are off. Such a 529 plan will follow the performance of the stock market as a whole, without any attempt to manage the risk of investment loss. The stock market has at least three corrections and one bear market in any 17-year period. A stock market correction is a drop of 10% or more. A bear market is a drop of 20% or more.You may also wish to avoid 529 plan portfolios that are too heavily weighted in real estate or foreign stocks, as these can increase volatility and do not recover as quickly as domestic stocks. 

Mark Kantrowitz

By Mark Kantrowitz

Mark Kantrowitz is a nationally-recognized expert on student financial aid, scholarships and student loans. His mission is to deliver practical information, advice and tools to students and their families so they can make informed decisions about planning and paying for college.
Mark writes extensively about student financial aid policy. He has testified before Congress and federal/state agencies about student aid on several occasions.

Mark has been quoted in more than 10,000 newspaper and magazine articles. He has written for the New York Times, Wall Street Journal, Washington Post, Reuters, Huffington Post, U.S. News & World Report, Money Magazine, Bottom Line/Personal, Forbes, Newsweek and Time Magazine. He was named a Money Hero by Money Magazine. He is the author of five bestselling books about scholarships and financial aid, including How to Appeal for More College Financial Aid, Twisdoms about Paying for College, Filing the FAFSA and Secrets to Winning a Scholarship.

Mark serves on the editorial board of the Journal of Student Financial Aid and the editorial advisory board of Bottom Line/Personal (a Boardroom, Inc. publication). He is also a member of the board of trustees of the Center for Excellence in Education. Mark previously served as a member of the board of directors of the National Scholarship Providers Association.

Mark is currently Publisher of PrivateStudentLoans.guru, a web site that provides students with smart borrowing tips about private student loans. Mark has served previously as publisher of the Cappex.com, Edvisors, Fastweb and FinAid web sites. He has previously been employed at Just Research, the MIT Artificial Intelligence Laboratory, Bitstream Inc. and the Planning Research Corporation.

Mark is President of Cerebly, Inc. (formerly MK Consulting, Inc.), a consulting firm focused on computer science, artificial intelligence, and statistical and policy analysis.

Mark is ABD on a PhD in computer science from Carnegie Mellon University (CMU). He has Bachelor of Science degrees in mathematics and philosophy from MIT and a Master of Science degree in computer science from CMU. He is also an alumnus of the Research Science Institute program established by Admiral H. G. Rickover.

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