Don’t worry…you’re not the only one. Whether you’re planning for college in the very near future or in the not so near future, you probably have concerns…and why shouldn’t you?
Today I would like to address these concerns and offer some alternative planning strategies that just might ease your mind.
For those of you who are planning for the not so near future and investing money into a 529 plan, you may be concerned that the financial markets could duplicate what has transpired in 2009 - when it might be too late for your child or grandchild to recover. You may also be well aware of the extreme rise in tuition costs on an annual basis, which means principle-preserving portfolios just won’t cut it. The 2015-2016 average in-state tuition and fees at public four-year institutions are $9,120.1 So what are your options?
A 529 plan may still be in your best interest. First, this savings vehicle allows your money to grow tax-free, and if you use the money for qualified education expenses, you escape Uncle Sam’s bill altogether. Second, Warren Buffet attributes some of his success to the statement, “When other people get greedy I sell; when other people get fearful I buy!” Why not take a little advice from a billionaire? So if the future college grad is a toddler, 4, or 7 years old; I encourage you to talk with your advisor about a 529 plan. Of course, it is absolutely critical to have your advisor review the student’s overall portfolio annually at the very least to make sure the allocation stays in line with the time horizon as the child approaches his or her mid-teens.
Another option is the “Texas Tuition Promise Fund.” This is a prepaid college tuition plan for students who will attend a public school in the state of Texas. There are two great advantages to this type of plan. Number one, you don’t have to worry about average annual inflation. If you pick the lump sum plan or installment plan, you will pay the average price of college tuition today to cover whatever the cost may be later. Number two, the schools in the state of Texas, not the state itself, promises to honor your purchase. This means you have less risk when it comes to how the investments perform inside the Promise Fund. On the downside, if the student decides to obtain higher education out of state or at a private school, your money may not stretch near as far. For more information about this type of fund, visit: www.texastuitionpromisefund.com and work with your advisor to decide if this is a fit for you.
So what about those who are planning for the near future? What do you do if you are one of the victims subject to a double-digit loss in your student’s 529 plan? Well first of all, here is what you cannot do:
- Prepaid plans, like the Texas Tuition Promise Fund, are not intended for last minute changes. You must have the units purchased and paid for three years prior to using them.
- Do nothing.
What you can do is get creative. Here may be one option: Let us say you have a 17 year old and a 13 year old. You have financial resources or income that could allow you to pay for your older child’s education out of pocket. Or you’re able to acquire student loans for your older child’s education for the first couple of years. By choosing one of those options, you may give your 529 plan enough time to recover some of its recently incurred losses. Additionally, you can change the beneficiary on the 529 plan with no penalty to your younger child who has a longer time horizon.
Charlie Mahar, a money manager for Tealwood Investments and a good friend of mine, stated, Waiting for a burned out light bulb to come back on is not a strategy. It is more important today than ever before to work with your advisor in determining what strategy you need to have going forward to recover from today’s financial turmoil and protect yourself in the future.
- The College Board, Annual Survey of Colleges 2015-2016