The pandemic has severely affected the finances of many families, making it harder to save for college.
Uncertainty over job stability, fluctuating markets and the length of the pandemic are putting additional pressure on parents whose children are approaching college age. And some traditional ideas about college savings are being questioned, such as whether to save for a branded school when many are currently online-only or only take limited classes on campus.
With these questions in mind for many families, The Wall Street Journal invited three experts to discuss college financial planning: Dan Hill, president and CEO of Hill Wealth Strategies in Richmond, Virginia; Nicole Strbich, director of financial planning at Buckingham Advisors in Columbus, Ohio; and Jeffrey Swett, senior financial advisor and portfolio manager at UBS and leader of the Swett Wealth Management Group in Boston.
Here are edited excerpts from the discussion.
So long, 529s?
WSJ:What specifically are you telling parents to do differently now in terms of saving for college because of the pandemic?
SP. STRBICH: We advise parents to keep more of their savings cash. This could mean not committing to a 529 plan or investing in potentially volatile stocks in the event the money might be needed due to job loss or reduced income. They can look to borrow money for tuition when the time comes, or use the money they have saved. While it is possible to miss investment growth in this case, you avoid the volatility and potential losses on funds that you may need in the short term.
Mr. SWETT: Due to the uncertainty caused by the pandemic, parents may find it helpful both financially and emotionally to have a higher cash balance than usual. Maintaining some exposure to stocks in a college savings plan until withdrawal is typical, but reducing that exposure to stocks and increasing cash flow at this point can be both timely and comforting. This can be particularly useful for parents of high school children who will be writing tuition checks in the next few years.
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M. COLLINE: I spoke to my clients more about other options that might make more sense at the moment, like volunteering on a gap year or studying at home and taking classes online while participating in a community or university program. local. I also continue to reaffirm to my clients to keep saving. While these savings aren’t officially applied to tuition, they can be applied towards new supplies, including a tablet or transportation, if their child chooses to work or volunteer outside of the home.
WSJ:What would you advise people with children approaching college to continue contributing to a 529 plan, given the uncertainty of the market and possibly their finances?
SP. STRBICH: For those students who will be using their 529 accounts in the short term, the growth potential of any new deposit is low as they are invested more carefully due to short term goals, so it may not be worth doing a contribution now. In this situation, if you are in a state that offers a tax deduction for contributions, consider delaying the deposit to account 529 until you know the funds will be available for college expenses. Then deposit the funds into account 529 and turn around and take a distribution to pay for the tuition. There is no benefit to tax-exempt growth, but you have retained control and use of your funds during times of uncertainty and then receive a tax benefit for the 529 contribution.
M. COLLINE: I inform them that it is always a good idea to save in a dedicated 529 savings plan. This is important to do because if the child closest to college age is not using it for college, it can still be used for their other educational purposes, including professional development. If they do not use it at all, then it can be passed on and applied to the education of another person.
WSJ:For many parents whose children are approaching college age, their 529s may be essentially parked in low-risk placements. What should they do now if they find that they do not have the money they will need?
M. COLLINE: Consider increasing your own contributions, if you can. If you increase the risk, it can lead to the possibility of losing more of your money. Another benefit of the 529s is that the family can also contribute to your child’s plan. If you fail, consider asking family members to contribute to the plan for birthdays, vacations, and graduation.
SP. STRBICH: We also advise parents to start preparing a plan on how they will handle these costs by completing a Fafsa estimate, understanding expected tuition fees, and researching scholarships and scholarships.
WSJ:What other education savings recommendations do you offer parents in the current context?
SP. STRBICH: We advise clients to allocate education savings between 529 accounts, investment accounts in their name, and Roth IRAs, if you are eligible to contribute. This approach allows savers to take advantage of the tax savings offered in the 529 and retain the flexibility of Roth IRA assets and investment accounts to help you if life throws a curve at you.
Mr. SWETT: For parents who want to save longer term for college, it may be worth considering investing in defensive sectors like healthcare, consumer staples, and utilities. These sectors tend to pay dividends and can hold their values more effectively in tough economies. Additionally, this exposure can be achieved through formalized college plans or through traditional brokerage accounts for those who prefer a less formalized strategy.
WSJ:We’ve heard that using a Roth IRA more often for college savings might be a good idea. Is this a good option in this environment compared to a 529, and why or why not?
SP. STRBICH: For funds that will certainly be used for education, a 529 account has even more tax advantages, especially if you live in a state with a tax deduction for contributions to the 529 account. If you may not have need the funds for college tuition, or if you might have a job change that might require you to access some of these funds, a Roth IRA would be the best choice, as you can still access your contributions without penalty.
M. COLLINE: A major downside to using a Roth IRA to save more for your child’s future education is that there are tax implications to income that is withdrawn before the age of 59 and a half. or if you have had them for less than five years. An advantage of using a Roth IRA would be your ability to use the funds for your retirement, if your child gets financial assistance elsewhere or decides not to use it at all.
Ms. Munk is a writer in West Orange, NJ. She can be reached at firstname.lastname@example.org.
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