Need to tap your 529 college savings? How to handle a market downturn

Months of stock market volatility may deliver a costly surprise to parents sending children to school this fall: smaller-than-expected 529 college savings plan balances. 

The average 529 account size was $30,287 in 2021, according to the College Savings Plans Network, but families may now have lower balances, financial experts say.

And it may be a “rude awakening” for parents scrambling to make their first payments in August, said certified financial planner Lisa Kirchenbauer, founder and president of Omega Wealth Management in Arlington, Virginia. 

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Many 529 plans offer age-based portfolio allocations, shifting to more conservative assets as college approaches, such as stocks to bonds. But since bond values and market interest rates move in opposite directions, bond prices have fallen in 2022 amid rate hikes from the Federal Reserve.

“You might only have a 4% or 5% spread between what your stocks and your bonds are doing, and they’re both double-digit losses,” said Byrke Sestok, a CFP and co-owner of Rightirement Wealth Partners in Harrison, New York. 

Smaller 529 accounts mean less money to cover college bills, and the solution may depend on several factors — how much you need, when bills are due and other funding sources.

Some advisors suggest waiting to tap 529 accounts until the market rebounds. But there’s no guarantee waiting six to 10 months will pay off, Sestok warned, especially with more rate hikes on the horizon.

While savings account yields are starting to creep higher, returns are still fairly low, making it an attractive option for covering short-term college expenses, Sestok said.

Of course, paying cash may be difficult with the average 2021-2022 tuition and fees for full-time undergraduate students ranging, according to the College Board, from $10,740 for in-state public schools to $38,070 for private schools.

With surging home prices, you may consider a home equity line of credit, or HELOC, allowing you to borrow money as needed, Sestok said.

HELOC rates may range from about 2% to more than 7%, depending on your credit, according to Bankrate.

Another option, portfolio loans or lines of credit, allow you to borrow against the assets in your investment account, with limits depending on how risky your assets are. “With securities-based lending, you’re likely to get a better rate,” Sestok said. 

Both options may provide temporary access to cash with the ability to pay off the loan with your 529 account later. However, you’ll need detailed record-keeping for the IRS since withdrawals for non-qualified expenses may incur taxes and a penalty.

And you’ll need to crunch the numbers by comparing the difference between interest rates to how much your 529 account is down, factoring in repayment timelines, Kirchenbauer said.

“Unfortunately, it’s not an easy no-brainer,” she added.