Alonso Rodríguez Segarra fielded a frantic call in April from a graduate student who had a big tuition bill due — and an educational savings account that had just cratered in value.
“She was desperate,” says the founder of Boca Raton, Florida-based Advise Financial. “Most of her money was just in stocks and she was about to pay for her education.”
It’s a nightmare scenario, but it’s one a growing number of investors should have on their radar. To cope with the ever-rising price tag of a college degree, some 17 million Americans have more than half a trillion dollars socked away in tax-preferred 529 plans. These plans, which are offered by most states as well as some financial institutions, allow after-tax contributions to be invested and grow, tax-free, as long as the withdrawn funds are spent on qualified educational expenses.
Many 529 plan savers keep their money in target-date funds that automatically shift from more risky allocations that are geared toward growth to more conservative ones as the expected date of withdrawal nears.
This is typically done by adjusting the ratio of stocks to bonds. In theory, this protects investors from weathering significant losses around the time they need to withdraw the money to pay school bills.
In practice, though, results can be mixed, says Tara Lawson, a wealth strategist at U.S. Bank Private Wealth Management. “It’s helpful, but it’s not perfect, because as we know, there are even times when the bond market is down.”
Typically, bonds move inversely to stocks; when stocks are outperforming, bonds don’t do as well and vice-versa. But if volatility is high enough, even asset classes considered lower-risk can experience losses. This past April, Wall Street was alarmed by simultaneous falls in both stocks and bonds, a sign of acute investor pessimism. Fear that the Trump administration’s trade, tax and immigration policies could damage the economy sent the market on a roller-coaster ride this spring.
While stocks have largely recovered from the turbulence that skirted bear market territory, volatility remains high. When a market plunge collides with a tuition bill coming due, what are a parent’s options?
Money asked financial planners to share their best advice for keeping your college savings — and your sanity — intact.
Don’t cash out in a panic
It can be tempting to tuck your tail and run, or in the case of 529 plans, shift all your savings into safer assets when markets are in free fall. But that’s a mistake, experts say.
“Avoid panicking and selling your positions, especially when you have the need for future growth,” Lawson says.
IRS rules stipulate that you can only rebalance a 529 plan allocation twice a year without incurring penalties. If you already made one change this year, then had a knee-jerk response — say, moving all those funds into cash — your money could be stuck on the sidelines while the market rallies.
What’s more, historical market patterns show that days of heavy losses are typically followed in short order by days of big gains, and missing out on those recovery days can do lasting damage to your earnings.
Sit tight and wait it out
If you don’t need the money right away, keeping your money in the 529 plan until the market recovers and you can recoup your losses is a good option, says Autumn Knutson, founder of Tulsa, Oklahoma-based Styled Wealth.
“If they have extra savings that’s not allocated to another goal, they can use that and take the [529] money out later,” she says. This strategy is obvious if, for example, you’ve still got three years of undergraduate education to pay for and you can swing the first semester’s bill through other sources, whether it be your existing savings, current income, a low-interest student loan or scholarships. But even if you’re nearly through spending on qualified expenses — if your kid has only a semester or two left, for instance — you still have options. You can transfer a 529 plan to another family member via a rollover or by changing the beneficiary.
You may also be able to convert your college savings into retirement savings: As part of the SECURE 2.0 Act, rules were changed to allow 529 plan custodians to roll over up to $35,000 into a Roth IRA in the beneficiary’s name.
“The ability to transfer to a Roth IRA is very new, but there’s a lot of red tape around this,” Knutson cautions. For starters, ordinary Roth IRA contribution limits — $7,000 in 2025 — still apply, the beneficiary must have earned income of at least as much as you plan to roll over and the 529 plan the money is coming from needs to be at least 15 years old.
Give your risk tolerance a gut check
Since markets have largely recovered from the beating they took earlier this year, it’s a good time for anyone with a 529 plan to take a pulse of how much risk they’re comfortable with.
“Most families go with the enrollment date investment options and don’t think about it. Now is the time to think about it,” says Elizabeth Pennington, a senior associate at the financial planning firm Fearless Finance.
Even if your kids are still writing their names with crayons, the recent spate of volatility can serve as a good opportunity for a gut check, she says. “It’s important for parents to think about how they would respond” if their kids were older and they had tuition bills looming.
“If the answer is they’d have to take on debt or couldn’t go to that school, that tells me they’re taking on too much short-term risk for their comfort level,” she says.
Don’t stay too aggressive for too long
Resist the temptation to keep your foot on the gas when stocks are climbing. “For a lot of my clients, I’d say if we need it in a five- to seven-year period, it should be in cash. By the time they’re a junior in high school, I want it in stable assets,” Pennington says.
This might seem like an overly-cautious approach, but Pennington says the limited investment options and ability to change allocations within 529 plans call for a more defensive strategy, particularly if you’re relying solely on that money to cover educational expenses.
“If this is the only money, stability at a certain point is more important than growth,” because you want to preserve the gains you’ve already earned, she says. Since stocks have rebounded from their April lows, right now might be a good time to lock in some of those gains.
Mitigate losses by spreading out withdrawals
For Rodríguez Segarra’s unlucky grad student client, some loss was unavoidable, but he advised her to make incremental withdrawals rather than pull out the full amount she intended to spend on her education all at once. Many colleges have installment plans or deferred payment plans that allow you to chip away at your tuition bills incrementally rather than paying everything at the start of the semester.
“Let’s not try to sell your position at once,” he told her. This way, at least some of her principal remained invested, which gave her the opportunity to recover some of her losses when stocks recovered in the subsequent weeks.
Rodríguez Segarra says the principle here is the same as dollar-cost averaging, a strategy that calls for making investments on a regular schedule rather than trying to time the market (which even professionals don’t do very well).
“It’s the only way we can average this damage,” he says.
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In April, Alonso Rodríguez Segarra received a frantic call from a graduate student who was facing a large tuition bill and had just seen her educational savings account lose a significant amount of value.
“She was in a desperate situation,” says Segarra, the founder of Advise Financial in Boca Raton, Florida. “Most of her money was invested in stocks and she needed the funds to pay for her education.”
This is a nightmare scenario that more and more investors should be aware of. With the rising cost of college education, approximately 17 million Americans have invested over half a trillion dollars in tax-preferred 529 plans. These plans, offered by states and financial institutions, allow after-tax contributions to grow tax-free as long as the funds are used for qualified educational expenses.
Many 529 plan savers opt for target-date funds, which automatically adjust the allocation of stocks and bonds as the expected date of withdrawal approaches. This is meant to protect investors from significant losses when they need to withdraw the funds to pay for school.
However, this strategy may not always be foolproof, according to Tara Lawson, a wealth strategist at U.S. Bank Private Wealth Management. “It’s helpful, but it’s not perfect, because as we know, there are even times when the bond market is down.”
Typically, bonds and stocks have an inverse relationship, meaning when one performs well, the other may not and vice versa. But in times of high volatility, even traditionally lower-risk assets can experience losses. This was evident in April when both stocks and bonds saw significant declines, causing concern among investors. The market’s roller-coaster ride this spring, driven by fears of the Trump administration’s policies, has resulted in continued volatility. So what can parents do when a market downturn coincides with a tuition bill?
Don’t make hasty decisions
It may be tempting to panic and sell off your investments or shift all your savings into safer assets during a market downturn. However, this is not a wise move, according to experts. “Avoid panicking and selling your positions, especially when you have the need for future growth,” says Lawson. The IRS only allows two changes to a 529 plan’s allocation per year without penalties. If you have already made one change this year and then make a knee-jerk reaction, such as moving all your funds into cash, you may miss out on potential gains if the market recovers. Additionally, historical market patterns show that days of significant losses are often followed by days of significant gains.
Consider other options
If you are facing a tuition bill and your 529 plan has taken a hit, there are other options to consider. One option is to take out a loan to cover the cost of tuition and then repay it with the funds from your 529 plan once the market has recovered. Another option is to use other sources of income, such as a part-time job or a home equity line of credit, to cover the tuition bill and leave your 529 plan untouched.
Reassess your risk tolerance
A market downturn can serve as a reminder to reassess your risk tolerance and make any necessary adjustments to your investment strategy. If you find that you are uncomfortable with the level of risk in your 529 plan, it may be time to consider a more conservative allocation. However, it is important to keep in mind that a more conservative allocation may result in lower potential returns.
In conclusion, while a market downturn can be a cause for concern for those with 529 plans, it is important to remain calm and avoid making hasty decisions. Consider alternative options for covering tuition bills and reassess your risk tolerance to ensure your investment strategy aligns with your goals.
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