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Another Blow for College Savers

The volatile markets of the past few months have taken a toll on the investments millions of parents use to save for their children’s college education, according to just-released third-quarter performance figures.

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Premade portfolios of stocks and bonds, with set-it-and-forget-it convenience, are by far the most popular investments in state-sponsored college savings plans, but the third quarter showed, once again, that they are not immune to market gyrations. During the third quarter, these kinds of investments lost almost 9% on average, according to new data from Morningstar Inc., a fund research firm. While that drop was not as large as the broad market — the Standard & Poor’s 500-stock index fell 14% during the same period – savers may find the drop troubling, especially if they are counting on the money to pay tuition bills in the next few years.

Despite the recent losses, total assets in 529 plans have been growing steadily over the past several years. As of June 30, 529 plans had $149.8 billion in assets, up 34% from 2007, according to the most recent available data from the Financial Research Corp.

The premixed portfolios in state 529 plans typically come in two flavors: Age-based portfolios, which are designed to get more conservative as a child nears college-age, and so-called static portfolios, which don’t change over time. Together, they’re down 5.5% through the end of September, compared to a loss of 10% for the S&P 500.

Parents invested in age-based portfolios may be experiencing some déjà vu. These are many of the same investments that suffered during the market collapse two years ago – even those for students within a year or two of college enrollment, or currently in college. Age-based portfolios for kids ages 13 to 18 fell up to 9% in the third quarter. Those designed for students in college, ages 19 and up, lost as much as 6%, according to Morningstar. Not every investor lost money, however: For both age ranges, the most conservative available options were basically flat for the quarter.

The last few months of volatility highlight a key problem for parents, analysts say: For parents to keep up with the rapidly rising cost of college, they need stock-like returns. But in recent years, those returns haven’t come through. For the last five years, the S&P 500 is basically flat; over the same time period, tuition and fees are up 38% for in-state, public college students, 30% for private college students. In the same period, the average 529 plan has returned 5.6% — better than the market as a whole, but far behind the increase in tuition.

To encourage parents to keep saving even when the markets falter, a growing number of states are adding more conservative options to their 529 plans. Those include bank-like accounts that guarantee principal while offering a small return that’s tax free. And at least one state is now offering age-based portfolios that cut exposure to equities when market turbulence picks up. But parents can make only one investment change each year, which means it can be harder than ever to time the downs – and the ups – of the market.

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