When your 529 college plan becomes a $5.29

Saving college money for your kids or grandkids looks grim right now. But hang in there, experts say. You’ve got a sympathetic ear where you might not expect.

Consultants at Financial Research Corp. in Boston recently released some back-of-the-envelope calculations indicating savers who a year ago had more than $110 billion stashed in tax-friendly 529 college savings plans lost about 9 percent of their investment last quarter. The October-November market bloodbath whacked the funds even harder, but it isn’t clear who, if anyone, has dared to look.

Even Missouri’s MOST and Kansas’ Learning Quest plans – which both remain among the nation’s best performing 529 savings plans, according to SavingForCollege.com – have taken hits, said Rob Myers, manager of American Century Investments’ Leawood investors center. But not all have been hit the same.

Learning Quest’s mix of more than 17 investment choices, for example, currently are running between a 41 percent loss for the year in ultra-aggressive all-stock funds and a 2.5 percent gain in ultra-conservative money market funds, Myers said.

Most families put their money in age-adjusted plans that are regularly rebalanced with more conservative investments every few years to preserve profits as college approaches. Based on Learning Quest’s performance, a moderate to conservative fund for a 15-year-old might be down about 13 percent for the year, while an account for a three-year-old sibling might have dropped 39 percent, he said.

Losing that money now seems especially hard because college costs in the last decade have outpaced inflation by a more than 2.6 to 1 clip and student debt is up an inflation-adjusted 63 percent to an average $22,000, according to the Chronicle for Higher Education. College costs are red lining beyond the reach of increasing numbers of families and already out of reach in every state but California, according to new reports this week.
Parents investing for a 10-year-old or younger child probably will be able to plug much of that gap by continuing to put money into the same age-adjusted account they have already, say commentators such as Mara Strom at FinancialAidFinder.com in Seattle.

Investing for an 11- to 16-year-old is trickier. Switching from an age-based account to one with more stocks may be a reasonable choice, but so might staying the course if the risk that comes with switching seems to great.

Savings guru Joe Hurley at SavingforCollege.com reports two other reasons for betting on 529 plans. First, if taxes are increased sometime in the future to deal with growing federal deficits , tax-free growth in 529 plans will become even more critical for savers, he said.

And the second reason? President-elect Barak Obama’s recent financial disclosure statements show that the Obamas opened 529 accounts for their 7- and 10-year-old daughters. Hurley calculates are down about 34 percent and 26 percent respectively.

“It's nice to know that our new President has his personal interests aligned with other parents who are concerned about funding their children's future college education.” Hurley writes. “ Let's just hope our economy can recover quickly enough to make our use of 529 plans worthwhile.”