Time can help heal wounds to college savings accounts

NEW YORK -- For many Americans, the slumping stock market has dealt a double blow: Their retirement accounts have tanked, and so have college savings accounts they set up for their children's education.

Repairing the damage to education accounts can be a bit trickier than for retirement savings because parents often don't have as much time to recoup.

Parents with young kids needn't be too frantic because they can wait for the market to recover, experts say. But those with teenagers may need to consider some disaster recovery strategies if they have tuition payments due soon.

Among the most popular education accounts are the Section 529 college savings plans, which take their name from Section 529 of the U.S. tax code. Sponsored by states, they allow parents and grandparents to invest in a variety of stock and fixed-income accounts. Savings grow tax free, and earnings are exempt from federal taxes when they're withdrawn for a child's education expenses. There can be state tax breaks, too.

Joseph F. Hurley, author of "The Best Way to Save for College -- A Complete Guide to Section 529 Plans," said that despite the depressed stock market, the plans are still growing strongly. Balances rose $6 billion to $15 billion in the first half of the year, he said.

Don't be rash

Hurley suggests worried families should review their accounts, but not act precipitously.

"You can cash out, but then where are you going to put the money?" he asked, referring to stocks. "Assuming you still want to save for college, the best returns -- and certainly the best tax consequences -- may remain in the Section 529 plans."

Lew DeRisi, MetLife director for retirement and savings, said most education accounts haven't been as hard-hit by the down market as retirement accounts.

"The savers are parents and grandparents, and they tend to be more conservative in investments in college programs because there's a child involved," he said. "They've made a promise, and they don't want to renege."

But if they have a 17-year-old and a foundering account, they might "need a disaster recovery plan," he said. "And it might be worthwhile seeking help from a financial planner."

One thing a family can do is give the 529 account time to recover by funding the child's early college costs from other sources, DeRisi suggested. For example:

Is there other money you can tap, perhaps U.S. Savings Bonds you've stashed away, or maybe some bank certificates of deposit?

Do you qualify for a home equity loan or a short-term personal loan?

Does your child qualify for more financial aid from the university or, perhaps, scholarships or grants?

"If you defer tapping your account, you still should review how the 529 assets are allocated to get them in better shape for the future," DeRisi said.

'Tough it out'

Timothy Hayes, a fee-only financial planner in Pittsford, N.Y., said parents shouldn't abandon their savings strategies.

"If children are still a number of years away from starting college, the advice I'd give parents is not unlike that I'd give them in preparing for retirement: Tough it out," he said. "Keep adding money. In time, the market will recover."

Still, for those who are queasy, there are a lot of new investment options in the state 529 programs that are worth looking at, he said.

Many parents and grandparents have found that the age-based funds make a lot of sense. These funds generally blend stocks with fixed-income components like bonds. They might start with an 80-20 mix of stocks to bonds when a child is young, then evolve to a 20-80 mix as the child approaches college age.