Market Volatility Could Be Wreaking Havoc On College Tuition Savings

Families across the nation have been affected financially due to the novel coronavirus. Families of high school seniors who were already worried about financing their education are now even more apprehensive about their family’s ability to afford higher education.

“People's college savings have likely seen a significant decline in account balance due to the stock market declines,” says Robert Farrington, creator of The College Investor and contributor on Forbes.com.

The cost of education is traditionally one of the biggest barriers to affording college, and COVID-19 has exacerbated that fact, according to a Carnegie-Dartlet survey of more than 4,800 high school seniors.

Anxiety About College Costs Rises Broadly 

Carnegie-Dartlet’s survey found that only 23% of the sample say they currently have a high level of confidence in their ability to afford college now, while 32 percent say they had a high level before the pandemic took hold.

Seventeen percent of students are not at all confident they can afford college now, up 11% from the period prior to the pandemic. 

Traditionally confident groups, like those intending to go to private schools, have experienced a strong dip in their ability to afford college, according to the survey. Students’ confidence in their ability to pay for religious private schools has dropped further. 

Though millions of families have seen financial declines, including job loss, there’s still hope. “Coronavirus will impact college savings accounts in the short-term because parents simply won’t be able to contribute as much if they're not working. In the long term, this will lower the amount of compound interest they earn, but shouldn’t keep kids from going to college,” says Jack Choros of IronMonk.

How Families Invest For College

The College Savings Foundation’s 12th annual State of College Savings survey found that 79% of parents save for college and half of all families invest in a 529 savings plan for their children. 529 plans permit tax-free withdrawals as long as funds are used for educational expenses such as tuition or room and board.

Many college savings plans like 529s automatically move from an all-equities aggressive allocation to a more conservative bond allocation as children grow older.

Yet plans heavily invested in stocks, domestic or foreign, will have experienced substantial decreases in value.

“Most 529 savings plan portfolio options have at least some exposure to the stock market, so these have likely taken a hit. I know from my own experience that it can be frustrating, as my kids' accounts have fallen by about 20% since March 1,” says Matt Frankel, certified financial planner at The Ascent.

Families invested in high-risk funds may feel more comfortable moving that money to something more low risk. For example, families may want to move a year’s worth of tuition into a cash-based investment, like a money market fund or high-yield savings account.

It may be a good idea to talk to a financial advisor to ensure that a child’s account is in an appropriate portfolio option.

Look Into Alternatives To Your Plan A For College 

It’s not worth it for some students to spend hundreds of thousands of dollars for a degree, according to Ric Edelman, founder of Edelman Financial Engines.

“Half of freshmen drop out, less than half graduate after six years and more than a third obtain more college credits than are needed for a degree,” he says.

One reason this occurs is because students may change majors or transfer to other colleges, and the new major or college may not accept the credits previously earned, Edelman says. This is why it takes many students six years to graduate instead of four.

Students can consider several alternatives to what may have been an originally expensive college option, he says: 

Get a job at a company that will pay for college. Starbucks Corporation SBUX, Fiat Chrysler Automobiles NV FCAU, Walmart Inc WMT and Walt Disney Co DIS are among the companies that will help pay for a degree. 

Look into government programs. Students must agree to serve after graduation.

Attend community college first. Students can pay a fraction of the cost by attending community college. Many community colleges guarantee admission to four-year colleges and universities upon graduation.

Get a job. Students can also opt to go to school part-time and work part-time to fund college.

Take a gap year. Students can also work to accumulate some savings to pay for college. Almost all schools will allow students to defer enrollment with the exact same scholarship package a year later. Deferring enrollment could put time on families’ side in hopes that investment returns are more positive in a year.

Consider online degree programs. An affordable, flexible option, students could consider attending college online temporarily until college savings have a chance to build back up.

Ask Colleges For Help

Students may want to stick to the original college plan. In that case, families should get on the phone with colleges if their college accounts have experienced market volatility.

Many colleges can dig up more scholarships. 

Find out about loan options.

“In my opinion, student loans get a bad rap. There is no doubt that the system has been abused and that some students have accumulated a mountain of debt and have earned degrees that simply won’t provide the earning power to pay that debt back," says Robert R. Johnson, author and professor of finance at Heider College of Business at Creighton University. 

"But, used judiciously — and to earn degrees that truly build a person’s human capital — student loans can be an essential bridge to career success.” Ask the college’s financial aid office about federal and private loan options.

Work with the financial aid office to double-check the FAFSA. Is everything correct on the FAFSA, which could have been submitted way back in October of last year?

Make sure the college knows about drastic changes in family finances. Check with the college financial aid office to find out whether students are eligible to fill out its special circumstance form. That could change the financial aid award in families’ favor.

Plan For Other Children

It’s also a good idea for parents to consider how they’re investing for their other children, according to Farrington.

“Long term, parents should continue to save and invest. Dollar-cost averaging into a college savings account is a solid way to grow the account over time. In the short term, parents should have an asset allocation that reflects current needs. If a child is going to college soon, it might be a good idea to keep that amount in a risk-free investment,” he says.

The Ascent's Frankel says it's also important to remember that the stock market is still the best long-term investment vehicle.

"As long as you're in an age-appropriate investment option — based on how many years until your child will go to college — you shouldn't worry from a long-term perspective."

The coronavirus could change college decisions for the class of 2020, as it’s changed the way families prepare for college. Less than 1% of students in the class of 2020 are actively planning to delay their education, with more than one-third saying they will not consider delaying at all, according to Carnegie-Dartlet’s survey.