With the sudden economic meltdown caused by the collapse of the housing market under the weight of loans to unqualified borrowers, families of college-bound students are feeling the pain. This has been building for some time now, as the easy credit government policies and growing number of defaults heated towards a collision.
The San Jose Mercury News ran a good article in their paper this past Thursday, October 23rd, describing this pain with a couple of real life examples. Since I have seen over a hundred families in the last few months, I can attest that these examples are not unique, but in fact typical. The article is located here:
There are a couple of points in the article on which I would like to elaborate. Overall, this article is very well written and researched. But on the point about the "529 college savings accounts", I think the information is potentially dangerous without further clarification.
First, notice that the paragraph that brings up the 529 plans by saying, "And as the stock markets continue to fall, many families who did manage to set up college savings accounts, often through mutual funds or tax-free "529" accounts, have seen their assets dwindle". Exactly right. And this is the source of much of the family's pain.It goes on to add that, "Many advisers say that if your child is still a few years away from college, now is a good time to invest, essentially buying stocks on sale". This where I say, whoa.
This issue is market risk, in my opinion. Most savvy advisers I know say that, regardless of the use of the funds, if you need those funds with the next 3 years, then is is prudent to be out of the market, for the reasons we have lately seen. At the very least, there should be a steep tapering of asset allocation to more fixed-rate investments and away from the stock market as the years get close. Since markets perform more predictably and better over the long-haul, and remain volatile in the short-term, this is a prudent approach on money needed for college, or other important things like weddings.
There are places to accomplish these objectives. The problem is knowing all the different choices and their strengths and weaknesses. And judging from the widespread pain around the valley and beyond right now, few are getting adequate information.