Navigating stock market volatility in college savings plans

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  • Market volatility impacts 529 plans, but age-based strategies help mitigate risk by shifting to conservative investments as college nears.
  • Short-term solutions exist for families facing tuition bills soon, such as delaying withdrawals or using student loans temporarily.
  • Long-term investors may benefit from buying stocks at a discount, as history shows markets tend to recover over time.

[UNITED STATES] It's a difficult moment for many families that rely on stock market profits to send their children to college. Stocks have fallen sharply in response to President Donald Trump's new tariff policy and concerns about a worldwide trade war. The S&P 500 fell almost 15% between Trump's inauguration on January 20 and April 7.

The recent volatility underscores how geopolitical tensions and policy shifts can ripple through financial markets, leaving investors scrambling to adjust their strategies. For families counting on 529 plans, the timing is particularly fraught, as many are already grappling with rising tuition costs and inflationary pressures on household budgets.

The index fell about 11% in two days of trade, ending Friday, and continued to fall Monday. There was little change Tuesday afternoon. The market selloff may manifest in the balances of state-sponsored 529 college savings plans, as it does in other investment accounts. These programs, called after Section 529 of the Internal Revenue Code, allow parents to invest money and then withdraw it tax-free for specific educational expenses.

Interestingly, despite the recent downturn, contributions to 529 plans have remained steady, according to data from the College Savings Plans Network. This suggests that many families are viewing the market dip as a temporary setback rather than a long-term threat to their savings goals.

Financial experts say you have options if you have a college payment that is coming due soon. Meanwhile, if your child is still little, this could be an excellent opportunity to buy stock at a discount. "The stock market will eventually recover," said higher education expert Mark Kantrowitz.

At least, that is what history has demonstrated. According to JPMorgan Asset Management's study, an investment of $71,750 yields a 10.4% annualized return over time. However, past performance is no guarantee of future results, and some analysts caution that today’s economic landscape—marked by high inflation and aggressive Federal Reserve rate hikes—could prolong the recovery period. Still, for long-term investors, staying the course has historically paid off.

Here’s what college savers should know during the market volatility.

Age-based risk should protect many investors

Many 529 plans use age-based asset allocation, which means that the investment mix is determined by the beneficiary's age and time horizon, and typically gets more conservative as they approach college enrollment age. In other words, by the time college rolls around, families will most likely have invested heavily in bonds and cash rather than equities. This can assist mitigate their losses.

"A 5 year-old has a long time horizon, whereas someone entering college this fall should not have that much at risk," said Barry Glassman, a certified financial adviser and the founder and president of Glassman Wealth Services.

Another advantage of the age-based investment strategy is that the funds would automatically rebalance to sell high and buy cheap, according to Glassman, a member of the CNBC Financial Advisor Council.

"So not only are they getting less risky over time, but they have been taking profits as stocks have soared to bring risk back into check," he told me. Kantrowitz advised parents to verify if their 529 plan money is invested in "a dynamic" portfolio. "The dynamic portfolios change the asset allocation either by age or enrollment date," he told me.

Typically, age-based accounts begin with 80% to 90% in stocks and gradually decrease to less than 30% as the child approaches college, according to Kantrowitz.

For those unsure about their current allocation, many 529 plan providers offer online tools or consultations to help assess whether adjustments are needed. Some states even provide free financial advising sessions for account holders, a resource that could prove invaluable during periods of market uncertainty.

Short-term workarounds to preserve your 529

If you have an upcoming college payment and notice that your 529 account balance has just dropped significantly, you still have choices to defer taking down the money and allow equities time to potentially rebound, according to experts. According to Kantrowitz, you can use other potential cash savings or income to postpone a 529 plan distribution until the market recovers.

Another option is to borrow federal student loans for the time being, with the goal of repaying the debt later through a qualified distribution from a 529 plan. Kantrowitz noted that families may be able to use their 529 college savings plan to pay off student debt for a beneficiary without paying taxes or penalties. But the lifetime limit of the option is $10,000, he said.

Families with many years before sending their child to college should view the current situation as an investment opportunity, according to Glassman. "During market turmoil, they are scooping up bargains to invest for the future," according to Glassman. Kantrowitz concurred.

"Pulling out funds now will lock in losses," Kantrowitz explained. "If anything, families should save more now that the market is down."

Over longer periods of time, the stock market has generally given more than it received. Advisors argue that once investors have established a good allocation strategy, they should ignore headlines and let the market do its thing. As stressful as the last few weeks may have been, such dips are not unusual, Kantrowitz pointed out. The stock market typically experiences at least three 10% drops and at least one 20% drop in any 17-year period, the typical timeline from birth to college, he added.


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