Stock Market and Banking & Finance and Investing and Education & Workforce Development and Wealth Management

A battered stock market is no reason to stop investing for a college education

September 26, 2009

Stock market investors typically are told to buy low and sell high. So the sage advice is quite timely now—even for participants of college-savings plans—as the major indexes attempt to rebound from a severe slide.

Financial planners who counsel clients on investment strategies say there’s no reason a contributor to a college fund shouldn’t remain aggressive. In fact, the biggest mistake one can make right now is to avoid stocks in favor of safer investments, said Matt Haab, a wealth management partner at Indianapolis-based Veros Partners Inc.

“Some people’s knee-jerk reaction is, ‘We can’t afford to lose anymore; let’s shift to something that offers more stable value,’” he said. “The problem with that is, it’s going to be a fixed, low rate and they’re not going to get any benefit from any market recovery. So they get the worst of both worlds.”

Of course, one’s aggressiveness depends upon how close the beneficiary is to enrolling in college.

Parents starting a savings plan for a newborn arguably can afford to invest in riskier options, just as younger employees have more flexibility to roll the dice with their 401(k) plans.

Those who have the luxury of waiting a decade or more before making withdrawals have plenty of time to invest more heavily in stocks.

“The future is always uncertain, but if you buy at a relatively lower spot, and you’ve got some time, the more time you’ve got, the better,” said Chris Cooke, managing director of investments at locally based Cooke Financial Group.

But if college is in the near future, it’s far too perilous to have a portfolio consisting solely of stocks.

Then, Elaine Bedel, president of Indianapolis-based Bedel Financial Consulting Inc., recommends switching to more reliable investments such as corporate bonds, Treasury bills and certificates of deposits.

“If the child is getting close to going to school, you shouldn’t be in the market,” she said. “You need to make an adjustment so that your funds are in the fixed-income side.”

Whatever path one takes, the drop in the stock market presents an ideal time to begin saving for college, and a 529 plan—particularly Indiana’s offering—is one of the best options, Bedel argued.



She’s not alone in her opinion. Chicago-based investment research firm Morningstar Inc. in April rated Indiana’s CollegeChoice plan one of the five best in the nation. Morningstar lauded the state’s plan for its solid underlying funds across all major asset classes, sensibly constructed portfolios, reasonable fees and 20-percent tax credit up to $1,000 for Hoosiers.

In other words, Indiana residents receive a $1,000 tax credit when they invest at least $5,000 in the plan annually. The state introduced the tax credit in 2007 and since has seen the number of accounts mushroom more than 500 percent, said Jodi Golden, executive director of the Indiana Education Savings Authority.

Indiana’s 529 savings plan boasted assets of roughly $895.3 million as of July 30, and total plan participants numbered 146,392, including 103,466 Hoosiers. U.S. citizens can enroll in any state plan, regardless of where they live, but only residents of the state offering a particular credit or deduction are eligible for the tax break.

Making Indiana’s plan even more attractive is its switch in December 2007 to a different administrator. The authority dumped New York-based JPMorgan Chase & Co. amid complaints of expensive fees and hired Massachusetts-based Upromise Investments Inc.

“We cut our fees in half and expanded our investment options,” Golden said. “When we transitioned over, we really wanted to make an effort to have more Hoosiers participate in the plan.”

College-savings plans have become wildly popular in recent years due mainly to three factors: Congress made permanent the tax-free withdrawals that had been slated to end in 2010, financial aid rules were clarified and quelled concerns the plans could hurt eligibility for grants and loans, and many 529 providers slashed expenses and upgraded investments.

Indiana’s plan offers two investment options: a program that can be purchased directly on one’s own and a custom version that can be accessed only by a financial adviser.

Nationwide, 115 plans are available, with every state and the District of Columbia offering at least one program.

By 2010, 529 assets are expected to reach $300 billion, according to Financial Research Group in Boston.•

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