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Time can help heal wounds to college savings accounts

Posted: Friday, September 13, 2002

NEW YORK (AP) -- 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 Savings grow tax free, and earnings are exempt from federal taxes when they're withdrawn for a child's education expenses.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.

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

''You can cash out (of stock), but then where are you going to put the money?'' he asked. ''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 (to fund education) 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.

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.

''If you're in an aggressive age-based fund and you're not happy with it, consider switching to a more conservative age-based fund,'' Hayes suggested.

There's even less risk in the increasingly available guaranteed or stable value accounts, he said. The savers' principal is protected, and there's often a guaranteed return that's at least equivalent to a money market fund if not higher.

Not all college savers are backing off from the market.

A recent survey by Strong Capital Management in Milwaukee, Wis., found that 70 percent of parents have not changed their asset allocations despite the market's volatility, while about 25 percent have shifted to more conservative options.

Strong, which runs college savings plans in three states, is still ''seeing a lot of money going into the more aggressive portfolios,'' said Sarah Henriksen, the company's director of education planning.

''People do think of these as long-term investments,'' she said. ''It's not unusual for them to put 75 percent to 90 percent in equities.''

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On the Net:

Hurley's site: www.savingforcollege.com

www.metlife.com

Hayes' site: www.landmarkfas.com

www.strong.com



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