Saving for College


When the stock market hit the skids, investors stampeded into conservative investment options, desperate to preserve as much of their savings as possible. But with the Dow crossing the $10,000 mark in October, you may be wondering if it's time to get your savings back into the market to generate as much return as you can to pay ever-increasing college costs.

It's a difficult dilemma: The more aggressively you invest, the better chance you have of meeting your college savings goals, but by investing aggressively, you're taking on risk that could derail those same goals. So how do you balance those competing options?

If you're investing on behalf of a very young child, you should invest aggressively because you have many years to grow your funds before your child goes to college. That being said, advisors do not recommend investing 100 percent in stocks, even for a young child. "The maximum equity allocation I would recommend is 80 percent stocks, 20 percent bonds, because the research we have done shows that this is the point at which you don't add return," she says.

Another situation when it's appropriate to invest aggressively is when you can fund college from other income sources, should your investments suffer a large loss at the wrong time. "If you have other sources of income that you can use to fund the first two years of college, you can also be more aggressive," she says.

Generally, 529 plans offer a number of aggressive investment options, including age-based plans that are invested mostly in stocks during the years leading up to the time the child goes to college. Other common options include aggressive allocation options to single fund options that invest in small and medium-sized companies and international companies. When choosing between aggressive investment options in a particular state's 529 plan, pay some attention to the underlying investments, he says.

Your 529 plan Web site offers details about what mutual funds make up a particular investment option, who manages those funds and how those funds have performed. Look for funds with low costs and a strong performance over the past three- and five-year periods.

Avoid being overly aggressive when your child is in high school and you don't have cash available outside your 529 plan."With a child in high school, there's too much downside risk. It's better to err on the conservative side once your child is within four years or so of going to college."

If you have limited funds in your 529 account think carefully about how much you should funnel into aggressive options and at what point you should switch those funds over to more conservative options. A major benefit of age-based investment options is that they make these decisions for you, switching away from overly aggressive options as your child moves closer to attending college.

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