Prepaid 529s May Be Hit by Market Downturn

One way parents of potential college students can pay for college tuition is through a prepaid 529 plan. Instead of putting money into a customary 529 plan, where it’s subject to market swings, parents can pay for future college expenses at today’s prices through a prepaid 529 plan. Although the terms of these plans vary from state to state, they essentially pledge to meet any future increases in tuition charges. Since the plans are usually funded by market investments, however, some observers are forecasting a money crunch down the road.

The potential crisis comes at a time when the market implosion is causing more parents to look into prepaid 529s, resulting in a sharp increase in new accounts. In Pennsylvania, for example, new accounts were up 26% last year. The ultimate risk is that parents could lose part of their investments, but most of the prepaid 529 plans say they have enough cash to weather the market’s storms. Many say plans that once had surpluses, however, are now underfunded, even though they may still have enough money to finance several years of tuition obligations.

Plans that are in financial trouble have some options to close the money gap, including an increase in fees on future investments. Others may appeal to their state legislatures for additional funding, although that may prove to be a hard sell as many state budgets are already awash in red ink. In the past, the most common response to market downturns has been to close 529 plans to new enrollment. Even when that has happened, plans typically were able to honor existing contracts.