BUFFALO, N.Y. — Having already lost their spring sports seasons, proms, and perhaps even their graduation ceremonies due to the coronavirus outbreak, high school seniors face another daunting reality as they prepare to head off to college next fall.
The money their parents scrimped and saved for several years in order send them to school may have taken a dramatic hit during the recent economic meltdown associated with the outbreak.
Hopefully, investments in savings programs such as 529s had been carefully monitored in recent years to minimize sudden losses.
“I’m a big believer for those in 529 plans to use some of the age-based portfolios to do that automatically,” said certified college planning specialist Jeff Boron of Send Your Kids to College. “They dial back the risk as the college years approach to less aggressive funds.”
However, Boron also understands the temptation of many to have let their college savings investments ride in higher risk funds during an unparalleled period of growth in the stock market since 2017.
For those who did that, and sustained losses, their best options may now to use some debt financing for the first years of college until (hopefully) the market swings back to replenish their 529s.
A critical time
There is much that parents and students need to know right now because circumstances in terms of the coronavirus and the impact it is having are changing daily at what is a critical time in preparing to send a student to college next fall.
For example, “decision day” is fast approaching. For many colleges and universities that day, when prospective students select a college and commit to attend by sending in a deposit to hold their space, is typically May 1, although according to Boron that may likely be pushed back a bit.
Meanwhile, we are currently amid the so-called appeals period.
That is the time during which prospective students, having received their financial aid commitments from colleges to which they have been accepted, can then “appeal” for additional aid based on special circumstances which arose since last October, when they would have submitted financial data upon which their financial aid packages are based.
“Coronavirus is going to create some of those special circumstances,” Boron said. “So if you are a small business owner that got hurt by this, or let’s say you got laid off or lost your job, or won’t be called back to work for a while, you have a special circumstance impacting your income.”
Boron says your first step under such circumstance should be to contact the college your child plans to attend.
“If you have a special circumstance that the college doesn’t know about, you want to make sure to make them aware of it in a proper manner,” he said.
The chances of getting additional aid
“Schools, if an appeal is written correctly, will generally listen and use what is called discretionary authority to send additional award money to that family,” said Boron, whose firm offers that service.
“Whenever there’s a significant change in circumstance that effects income for the household you want to let the college know about that. Some are very good art listening and understanding, some are not, and a lot will depend on how badly that college wants your student and what they are willing to do to get that student, as opposed to seeing your student going to another school because they couldn’t compete.”
However, with so many potentially vying for additional aid under today’s circumstances, it may not be as much as it would be in more ordinary times.
“A lot of these schools rely on endowment money and they protect that endowment money,” Boron said. “With the markets being down to the degree that that they are, and with that money having been invested, they’re going to see that pool shrink just like a lot of individual's 401Ks and other investment accounts have shrunk. They might be a little leery about doling out more of it because this could also be the nail in the coffin for a lot of private schools that are struggling to survive.”
Tough times for colleges too
“This happening at a time when enrollment may go down, and when colleges may have to refund on a pro-rated basis a share of room and board money to existing students,” said Boron, referring to the many colleges and universities which went to on-line learning and closed their dorms and dining halls in an effort to help stop the spread of the virus. “So it's going to put colleges in a big financial strain,” he said.
According to Boron, very few schools have figured out how they plan to do this, noting that much of their administrative staff are also working from off campus, creating circumstances where workflow has been interrupted.
“Based on my research, only a handful of colleges across the country have come up with a policy already and it's something they will work on but it's still early in the game for that. There are also some messages being sent to congress that the colleges need some relief from this and will want to be in on part of this stimulus act.”
Changing Your Strategy
You may have saved enough to get your child through one or more years of college, thinking that if loans are necessary, you’ll take them once the money you saved had been expended.
Then came the crash associated with COVID-19, perhaps decimating the amount you saved.
Under those circumstances, instead of spending those savings next fall, you might want to reverse your strategy by taking loans to pay for the earliest years of college.
“The loan rates for things like direct loans as well as private loans are probably coming down as a result of all this,” said Boron.
This would allow for the money left in a 529 or other college savings program to be left alone, perhaps to grow again when the economy and the stock market recovers.
“Pulling money out of a depressed account is always a dangerous idea,” Boron said.
It’s also important to remember, even if your son or daughter is about to enter college, you may not need all the funds you saved immediately.
“It’s very similar to when we work with people on their retirement plan, who say they are retiring next year and want to put everything into a fixed interest account. We often remind them that this is a 20 to 30-year proposition. … Same thing with college, although that may be for just four or five years, so we do have some time to recoup some losses.”
Other things to note
Currently enrolled students may also want to keep an eye on interest rates on loans, especially if they are lowered as a result of stimulus bills and allow them to refinance their existing loans at lower rates.
If you save through a 529 plan, it’s important to remember you may be limited in terms of how many times you can change your investment options in a calendar year.
“That’s because these are low cost plans,” Boron said. “And the cost for everybody making changes on a daily or weekly basis would be significant to them in order to do all that trading. So, most of them are limited to the number of time s a year you can make changes,” he said.
New York’s 529, for example, only allows investments to be changed twice within a calendar year.
This means that those who have already made a change since the economic tumult began, need to be aware that they only have one more chance to make changes if the markets rebound.
And while getting back into higher growth investments just before a bounce would be fortuitous, no one can time the market … not even seasoned professionals such as Boron.
There are also important changes to note regarding the Scholastic Aptitude Test (SAT), which is key in determining which colleges a student might qualify to attend.
“There is a little bit of wrinkle right now in that they cancelled the test for April and May,” Boron said. “June is still on the table, so we are viewing this day to day and week to week. There will likely be some schools which, for at least a year, will go ‘test optional.’ That would be good news if your son or daughter is a good, well rounded student but a horrible test taker. That may work in their favor.”