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Setting Expectations When Saving for Education

Updated: Dec 27, 2022

Everyone wants to earn a favorable return on their investments.

This is particularly true when we invest money for a specific and time-sensitive purpose like saving for college or buying a home. Over the past decade the stock market has had a remarkable run with the S&P 500 Index posting an annualized return of about 14% (or 12.4% when adjusted for inflation).

In 2022, however, both the stock and bond markets have taken a beating with double-digit declines in investment portfolios often being the norm rather than the exception.

What to Do if Market Drops Took a Bite Out of Your College Savings

A recent article in the New York Times entitled “What to Do if Market Drops Took a Bite Out of Your College Savings” points out that savings in 529 Plans have not been immune to these declines. As the Times article reports, investors in age-based 529 options - which are more conservatively invested as a beneficiary ages – experienced losses of between 5% and 7% in accounts for students near college age. For those accounts where the beneficiary is younger, the declines have been greater because they typically have a greater portion of their investments in stocks.

So what to make of these developments? Is it time to reset expectations?


A few observations:

Open An Account Early

First, 529 accounts held for the benefit of younger beneficiaries have ample time to recover from the market downturn. Much can happen even over short periods. While investment gains are never guaranteed, it is also true that past performance is no guarantee of future results. This applies to market downturns as well as upswings. So opening a 529 account when beneficiaries are young and making steady contributions over time maximizes the opportunity for compound growth and recovery from market declines.

Leverage Tax-Free Savings Vehicle

Second, unlike UGMA/UTMA accounts and other taxable savings vehicles used by college savers, investments in a 529 plan are tax-free. This keeps more money in the account with an opportunity for growth and quicker recovery from market losses.

7% Portfolio Return Over 15 Years Puts You Ahead

Lastly, it’s important to have reasonable expectations about investment returns. Despite the year-to-date market declines, 529 investments have performed quite well over time. The Times article notes that the annualized fifteen-year return for the period ending August 1, 2022 for a lump sum investment in the New York 529 Plan aggressive age-based option was 6.9%; for the moderate age-based option the annualized return was 5.9%. As previously noted, an age-based option is more conservatively invested as the beneficiary ages. This helps preserve principal when it is needed to pay qualified education expenses. Even with the recent market losses, a 6% - 7% portfolio return over fifteen years puts investors in 529 Plans ahead.

Saving is Always Better Than Borrowing

One last point: 529 Plans provide a dedicated tax-efficient account for education savings. This means that in addition to the potential for tax-free investment growth, every dollar saved is a dollar not borrowed. And with interest rates on the rise even a muted investment return is preferable to long-term student loan debt.


We realize that there are no guarantees when it comes to investing but we believe that you have the best opportunity for success if you invest early. After all, saving is always better than borrowing.


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