Parents Counting on 529 Plans to Pay for College Feel Market Pain

The volatile start to 2025 has left many parents relying on 529 college savings plans grappling with losses, as equity-heavy portfolios falter while conservative strategies cling to modest gains. With college costs rising and market turbulence persisting, families face a stark reminder of the risks inherent in long-term educational savings.

The Performance Divide: Equity vs. Safety

The first quarter of 2025 underscored the critical importance of portfolio selection in 529 plans. Equity-focused portfolios, such as the Stock Index and Aggressive Growth options, saw significant declines:
- The Stock Index Portfolio dropped -15.64% year-to-date (YTD) through April 8, 2025.
- The 2042 Target Enrollment Portfolio (for beneficiaries 12 years or younger) lost -7.55% YTD, reflecting its high equity allocation.

Meanwhile, conservative options fared far better:
- The FDIC-Insured Portfolio gained +1.20% YTD, shielding savers from market swings.
- The 2024 Target Enrollment Portfolio (for students nearing college age) rose +0.93% YTD, backed by its fixed-income focus.

Why the Pain? Market Volatility and Risk Exposure

The market downturn in early 2025, driven by lingering inflation and mixed economic signals, hit equity-heavy portfolios hardest. For parents with younger children, whose 529 plans are often in aggressive growth strategies (e.g., Target Enrollment Portfolios for 2039 or later), the losses are a wake-up call.

Consider the ESG Core Equity Portfolio, which fell -12.29% YTD, or the Global Equity Portfolio (-11.14% YTD). These results highlight the risks of overexposure to volatile asset classes, even in thematic strategies.

Strategic Considerations: Navigating the Storm

1. Rebalance with Time Horizon in Mind:
2. Parents of younger children should avoid panic selling. Equity-heavy portfolios historically recover over time. For example, the Stock Index Portfolio’s 5-year return of +15.97% (as of February 2025) underscores long-term resilience.

3. Conversely, those with college-bound students (e.g., 2024 portfolios) should ensure their allocations are conservative enough to weather near-term volatility.

4. Cost Matters:

5. High expense ratios erode returns. The ESG Core Equity Portfolio, with its 0.555% fee, underperformed the cheaper Bond Index Portfolio (0.065% fee) by over 10 percentage points YTD.

6. Diversify and Automate:

7. Target Enrollment Portfolios that automatically shift from equities to bonds as college approaches (e.g., the 2030 Portfolio, which dropped only -2.75% YTD) offer a disciplined, hands-off strategy.

The Bigger Picture: Balancing Risk and Reward

While short-term losses sting, parents must focus on long-term outcomes. For instance:
- The 2030 Target Enrollment Portfolio, despite its modest YTD loss, delivered a +6.54% annualized 5-year return (as of February 2025).
- The FDIC-Insured Portfolio, though low-risk, only grew +2.94% over five years—a stark reminder that safety often comes at the cost of growth.

Conclusion: Plan, Adapt, and Stay the Course

The 2025 market turbulence reveals three key lessons for 529 plan holders:
1. Time Horizon Trumps Timing: Aggressive portfolios are viable only for those with a decade or more before college begins. Parents with near-term needs should prioritize principal protection.
2. Cost Efficiency is Non-Negotiable: Index and passive strategies (e.g., the Bond Index Portfolio) offer superior risk-adjusted returns compared to high-cost active funds.
3. Automatic Rebalancing is Your Ally: Target Enrollment and Target Risk Portfolios, when chosen thoughtfully, reduce emotional decision-making during market swings.

For now, the data is clear: parents must align their 529 portfolios with their child’s age and risk tolerance—or risk feeling the pain of poorly timed choices.

In the end, college savings require patience, discipline, and a deep understanding of the trade-offs between growth and stability. Those who embrace these principles will be better prepared for whatever the market delivers next.