So your baby's almost grown and college is near. Here's the plan: 1. Fill out the Free Application for Federal Student Aid, or the FAFSA, available at www.fafsa.ed.gov/ The sooner you fill it out, the greater your chances of receiving gift aid, says student loan provider Sallie Mae. Ronald Ramsdell, founder of Minneapolis-based College Aid Consulting Services, said parents should also be aware of each school's financial aid deadline. Some are as early as mid-January.
2. Reevaluate your 529 plan allocation. Like 401(k)s, 529 plans offer a mix of investment options that range from 100 percent equity to 100 percent cash. Many parents select an age-based fund that invests more in stocks when the child is young and more in bonds and cash as the child nears college age. But that doesn't mean teens are protected from a stock market tumble. The Minnesota College Savings Plan's age-based option for 15- to 17-year-olds, for example, was down nearly 12 percent on Nov. 30 while stock-heavy accounts for children up to 3 years old lost about 35 percent of their value.
If your child is in high school, consider moving the money to a cash or guaranteed option. The rule of thumb is that short-term savings and stocks don't mix. Then again, moving the money to cash will mean locking in your loss, reminds Finaid.org Publisher Mark Kantrowitz. He suggests parents with kids in school who believe the market will recover over the next several months should avoid making withdrawals from their accounts this year if possible. Tax credits and low-cost loans can bridge the gap. Or parents could hedge their bets by moving enough money to finance the next year or two of college into the cash option and leaving the rest to benefit from a stock market rebound.
3. Dislike your 529 investment mix? Now you can change your mind twice. This year, the IRS altered the rules so that 529 plan account holders can change their investment allocations not once, but twice in the calendar year. The one-time-only rule, which was developed so individuals didn't day trade their college funds, locked many people into stock-heavy funds during the 2008 decline.
