Stock slump hits college savings funds

PHILADELPHIA -- The stock market's long slide has had a punishing effect on the Buchanan family college fund.

After years of gains, the investment portfolio that Buck Buchanan had hoped would put his seven children through school is losing value fast.

"You know, a year or two ago, I had it. I had enough money set aside in my investments to pay for all of my children to go to a full four years of college. I had it, and now I don't," said the retired executive from Devon.

Parents across the nation have suffered similar losses and are now scrambling to find ways to pay their children's tuition.

Demand for financial aid has risen, with the Education Department reporting a 10 percent increase in applications over the previous year. And some colleges are reporting an increase in calls and letters from parents whose ability to pay tuition has been abruptly compromised.

The stock market drop-off has been especially worrisome for parents whose children are nearing college age. They are suddenly faced with the prospect of having to cash out an education fund at one of the market's low points.

'Starting to panic'

"I certainly think that people are starting to panic," said Anthony Zalesky, a planner at Lincoln Financial Advisors. "For the first time, I'm hearing from some clients that they are worried about having to raid their retirement fund to pay for their kids' college."

As the school year approaches, some families have scrambled to appeal rulings made in early spring -- based on income data from 2001 -- that they were too well off to qualify for scholarships or subsidized loans.

The University of Maryland has seen a 30 percent increase this year in the number of students appealing their initial aid award. Temple University in Philadelphia is also dealing with a flood of requests for more aid.

"We've had many appeals this year from families whose assets are down because of the stock market. We have also had appeals from families where the primary wage earner has lost a job," said John Morris, Temple's director of student financial services.

The savings crunch comes at a bad time for colleges. At most colleges, operating costs are up and endowment income is down, and state schools are facing budget cuts because of falling tax revenue. As a result, tuitions are up significantly.

The families who have fared the worst are those who kept their money in stocks even as their children entered high school.

Buchanan's portfolio was hit hardest by the plunge at Tyco International, the company that purchased the sprinkler manufacturer where he had been an executive for 27 years. When he retired a year ago, his Tyco stock was worth $68 a share. This week it was trading at about $12.

Investment advice

Traditional investment advice says parents should invest more aggressively when the child is young and gradually move to more conservative holdings such as government bonds when the student is within a few years of needing to tap that college fund.

State-sponsored 529 education savings plans have been among the most popular tools of late, since they allow students to save tax-free and they usually move into more conservative investments as the child gets older. But the families who have poured more than $9 billion into these plans have seen their holdings shrink.

Joe Hurley, the Pittsford, N.Y., accountant who runs the 529 plan ratings service www.savingforcollege.com, said families with children still many years away from college should not abandon an investment savings plan.

"Some people are suggesting that there has really been no better time to invest in the stock market than right now, when it is at bargain levels," he said.

"I wouldn't suggest that they just put it under the mattress."

Not everyone is buying that advice.

Del Riesenhuber of Los Gatos, Calif., said he lost faith in the markets after the $5,000 investment he made in one of California's state-sponsored 529 plans for his grandson dwindled to $3,500.

"I'm walking away and putting money in the bank instead," he said. "I put another $5,000 in a savings account for him last year, and he now has $5,100. I'll stick with that."