Could bond losses derail my college savings plan?

  @Money July 22, 2013: 5:34 PM ET
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NEW YORK (Money Magazine)

My kids' 529s are in age-based funds with lots of bonds. Is that OK if rates rise? -- Chris Berk, Westerville, Ohio

Though prices on existing bonds fall when interest rates rise, you're unlikely to face losses similar to what a bad year in stocks could generate.

Plus, 529 plans' age-based funds -- invested more conservatively as kids approach college age -- tend to hold bonds with short or intermediate maturities (less than 10 years), dampening possible declines.

Still, says Christine Benz, director of personal finance at Morningstar, if you're nervous about rates and college bills are less than five years out, you could move some of your 529 to a money-market or short-term-bond fund (maturities under five years) in your plan.

Related: Coverdell, 529, Roth: Which to tap first for college?

Leave money slated for college's later years or grad school untouched. And remember that you can move a 529's existing investments typically only once a year. To top of page

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Bond losses vs. stock losses
The bond market has had down years over the past quarter-century, but its declines haven't matched those of stocks.
Total returns starting in worst years since 1988 One year later Four years later
Bonds (starting January 1994) -2.7% 30.4%
Stocks (starting January 2008) -36.5% -6.3%
Note: Bond market is measured by Vanguard Total Bond Market fund; stocks are measured by the S&P 500. Sources: Morningstar, Bloomberg
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