Bond investors have been worried about a rise in interest rates for years now, pretty much ever since the Fed lowered rates in response to the 2008–09 financial crisis. Any rise in rates hurts the value of existing bonds (on the contrary, a drop in rates helps it), and rates have been hovering near historic lows for quite a while.

For families saving for college, bonds have long been seen as a safe-haven investment—a place to park cash reserved for a specific purpose within a specific time frame and a pretty good bet to increase in value faster than cash while avoiding the volatility of stocks. But what happens when bonds themselves become riskier than they’ve been in the past? It’s a question that many college savers, especially those who will need the money in just a few short years, are asking.

529 Plans and Duration

The majority of the $200 billion invested in 529 college-savings plans is held in so-called age-based portfolios—all-in-one investments made up of stocks, bonds, and other securities allocated based on the age of the beneficiary and, in some cases, the risk tolerance of the account holder. Typically these age-based portfolios are heavily weighted toward stocks when the beneficiary is very young, and they gradually shift assets into bonds and cash as the beneficiary gets closer to college age.

With traditional bond funds, the most commonly used method of gauging interest-rate sensitivity is a statistic called average effective duration. The higher the duration, the more sensitive the fund is to interest-rate movements. It works like this: For each percentage point that rates increase, the fund may be expected to lose in value a percentage equal to its duration in years, minus the fund’s yield. For example, if rates increase 1 point, a fund with a duration of 4.5 years and a yield of 2% could be expected to lose 2.5% of its value.

Finding the Numbers for a Specific 529 Plan

Although this rule of thumb may be a convenient way of assessing the interest-rate sensitivity of a single bond fund, most 529 accounts hold multiple stock and bond funds, making it difficult to arrive at a single duration measure for the entire portfolio.

Even though your 529 plan may not provide information on the duration of your portfolio, you might be able to track it down yourself by taking a closer look at the bond funds in the plan.

Unless you have all of your 529 assets in a single bond fund, you might have to do some calculations to figure out how to weight the various duration measures. For example, if your 529 portfolio is made up of 60% equities and 40% bonds, but the bond portion is half intermediate-term bonds with a duration of 5 years and half short-term bonds with a duration of 1 year, then the bond portion of your portfolio has an average duration of 3 years.

On average, an age-based portfolio for a 15-year-old beneficiary holds about 55% of assets in bonds, according to Morningstar data, and by the time most beneficiaries are ready to enroll in college at age 18, that weighting reaches 60%. At the same time, the average allocation to cash increases even more, from about 15% at age 15 to about 30% at age 18.

Options for 529 Plan Holders

Once you have some idea of how vulnerable your 529 assets are to a rise in rates, you then can decide what, if anything, to do next. If stocks dominate your account, leaving just a small allocation to bonds, you may have little to worry about in terms of interest-rate risk. But if bonds make up the bulk of your account and you find the average duration of the portfolio makes you nervous in case rates do rise sharply, you may be contemplating some major changes.

©2015 Morningstar, Inc.