Howard Gartenhaus on College Savings
Howard Gartenhaus is the founder and president of Gartenhaus Financial Corp., helping stressed out parents save for college, hopefully without going broke. In this interview, Gartenhaus explains how some parents can get past the stress of saving for college.
Why is it so hard for people to get into the mindset of saving for college?
When you project out the cost of college for a newborn in 18 years at a 5% annual increase, it turns out to be a very big number. A lot of people look at that number and think it’s hopeless. They get discouraged, procrastinate and fail to make provisions to try and crack that nut.
It also depends on the individual. The cost of college can be almost like the cost of buying a house—it’s a huge and scary number. They have other demands on their resources too. They want to set up a retirement plan, have some savings, buy a house or move into a different house. There are many needs pulling on the purse strings. My advice to people again is to chip away at all those needs. You may not be able to fulfill all those needs 100% of the time, but do what you can.
How can they get past that to make the right investment choices?
My job is to try to break it down into a monthly figure that a parent can contribute to a fund, which looks a lot more palatable than the lump sum. In cases where a parent can’t afford that monthly amount, I tell them to put something away and chip away at it. A lot of things can happen over 18 years. Start doing something now and that will help.
Why are 529 plans better than other plans?
The advantage of the 529 plan is it grows tax free and comes out tax free when used for qualified college expenses. And you can put rather significant sums away. A 529 is the optimal way to go because it offers flexibility. Let’s say you have two kids and one goes to college and the other doesn’t. You can just transfer the balance to the child that does. You are only taxed on an unqualified withdrawal.
A Coverdell Education Account allows you to save only $2000 a year. The advantage is it can be used for any type of education, like private school. There are low contribution limits but it grows tax-free. You could also look into taking out a home equity loan, but that’s not optimal. Some parents tap into their retirement accounts or borrow from their 401ks. Of course then they’re paying taxes and premature withdrawal penalties.
When’s the best time to start saving for college?
Start when your child is an infant, or even the day he or she is born because you have the most time to save.
What if you have five years before your child goes to college?
Start saving something because that’s better than doing nothing. Let’s say you’re looking at nine or ten years, the smart thing to do would be to figure out what college the child might be going to. What’s the tuition? Then do an analysis of what the tuition will be five years from now. Plan where you can make contributions to that—monthly, quarterly.
The markets are pretty rough right now. Are 529 plans still a good deal?
If you’re investing $100 a month in a mutual fund that was $10 and drops down to five, you’re buying 20 shares instead of 10 shares. Basically, you’re buying on sale and accumulating extra shares. This is an opportunity to buy 529 plans on sale, if you think about it rationally. Unless this time is different, the market has always dropped and come back. If you’ve been procrastinating, in my opinion, now is a great time to start investing.
SIGNATURE QUESTIONS
What is the belief you personally go to during times of change?
I believe in doing the right thing and committing to do the best I can.
The best thing about change is...
…you can use it to re-shape your life in order to achieve happiness.
What is the best change you have ever made?
Starting my own business in 1990, while having no clients or sources of income. With a wife and two young children to support, it was truly a challenge, but ultimately worth the effort.
For more information on Howard Gartenhaus, visit www.gartenhaus.com.
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