Mark Kantrowitz on Saving for College

Mark Kantrowitz could be called a college-financing guru. He’s the publisher of FinAid.org and EduPASS.org, two of the most popular web sites on the web dedicated to saving and paying for college. He’s also the director of advanced projects for FastWeb, a popular free scholarship search site, and the author of FastWeb College Gold: The Step-By-Step Guide to Paying for College. Here, Kantrowitz explains why saving anything for college can be helpful.

Are 529s the best way to save for college?

The 529 college savings plans are among the best, though advisor-sold plans are often not worthwhile. Advisor fees eat up much of the tax savings, so it’s important to look at the fees associated with each plan. Fees should be under 1%, above and beyond fees associated with the mutual funds. Any more than that and you’re losing money. Some of the best plans with low fees are managed by Vanguard and TIAA-CREF.

Even if college is imminent, there are still some advantages to saving. Around 32 states allow state income tax deductions for all or some of the contributions to a 529 savings plan. It’s like getting a discount on college costs, even if you immediately withdraw the funds. A few states require funds to be in a 529 plan for at least a year, but that can still provide a discount on college costs. If your state isn’t one that offers a deduction, look at the states with the lowest fees, like Virginia, Utah and Pennsylvania.

Regardless of the age of the student, do all parents have the same starting point when it comes to saving for college?

Your main asset is time. The sooner you get started, the less money you will have to save per month to achieve your savings goal. Whenever you’re starting to think about saving for college, that’s when you should start. Save whatever you can. Make it a habit and make it automatic, and don’t worry that it won’t yield enough to pay for four years of college. The point is to get started. Once you’re in the habit of saving, it’s easier to save more.

What’s the harm in depending on loans to pay for higher education?

It’s cheaper to save than to borrow. Let’s say you save $200 a month at 6.8% interest, which is the average interest rate for a school loan. Over 10 years, you’ll save about $34,000. Now, imagine that instead of saving that amount of money, you borrow it at 6.8% interest with a 10 year term. Your monthly payment will be about $396 a month. Either you could save a certain amount of money before college, or pay back twice as much after college. When you’re saving, you’re keeping the interest. When you’re borrowing, you’re paying the interest.

What are the five most important pieces of advice you give people who want to save for college?

1. Just get started. Don’t try to figure out how much you need to save. Get started with whatever you can, and gradually increase that contribution.

2. Set your savings goal at one-third of your expected college costs, not the full amount. If you focus on the full amount, the sticker shock will make you so depressed that you won’t ever get started. Just concentrate on trying to save a third, since a third of your college costs will come from savings, a third from future income in the form of loans, and a third will come from current income and student financial aid. This will spread out the costs over an extended period of time instead of trying to pay for it all at once. Note that college costs rise by about a factor of three every 17 years. So if your savings goal is one-third of future college costs, a good rule of thumb is to consider the full college costs the day your child was born. That’s your savings goal.

3. Any time your expenses change significantly, use those windfalls to increase the amount you save. When your child gets out of diapers, take the same amount of money you would spend on diapers and move it to the college savings account. The same goes for childcare, inheritances and income tax refunds. You don’t have to put all this money into a savings account, but you should certainly save some of it.

4. Use a rebate program, like Upromise or Babymint.. When you buy certain products from companies that participate in these programs, you get a slight rebate that automatically goes into your 529 savings plan. If you set it up and forget about it, you might earn total savings of about $50 per year. You can also continue to use some of the rebate programs after your children graduate from college to pay down their education loans directly, or you have the option to request a check for your savings.

5. Make saving automatic. Every 529 plan has an option in which the plan will automatically transfer money from your checking or savings account to your 529 college savings plan account. Since the money is no longer in your checking account, you don’t have the opportunity to spend it.

SIGNATURE QUESTIONS

What is the belief you personally go to during times of change?

I tend to become analytical in times of change and try to adapt. I try to seek the optimal strategy and to anticipate change instead of getting upset when it happens. I am a very levelheaded, easygoing individual.

The best thing about change is…

…it helps you avoid getting into a rut.

What is the best change you have ever made?

Marrying my wife. We’ve been married for eight years.

For more information on Mark Kantrowitz, visit www.finaid.org.