Investing in your child’s education
Unit trusts and saving policies are key. The more and the longer you save, the better
Samir Kara and his wife started saving to educate the children they didn’t yet have, two years before they got married, which was six years ago. “The earlier you start saving, the better,” says Kara.
Kara should know, he’s a financial advisor. “The cost of education is expensive; if you want a proper education for your kids you have to pay the price for it, so the more and the longer you save, the better.”
Simply stashing money away in the bottom drawer of your wardrobe may work for some, but most people don’t have the self-discipline to stay away from those easily accessible savings, he cautions.
It’s better to choose a product like an endowment or a unit trust, which is essentially what he and his wife have done. “You need to choose something whereby you are forced to put money aside, whether every month, or every year — not everyone has the discipline to put money away for a specific need, and these kinds of products help you do so.”
Endowments and unit trusts force individuals to save money every month, so when the time comes to cough up money for school or university fees, one need only draw from them.
But as Richard Treagus, risk and actuarial director at Old Mutual Emerging Markets points out, the reality is that 60% of urban South African parents are not actively saving for their children’s education. This is according to the 2015 Old Mutual Savings and Investment Monitor. “Our stats show that when people are tightening their belts, saving for education is unfortunately one of the main areas where budgets are cut,” says Treagus.
This is despite the fact that education inflation is outstripping most salary increases for the foreseeable future, making the case for forward planning and saving for education even stronger.
According to Treagus, a 2021 forecast will see an individual spending between R45 000 and R176 000 for one year’s education. If your child started grade R this year, the total cost of their education is expected to be R1 082 000 for public schools and R2 431 000 for private. This includes primary school, high school and a three-year university qualification.
“Whether you are new parents, a single parent or an established family, the key is to start saving early,” says Treagus. “Life can be very demanding, so parents have to be aware of the future cost of quality high school and university education. The later you start saving, the more you will need to save per month.
“Assuming a 10% i nvestment growth before fees, parents need to save about R530 a month for university tuition (excluding accommodation, books and travelling costs) for a child born in 2015. Parents need to save about R1 050 (close to double) per month if their child is already 10 years old [if they haven’t made any savings for education thus far]. These monthly savings also need to be increased by 9% a year going forward, to keep up with higher education inflation. It is very important that parents invest in growth assets when saving for their child’s educa- tion to ensure they receive returns that are above education inflation. This may not be possible through normal savings accounts.”
Investment vehicles to save for education include unit trusts and savings policies, says Treagus. “Many people choose unit trusts for long-term investments as there is a lot of choice as well as funds that specifically focus on beating the rate of inflation by a certain percentage. This is important, because education inflation is higher than normal inflation.
“Unit trust investments are ideal for people who require flexibility and access to the funds. However you must be disciplined and avoid the temptation of dipping into your child’s funds,” he cautions.
Savings policies are fixed for a certain period of time, say five to 15 years, depending on when your child will go to school or university, he explains.
“You can either pay fixed monthly premiums or make a lump sum payment into the policy. You have limited access to the savings and generally have your savings invested in a wider range of the leading unit trust funds of your choice.”
Treagus points out that you can also choose to invest in some of the available life funds that offer minimum guarantees. However, these life funds are only available from life insurance companies.
The good news is that many policies offer a protection of premiums in the event of the death or disability of a parent. This means if you were to die or become disabled and unable to work, the insurance company will pay the premiums for the remaining period.
Another option is Fundisa, a government initiative that enables you to save towards an accredited qualification at either a public college or university. “You’re paid an annual bonus on the investment, which can be up to 25% of the money you save annually up to a maximum of R600 per child. If you save R100 a month (R1 200 a year), you will get another R300 a year,” says Treagus. “To receive the maximum bonus of R600, you have to save R2 400 a year. The bonus can be used by the learner. You can withdraw your money, but will then lose the bonus.”
The South African government will also be introducing a new taxfree savings vehicle to encourage savings. Any interest, dividends or capital gains will be tax-free. South Africans will be able to save up to R30 000 a year or R500 000 over their lifetimes into the tax-free savings accounts. They will be able to withdraw these savings at any time, without any disinvestment charges other than a transaction fee. “Start early, even if it’s only a small amount each month,” says Treagus.
Nolene Parboo, senior manager: Savings and Investments at Standard Bank, advises parents to seek assistance from a financial planner. “A financial planner will be able to do a scenario plan with you and work out how much to save in conjunction with other commitments. With a financial planner, take time to work out the best savings or investment plan for your child’s needs, potential and ambitions.”
If you are on a low budget, a good idea would be to ask your family to donate cash into your education funds instead of gifts, she suggests.
If you haven’t saved up for your child’s education, he/she doesn’t fulfil the numerous requirements attached to qualifying for a bursary or a scholarship, and you’re in a jam, you may want to consider a student loan.
In this case there a number of matters the family need to consider, says Parboo. “Such as who will sign surety, is loan insurance necessary, can he/she afford the monthly cost of the loan (the interest) and will the first job in the field he or she studied for be able to cover the loan repayments?”
Interest rates can rise and fall depending on the economic climate, she adds. “At Standard Bank student loans attract variable interest. You should, therefore, always plan your finances to include a possible rise in rates.”
It helps to know and understand the terms of your loans and find out how long the repayment period is, says Parboo. “Most importantly, find out when repayments will begin. It is also best to remember that the sooner payments are made on a student loan, the better off you will be later. It can help tremendously if you take a part-time job and begin proactively paying off your loan.”
All loans come with obligations and considerations, and have to be repaid and handled responsibly but, she concludes, a student loan for a child’s education should be seen as a long-term investment in a bright, stable future.