Long-term sav­ing is the clever way to pay for ed­u­ca­tion

Ed­u­ca­tion is al­ready a bur­den on many fam­i­lies, and few re­alise that ed­u­ca­tion in­fla­tion is much higher than gen­eral in­fla­tion, com­pound­ing the prob­lem. Angelique Ardé re­ports

Weekend Argus (Saturday Edition) - - GOODPOSTER -

With ed­u­ca­tion in­fla­tion at about 10 per­cent – four per­cent­age points above gen­eral in­fla­tion – the ed­u­ca­tion of your chil­dren will make you poorer if you don’t save for it.

Data from Sta­tis­tics South Africa show that ed­u­ca­tion in­fla­tion has been out­strip­ping in­fla­tion as mea­sured by the con­sumer price in­dex (CPI), and so it has, in all like­li­hood, been ex­ceed­ing the an­nual in­creases in your salary. And yet you can over­come this chal­lenge by sav­ing over the long term.

Al­lan Gray an­a­lyst Wanita Isaacs pro­duced num­bers that show the power of com­pound in­ter­est. She says it costs R2.4 mil­lion to pay Model C school fees and four years at var­sity, but if you save R2 100 a month from the day your child is born, you can re­duce what you will pay for his or her ed­u­ca­tion by 21 per­cent, even if the re­turn on your sav­ings was only equal to CPI.

What are your op­tions for sav­ing for your chil­dren’s ed­u­ca­tion, how much do you need to save and what re­turns can you ex­pect?

Fi­nan­cial plan­ner War­ren In­gram says he has two con­ver­sa­tions with clients about pro­vid­ing for ed­u­ca­tion: one about un­der­stand­ing the ed­u­ca­tion they can real­is­ti­cally af­ford to give their chil­dren, and one about sav­ing for it.

“You start with de­cid­ing on the kind of ed­u­ca­tion you can give your chil­dren. Peo­ple who earn well de­fault to think­ing they must go pri­vate – in other words, they want to give their chil­dren the best, ver­sus what they can af­ford. It’s ir­ra­tional.

“If you are not a rich fam­ily and you put your child in a top pri­vate school, you’re look­ing at spend­ing R150 000 a year, ex­clud­ing an­cil­lary costs. There are no tax de­duc­tions for fund­ing ed­u­ca­tion, which means you have to earn that money af­ter tax. You need about R250 000 a year pre-tax to fund that. If you aren’t af­flu­ent, this means your child can’t go on ev­ery tour or af­ford all that their peers can. In such an en­vi­ron­ment, chil­dren can feel in­fe­rior,” In­gram says.

Al­though it’s nat­u­ral to want to give your child the best, if you can’t af­ford the best, you’re putting the whole fam­ily un­der pres­sure, In­gram says.

“Money and chil­dren place the most stresses on a mar­riage, so you are cre­at­ing the per­fect storm [by spend­ing more than you af­ford on your chil­dren’s ed­u­ca­tion],” he says.

Par­ents have many op­tions when it comes to choos­ing a school, he says. “There are many de­cent pri­vate schools that aren’t madly ex­pen­sive and many good-qual­ity Model C schools that are semipri­vate. There are those that charge fees of less than R30 000 a year.”

Sav­ing for a child’s ed­u­ca­tion should ide­ally start when the child is born, In­gram says. To work out how much you need to save ev­ery month to reach your goal, he sug­gests that you use the banks’ online cal­cu­la­tors. For ex­am­ple, if you will need R30 000 a year for 12 years and you have seven years in which to save, Absa’s sav­ing- for- a- goal cal­cu­la­tor says you’ll get there if you put away R3 850 a month over the next 72 months, as­sum­ing you earn in­ter­est at a rate of 8.5 per­cent.

SAV­INGS PLANS

The best strat­egy is to save via a debit or­der into an in­dex fund or an ex­change traded fund, which is the low­est-cost sav­ings in­stru­ment, “but you need to do that for at least five years”, In­gram says.

Fi­nan­cial plan­ner Natasja Nor­val Hart agrees. She says a dis­cre­tionary sav­ings plan is the way to go.

“I have a client whose sav­ings plan has been to pay ‘school fees’ ev­ery month since her child was born. She ef­fec­tively pays money into a pure unit trust port­fo­lio, sep­a­rate from the rest of her port­fo­lio, to ringfence money for ed­u­ca­tion.

“Unit trusts are the most cost­ef­fec­tive, and be­cause we have five years-plus, we went for a bal­anced port­fo­lio with an eq­uity slant. She’s get­ting dou­ble-digit re­turns, beat­ing in­fla­tion com­fort­ably. To out-per­form in­fla­tion, you need to be mod­er­ately ag­gres­sive.”

Nor­val Hart says her client has the dis­ci­pline to save and to re­sist the temp­ta­tion to touch her sav­ings.

“It re­quires com­mit­ment. Ev­ery year, we in­crease her con­tri­bu­tions at the rate that her salary in­creases. When the child starts school, the plan is for her to leave the cap­i­tal and keep sav­ing into the port­fo­lio. But if she can’t man­age that, we will re­duce the con­tri­bu­tions in line with what she can af­ford.”

When it comes to school fees, Nor­val Hart says par­ents should con­sider all their pay­ment op­tions.

“A lot of schools, es­pe­cially pri­vate schools, are open to dis­cussing pay­ment op­tions – mean­ing they may al­low you to pay school fees an­nu­ally up­front, quar­terly, monthly or over 10 months in­stead of 12. Choose an op­tion that will work for you.

“For ex­am­ple, the ad­van­tage of pay­ing over 10 months is that you don’t pay school fees in Novem­ber and De­cem­ber, but you can use those months to buy uni­forms and books for the fol­low­ing year.

“If you get a bonus or 13th cheque, you might de­cide to use it to pay school fees up­front for the year. Most schools will give you a dis­count if you do this. The dis­count might not be worth it, but the peace of mind might be worth more to you,” she says.

LOANS ARE A NO-NO

The worst strat­egy is to fund ed­u­ca­tion on credit, such as by dip­ping into your mort­gage bond or tak­ing out a stu­dent loan, In­gram says.

“Peo­ple have high lev­els of debt; they’re pay­ing off cars and houses and many end up tak­ing money out of their bond, which is the worst thing to do, un­less you’re pay­ing in a lot ex­tra ev­ery month.

“But if you are pay­ing the min­i­mum mort­gage in­stal­ment and dip­ping into your bond to pay for ed­u­ca­tion, you’re dig­ging your­self deeper into debt. You’ll end up liv­ing in debt for five years longer and ul­ti­mately com­pro­mis­ing your re­tire­ment plans,” In­gram says.

Nor­val Hart says that you should go the stu­dent loan route only if you have no other choice.

First Na­tional Bank (FNB) said this week that the bank has had an in­crease of six per­cent in stu­dent loan ap­pli­ca­tions this year.

Pi­eter du Toit, chief ex­ec­u­tive of FNB Per­sonal Loans, says that, on av­er­age, loans are taken over 12 months for about R50 000.

To be el­i­gi­ble for a loan, the stu­dent’s par­ent or guardian needs to be cred­it­wor­thy and earn more than R6 000 a month.

Stu­dent loans are un­se­cured loans and the in­ter­est rates de­pend on the in­di­vid­ual’s credit pro­file, as well as the course be­ing stud­ied. Du Toit says FNB’s stu­dent loan in­ter­est rates vary from prime up to prime plus six per­cent.

Cus­tomers with a higher- risk pro­file may not qual­ify for a stu­dent loan but may qual­ify for a per­sonal loan (of a smaller amount and with a shorter term), where in­ter­est rates can be up to 31 per­cent, he says.

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