Education planning
ITHINK as a parent, very few music themes will be more sentimental than the snippet of the graduation theme – hearing the music while your (future) child goes up the stage, getting the diploma, walking to the stage front then bowing, then slowly exiting to stage right.
It is just a few seconds but behind that few seconds, years of hard work and sacrifice finally came into fruition. It is a challenging journey not just for the child but for the parents as well – who will have to muster all available resources in order to send their children to best school possible, on top of supporting and guiding their children as they go through formal education process. Education planning is an important financial activity for a household with children.
This is to ensure that resources are available to support children’s education when needed and to minimize financial burden of parents through adequate preparation.
How does a household prepare for a child’s education? I suggest beginning with the current tuition fee rates (this article focuses on college education planning). Universities have various average annual tuition fees and the following table provides a snapshot of sample tuition rates for several universities:
The next step is to simulate the future value of the tuition fees above using an appropriate time frame and inflation rate. To do so, one can use the formula FV = PV (1+r)n with r as the education inf lation rate and n as the number of years from present to the target first year of use of education fund.
Education inflation rate per May 2020 posting of Philippine Statistics Authority is around 6 percent. On the other hand, the exponent is actually a set of numbers usually from n, n+1, n+2, and n+3 indicating four future values corresponding to 4 years usually spent in college (5 for some degrees) which should be added to determine total estimated tuition fee to cover child’s entire college education.
knowing the total cost of education will allow an individual or a financial planner to create an investment program dedicated for education planning. Of course, the investment program will be constrained to client risk profile and available resources and should be grounded on realistic returns of available asset classes.
Another thing often overlooked when it comes to education planning is that it should be integrated with insurance planning of the household to ensure that no matter what happens to the breadwinner, the child will be able to study. Having an investment program for education fund is, to a large extent, as good as the capability of the household in executing and sticking to the plan.
Imagine what will happen to the plan if the breadwinner dies, becomes sick or disabled? A suggested way to integrate education planning to insurance planning is to determine the present value of the total education fund simulated earlier discounted by rate of return in which the insurance benefits intended for education planning will be invested into. Possible tools for integrating education planning to insurance planning could be either a renewable term insurance or VUL. It is important for a client to solicit advice from a reliable financial planner to come up with an appropriate integration strategy fit for the household’s financial situation.
As always, a household should not be earning salary only to settle insurance premiums – the insurance product to be considered should also take into account the available means of the household.
We need to remember that education is a right and each should be given the chance to study. It will be the parents’ responsibility to support their children’s education and financial advisors to provide parents appropriate means and fiduciary guidance in doing so.