By Anna Rich
The obvious first step when saving for your children’s education is to find out how much money you will need.
“How long is a piece of string?” is the response from Kirsty Scully, senior financial planner at Core Wealth, and chairperson elect of the board of the Financial Planning Institute – but her methods are precise.
From university websites, she sources the average cost of a degree at present. As an example, University of Stellenbosch 2021 estimates for the first year of these undergraduate degree courses are: R44 940 for a BCom, R64 974 for a BSc engineering, R54 501 for a BA Law, and R48 037 for a BA in human resources management.
Then Scully works on an annual inflation rate of 10% to get to the expected future cost when the child reaches university. The rate is higher than the general (or headline) inflation rate because educational inflation exceeds it historically.
“I like to ensure that the parents will have sufficient money for the full degree by the time the child is 18,” Scully says. However, this does not take other costs into account. “If the only place your child gets into is in another city, there’s the cost of accommodation and general living costs.” She recommends enlisting a financial planner to do the calculations.
The National Student Financial Aid Scheme (NSFAS) government bursary is a useful starting point for benchmarking costs, but you might find this too conservative. Currently, besides tuition fees, the annual expenses covered are the university accommodation charges (for example, catered residence fees at UCT are R35 000); R7 500 for transport; R15 000 living allowance; R5 200 for books; and R2 900 for personal care. Using the UCT example, that’s R65 600, excluding academic fees.
What are your priorities?
For most of us, there is a trade-off between competing needs: we can’t afford everything. Once our basic expenses have been covered, the decision on whether to buy a better car or to save for our children’s tertiary education may be straightforward.
But it becomes trickier when we feel we have to choose between “worthy” ways of allocating our money. If, for example, our household income doesn’t stretch far enough to cover saving for retirement as well as our children’s tertiary education, which takes priority? If we pick education, perhaps we hope our children will take care of us in our old age. But for personal finance experts, there is no question.
“It’s a difficult pill to swallow, but funding your children’s education should not cost you your retirement savings,” says Gugu Sidaki, director and wealth manager at Wealth Creed. “Always work on the premise that you will be wholly responsible for your own retirement funding. If you have a spouse or a child who can assist you in retirement, it can only be a bonus.” She points out that there are options for funding your children’s education if you do not have the money from your income, whereas the options for funding your retirement outside of the money you save are almost non-existent.
“Parents must take their retirement planning into account first,” says Scully. “Work through your financial planning with a Certified Financial Planner to ensure that you have made adequate provision for your own retirement, and if there’s anything left, save for your children’s education.”
Henk Appelo, lead specialist for investments at Liberty has a similar perspective: “While saving for education is important, it’s vital to look after your own finances, particularly your retirement fund.”
Advice needs to be personalised, because it needs to meet your needs, notes Scully. “It is important to see a financial planner to get personalised advice on planning for your children’s education.”
What are the best financial instruments to use?
There is a dizzying array of savings and investment vehicles, from unit trusts and tax-free investment accounts to education policies and endowments.
“It is very important that saving for education happens within the correct type of vehicle, based on age and stage of the children,” says Scully. “If you have very young children, and you are saving only for their tertiary education, you might have 10, 15 or even up to 18 years. If it’s long term like that, you can look at using a unit trust portfolio.”
Scully explains that the choice of unit trust portfolio takes your risk profile into consideration: how you accept risk, how you deal with risk, and the length of time you have for investing. (This determines the type of investments you allocate your money to: equity has a greater chance of achieving higher returns, though there’s also the possibility of losing money, but the converse applies to savings accounts and bonds.)
“For clients who are investing for more than 10 years, I use a flexible portfolio,” says Scully. “They tend to give higher growth, and they are also subject to more volatility – but that should not be a problem over a 10-year investment.” In this type of unit trust fund, the manager has the flexibility to adjust the portions in each asset class in response to market developments.
“If the period is below two years, you need to go into savings mode, as opposed to investment mode. You have to choose a conservative portfolio – without volatility – such as a money market fund,” Scully says.
What about an educational policy, offered by life assurance companies?
These are often housed in endowment policies, explains Scully. Endowment policies are life insurance policies that are designed to pay out a lump sum after a specific term. “They can be beneficial for those with a marginal income tax rate of over 30%,” says Scully. But she reserves them for estate planning and taxation purposes. “I don’t recommend an endowment plan being used as an education policy.”
Scully says endowments are much more expensive than new-generation vehicles, like unit trusts. “With endowments, you are effectively paying for the packaging and have little idea of the extent of the fees.” Costs associated with investing in unit trusts are more transparent: you know exactly what you are paying for, because you have to sign for these fees, she explains.
Endowments carry penalties for early withdrawal, whereas unit trusts are easily accessible. Though there might be some advantage in not being able to touch the money, Scully still advocates unit trusts for saving for education. “If it is important to you to be able to pay for your children’s education, view it as something you do not access. It is tough, but it comes down to self-discipline.”
She recommends keeping these savings in a fund dedicated to education. “Don’t mix education savings with other savings, as it is far too easy to ‘dip’ into it if you feel you need to redo your kitchen – and then there won’t be enough left for education.”
Pay as you go?
Relying on your salary to finance your children’s education becomes increasingly difficult, says Saleem Sonday, head of group savings at Allan Gray. “The cost of education grows at a higher rate than the average salary (and inflation in general). Over time, this means that more and more of your salary has to be set aside for education. By the time your children are at university, education could take up the bulk of the combined salary of two parents.”
On the other hand, investing ahead for your children’s education relieves future pressure because the growth earned on an investment can significantly lower the impact of education costs, Sonday says.
Ideally, parents need to decide what is financially feasible from the get-go, says Liberty’s Appelo. “Will your child go to private school? And university? A parent who puts away even small amounts each month from when their child is young will have a far less stressful time.”
“Rather than worrying about the fact that you are not saving enough, get started,” Sonday says.
What about a student loan?
“If you do not invest long term, you may be forced to use credit to finance your children’s education,” says Sonday. “Although the power of compound interest works in your favour when you invest, it works against you when you borrow. This makes credit the most expensive option.”
For Sidaki, taking out a bank loan to fund your children’s education is an option if you cannot fund it on your earnings alone. She sees it as a better alternative than sacrificing your retirement savings. The rider is that you need favourable terms and affordable premiums.
“The only time I think it’s acceptable to take out a loan to fund your child’s tertiary education is if you are already saving sufficiently for retirement,” says Scully. That said, her feeling is that children should pay for their education themselves if their parents cannot afford to.
The last thing you want is to have gone deep into debt to afford an education for your children, and then they have to support you as soon as they graduate. Education is an important priority, as is making sure you are self-sufficient in each stage of life, Appelo says.
To take out a student loan at a bank, all applications are subject to a credit and affordability assessment. But otherwise, the criteria vary from bank to bank. For example, to qualify for a student loan at FNB, the principal debtor (person who applies) needs to earn a minimum income of R6 000 per month, says Amika Maharaj, of FNB Loans. This could be the student (if they are employed part- or full-time), but more often it is a parent/guardian/family member/sponsor who meets the qualifying requirements and applies for the loan. “Student loan interest rates are generally lower than other unsecured lending products, such as credit cards or personal loans,” says Maharaj. “The interest rates are based on the principal debtor’s credit profile and start from the prime interest rate, currently at 7%.”
Students who are employed part-time or full-time can apply for an Absa study loan in their own capacity. However, most undergraduates are unemployed, so the loan application is concluded with the parent/guardian/sponsor, who would be in a position to service the monthly repayments on the loan, says Cowyk Fox, managing executive of everyday banking at Absa. This is in line with the National Credit Act. “We strive to ensure that our pricing on the study loan is as affordable as possible,” says Fox. “If students who take out our study loan with Absa are offered a lower interest rate elsewhere, we will beat it, and this could go as low as prime.”
No money does not mean no hope
If parents cannot pay for their children’s education, there are other opportunities, says Scully. “There are many sources of educational funding, such as bursaries.” A good starting point is the SA Bursaries website, which aims to provide a comprehensive list.
NSFAS bursaries are open to students who have been accepted into a public higher education institution, and whose household income is not more than R350 000 a year. In return, the student has to pass the course, and agree to participate in the economy for as many years as their studies were funded for (or pay back the bursary).
Scully points out that studying while working is an option, and that companies are often prepared to help fund your studies.
Will tertiary education go online, becoming free or more affordable?
The internet enables free access to information to some extent, but this does not signal the end of educational institutions, says Dr Morne Mostert, director of the Institute for Futures Research at Stellenbosch University.
“Information has to be consumed in meaningful ways to turn into knowledge, and this is where some form of educational institution may be useful,” he explains. “Various forms of universities are likely to emerge. In one of the scenarios for universities, the current face-to-face model becomes the status version, due to the direct access to high-quality teaching, research and infrastructure.” He envisages that this model will co-exist with open online courses that allow curated access to information to very large numbers of students.
Dr Mostert expects that the linear model of education and career will be severely disrupted, with an increasing number of job and career shifts. “This means that learning will grow as an essential part of life for any professional, at any age. And it will have to be financed in some way,” he adds. “But don’t expect governments to respond with agility; individuals and corporates will have to assume joint responsibility.”
For these reasons, Dr Mostert concludes that planning for the future educational needs of the entire family will become more, not less, important.
This article first appeared in the 2nd quarter 2021 edition of Personal Finance magazine. The digital version of the magazine is available on the Zinio platform here.
PERSONAL FINANCE