Education: be smart and save
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 semi-private. 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.
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 cost-effective, 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.
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.
GOVERNMENT LOAN SCHEME
The National Student Financial Aid Scheme (NSFAS) is a government scheme that provides loans and bursaries to students at universities and public colleges (known as Further Education and Training, or FET, institutions).
This year, the scheme provided about R8.2 billion in loans and bursaries to more than 450 000 students at FET colleges and universities, Lauren Vanacore, communications manager at the NSFAS, says.
To be eligible for a loan or bursary, a student must pass a means test, but Vanacore could not provide details about the test.
According to the NSFAS’s website, students do not have to provide guarantees or sureties from parents or guardians.
Interest is charged on outstanding balances at 80 percent of the repo rate (the rate at which the Reserve Bank lends to commercial banks), which is currently five percent. This is far less than the interest rates charged by banks that offer student loans.
The repayment terms are favourable, because the debtor starts to pay back the loan only once he or she has a job and earns R30 000 or more a year. Repayments start at three percent of annual salary, increasing to a maximum of eight percent a year when the debtor’s salary reaches R59 300 a year. This means that someone who earns R59 300 a year will pay back R4 744 a year, or R696 a month.
Students can have up to 40 percent of their loan converted into a bursary, which is not repayable, if they pass all their courses.
The Fundisa Fund is a savings account that pays incentives to parents or investors who save for a child’s tertiary education.
Every year, your savings are enhanced by a reward of 25 percent of your contributions, up to R600 a child. The bonus is made possible through a joint venture between government and companies that belong to the Association for Savings & Investment SA.
Fundisa was created to help learners from low-income families pay for an accredited qualification at either a public college or a university.
Anyone can open a Fundisa account, but the learner who benefits from the savings must come from a family that does not earn more than R180 000 a year.
The money you save belongs to you until it is paid over to a public college or university recognised by the National Student Financial Aid Scheme. You can withdraw your savings at any time, but you will lose the bonus money if you do so.
You can open a Fundisa Fund account at any Absa, Nedbank or Standard Bank branch.