Learn to save; save to learn

Private Property South Africa

Akin to a home or a car, a good education doesn’t come cheap. While many South Africans strive to save for a home or new pair of wheels, saving for a child’s education – the cost of which is almost equal to and could exceed the cost of a small property in the near future – tends to get put on the backburner.

Against the backdrop of ever-increasing costs, a lack of educational savings does not bode well if you are a parent. Consider the following: annual fees at a South African university currently cost between R40 000 and R55 000 a year. Factor in living expenses, transport costs and learning material and you’re looking at approximately R100 000 a year. Assuming a constant inflation rate of 6%, the total cost of a four-year degree at R100 000 a year could jump by close to 80% in 10 years’ time.

Should your child have entered high school this year, the expected total fees after the next five years will amount to about R535 000.If your child has only just started school, you can expect to pay around R720 00 a year when he or she matriculates – on average. Scary stuff.

Start saving now!

Given these sobering statistics, Nico Coetzee, Executive of Business Development at PPS Investments, explains that it is vital to start saving early. “By investing towards your children’s tertiary tuition as soon as you can, your cumulative contributions could likely amount to more than the cost of tuition by the time their studies commence.”

When saving for an education fund, Coetzee advocates a structured investment vehicle such as an endowment plan or a discretionary investment product that offers more flexibility.

Endowment plans support disciplined investing by allowing you to set up regular debit orders or set aside a lump sum for a fixed investment period (with a minimum of five years). This will ensure that your savings remain untouched and exposed to growth opportunities until they are needed. Discretionary investments allow you to structure a personalised investment portfolio tailored to your individual requirements.

Is a loan the way to go?

“Another alternative would be to finance the costs of a tertiary education by means of a loan,” says Coetzee. “However, interest charges will mean that you ultimately end up paying a great deal more than the amount you originally borrowed.”

The impact of these options is illustrated below. For an investment, Coetzee assumes annual investment growth of CPI + 4% and, if making monthly contributions, an annual debit order escalation rate of 6%. For a study loan, a borrowing rate of 9% over four years is assumed. Inflation has been kept constant at 6%.

Investing in advance

Loan

Cost of a four-year degree

Lump sum required

Monthly debit order required

Total loan repayment required

Current

R400 000

In 5 years’ time

R535 290

R332 373

R7 672

R639 395

In 10 years’ time

R716 339

R400 000

R3 496

R855 654

It’s clear that if you have the capital available, you stand to save the most on your children’s tertiary tuition by investing an appropriate lump sum as early as possible. However, Coetzee says that if such a large lump sum amount seems daunting, your required capital can be broken down into more manageable debit order investments, which can also result in significant savings.

If you’re unsure about how to set up and contribute to an educational savings fund, speak to your financial planner. Alternatively, you can contact an investment company or one of South Africa’s major banks . There may also be merit in dipping into funds in a paid-up bond facility, as bond interest rates are generally lower than other loan facilities – speak to your bonding bank for advice.

Ultimately, by assessing your financial situation and your children’s educational needs early on, you should be able put your child on the path to success without breaking the bank.

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