With the cost of education rising all the time, parents are well advised to start planning for this large expense sooner rather than later.
Parents sending their children to government schools are currently paying in the region of R3 000 to R10 000 a year, while parents of children attending private schools are paying anything from R20 000 to R40 000 a year. Tertiary education varies greatly depending on the course of study, but one could expect to pay in the region of R25 000 a year for tuition fees alone.
According to Franzo Friedrich, head of marketing at FNB Insurance, education is one of the biggest expenses that most parents will have to face.
“As parents, we always want the best for our children but, to achieve this, a large amount of planning is required.”
Since educational planning should be seen as a long-term commitment, choosing the right solution from the myriad options out there (endowment policies, fixed savings plans and other types of investments) can be tricky. Friedrich advises parents to look at three elements to help guide them with their decision: ongoing affordability, the time available in which to build up the capital needed for education, and the total amount that will be needed in order to meet their children’s educational needs at the end point.
So which is your best option?
Saving versus borrowing
“For saving to be effective it needs to be seen as part of a long-term plan and one can never start too early. In contrast, borrowing money meets a more instant need for cash over a shorter period of time.
“While borrowing money from a bank will give you instant access to funds, there is a cost — the cost is the interest charged on the loan. This amount can be avoided by planning in advance and saving from as early as possible but, for many parents, by the time they actually think about planning, it’s already too late. Ideally parents should begin saving for their children’s education from the day their newborn baby is brought home.”
Specialised educational savings
To bring together the best of both worlds with saving and borrowing, FNB offers an educational savings product called “Career Facility”. This allows you to save over a set period of time and, at the end of this term, advances you a sum equal to twice the amount you have saved, giving you access to a guaranteed loan.
“This gives you enough money to pay for your children’s education at the end point, but also allows you to achieve your goals in a much shorter period of time,” explains Friedrich. “The portion that you borrow is then paid back, with interest calculated at the prime interest rate.”
For example
You set aside R500 each month as educational savings for your child when they begin high school. You have five years in which to build up capital for their tertiary education and you set your target date for five years time. With 5% annual escalation to keep up with inflation, you would have saved approximately R33 000 over this period. Add interest at an average rate of 5% and that brings your total balance to R34 500.
Once you have accessed these funds, you are entitled to a loan equal to double your savings. In total, you would have access to approximately R104 000, enough to pay for a three-year university degree. The loan repayments will be calculated based on the prevailing prime interest rate at the time when you take the loan.
“The benefits of the FNB Career Facility that sets it apart in the market are the fact that consumers have full access to their savings as and when they need it. They pay what they like, when they like, which means they’re not tied into a policy that will be cancelled if they can’t keep up the payments.
“These benefits put the consumer in control and, with no stipulations about what this money can be used for, even children who choose not to follow an academic path can be catered for, as the money could be used to give them a helping hand in starting their own business,” adds Friedrich.
Endowment policies for education
“Endowment policies are good for those who are undisciplined in their savings, but consumers must be aware that they are making a long-term commitment that may last for anything from five to 20 years.
“The contractual obligations with an endowment policy are fairly strict; if you miss premiums the policy can lapse and you may lose the benefits. At maturity date, some institutions also require that payment be made directly to the nominated learning institution, which can be restrictive.”
Other types of investments
There are numerous types of investment accounts available to consumers, all offering various levels of risk. However, Friedrich cautions would-be investors not to gamble with their children’s futures by taking too many financial risks from which they may not be able to recover.
“While there may be many tempting options that seem to hold the promise of enormous returns, one always needs to keep the old principles of investing in mind — high returns come with high risks. Any asset that will grow over time is worth investigating as it may give you some more alternatives to draw funds from in the future,” Friedrich concludes.