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Varsity 2033: Save now or pay later

If you want to disabuse a person of romantic notions about parenthood, just tell them that to get their kid through university, they will probably need to have a few million rand in the bank.

This is without factoring in the money they will need to spend to get a child through school. As a parent to two small boys, these are the numbers that keep me up at night.

A rudimentary exercise to price a university degree revealed it could cost me up to R2‑million to pay for one child’s tertiary education in 16 years’ time. Nevertheless, this can be mitigated by the growth of current savings, assuming an investment return of just under 10%, and by putting away some money every month.

Even when accounting for the benefits of compound interest on savings and any additional money a working person can scrounge together each month, the figures seem daunting.

But what is perhaps more frightening is the cost of not sending a child to university. Research shows that a tertiary education, but most importantly a university degree, makes all the difference to your chances of being employed in South Africa.

According to research by Hendrik van Broekhuizen, a postdoctoral fellow in the University of Stellenbosch’s economics department, the unemployment rate for people with a matric in 2016 was 34.5%. This is compared with a rate of 21.2% for individuals with a post-matric certificate or diploma. The unemployment rate for individuals with an undergraduate degree, however, was a vastly lower 9.5%.

It’s essential to factor in the high costs of education inflation, according to Mark Lapedus, director of product development at Liberty. It has run consistently higher than consumer price inflation (CPI) for a number of years, he noted, and this has a huge impact over time.

Prior to the #FeesMustFall protests and last year’s fees freeze, according to Statistics South Africa, tertiary education inflation in December 2015 was 9.8% and 9.4% in December 2014. This was alongside inflation for primary and secondary schooling of 9% and 8.2% over the same years. Even with a 0% increase in 2016 for higher education, secondary and primary school inflation was 8%.

These increases are all well above the average consumer price index rate for 2014, 2015 and 2016 of 5.3%, 5.2% and 6.6% respectively.

For most people, covering the cost of a child’s education means saving must start early, said Lapedus. “Often, people think that a monthly contribution to an education policy means that a child’s education needs will automatically be covered.”

But often people either do not contribute enough on a regular basis or they do not choose an appropriate investment option — which, in this case, needs to beat education inflation, said Lapedus. This means choosing an investment vehicle that may entail more risk but that offers greater returns over time.

The challenges facing people who cannot put their children through private or semi-private state schools, and who face astronomical tertiary education costs, have in part driven the recent protests, said Lapedus.

When calculating the cost of my children’s studies, I used an education calculator provided by Liberty. It requires you to input a few things, such as the current cost of the type of education being considered, as well the estimated rate at which costs are likely to go up each year — in other words, the rate of education inflation.

You also need to provide the amount of money you have already saved and the number of years before studying is set to commence.

The tool then calculates what the qualification is likely to cost you, how much your current nest egg (if you have one) is likely to grow by, based on your expectations of its investment returns, and what the shortfall will be. On this basis it will give you the amount you need to save each month to make up the difference.

So I took a whirl, making some key assumptions. They included a modest savings pile starting at R20 000 placed in an exchange traded fund product, the Satrix Alsi Index Fund.

It has offered an annualised return of 9.5% and, as with passive index tracking funds, the fees are relatively low. It tracks the performance of the JSE/FTSE All Share Index, so is a rough proxy for the much more high-risk returns you might hope to get from the stock market.

I chose the universities of Cape Town and the Witwatersrand — the first being far from home and the second local. In both cases, I have estimated that education inflation remains at about 10%, despite the current efforts to cap tertiary fee increases at 8%. I have not accounted for any growth in earnings and also not factored in sundry costs such as clothes, toiletries and textbooks.

A bachelor of arts or social sciences at UCT over three years currently costs about R48 100 a year and I will need to have saved more than R703 000 to cover tuition in 2033.

Including residence fees will bring the amount to R95 600 a year currently. This means I will need to have saved almost R1.4‑million, but including food will bring my required savings level for three years of study to about R1.6‑million.

According to the calculator, assuming the R20 000 savings pool grows at 9.5%, it will grow to just over R82 000. But by saving an additional R2 000 each month — a major stretch for most people — this could increase to R908 000. To make up the shortfall, I’d need to boost the lump sum invested now to R110 000 or increase monthly contributions by R1 014.

To study for a bachelor of commerce at Wits, tuition for the first year is roughly R46 000, so to cover three years of tuition I will need to have saved R672 000. In this scenario, because we live in Johannesburg, my son will live at home while studying.

Assuming the nest egg grows and about R1 000 can be saved each month, the investment will grow to just under R500 000, again a war chest to help pay for fees.

So in my ideal world, the eldest son has a head start, unlike most children in South Africa — his parents are both employed and he is only two, so there is still time to save. I am hoping that his younger brother wants to eschew university altogether and become a rich and famous rock star.

A three-year degree adds oomph to your salary

A tertiary education not only makes a difference to employability, it also affects earnings potential, research shows.

Data provided by researcher Hendrik van Broekhuizen suggests that an individual’s earning potential rises dramatically depending on the level of post-matric qualification he or she has obtained.

The information comes with some important caveats, however, thanks to the dearth of published statistics about labour market earnings.

This particularly applies to figures for individuals with master’s or doctoral degrees, as the survey sample sizes for such groups are generally small, making reliable estimates difficult.

Nevertheless, Van Broekhuizen has estimated that average monthly earnings for employed people with a matric sit at about R8 600. Individuals with a post-matric certificate generally earn about R15 700 — which could include training at a technical and vocational college or another type of certification.

A person with a diploma earns roughly R18 100 a month, but this jumps to about R26 000 for a university graduate with a bachelor’s degree. For a person with a postgraduate qualification such as an honours or a postgraduate diploma, this rises to R28 000.

For graduates with a master’s or doctorate, the figure jumps to R37 000 a month in real 2016 rand terms.

These figures cover employed people aged 15 to 64 for whom the mean age is older than 38, so these are unlikely to be starting salaries, Van Broekhuizen noted.

Recalculating these figures for employed people aged 18 to 35 reveals that a person with a matric is expected to earn in the region of R6 800, with earnings for a person with a post-matric certificate closer to R12 300.

Earnings for a person with a diploma are in the region of R16 300, which jumps to R24 800 for a bachelor’s degree. A graduate with a master’s or doctorate is earning roughly R30 800 a month.

The gaps in the data and the margin for error notwithstanding, the figures broadly illustrate the difference a university degree can make.

“From everything we see, your chances of finding employment and your expected levels of remuneration are just so much lower [without a degree],” said Van Broekhuizen in his findings.

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Lynley Donnelly
Lynley Donnelly
Lynley is a senior business reporter at the Mail & Guardian. But she has covered everything from social justice to general news to parliament - with the occasional segue into fashion and arts. She keeps coming to work because she loves stories, especially the kind that help people make sense of their world.

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