Education in South Africa is fast falling victim to increasing living expenses that outstrip salary increases. Typically, the cost of education increases at 9% per annum, much higher than the current inflation rate, meaning that the cost of education is rising faster than salaries. According to the General Household Survey published last year, 74% of people aged seven to 24 were attending educational institutions nationally. A lack of money for fees is the main reason for a large proportion of individuals not studying in this age group, with 35.8% of premature school leavers blaming a lack of money for their inability to study.
The soaring cost of education
By 2027, five years of public high school will cost about R436 000, five years of private high school R1 743 900, while three years of university will soar to R643 900.
At present, half of South African parents are not yet saving for education – according to a recent Old Mutual Savings and Investment Monitor (Omsim) survey. It is generally believed that couples should begin to save even before they plan to have children. This would equate to more manageable monthly contributions, which are less likely to put excessive pressure on disposable income (short-term personal loan providers can help out in a pinch).
When choosing a savings product to make provision for education funds, three factors should be considered.
Calculate how the savings return will fit in with the rest of your financial portfolio. For example, if you choose a product with a 7% return, but are paying 9% interest on your bond, it would be better to invest in your bond which would allow you to save more in the long-term.
Properly research investment product providers. Look into the credentials of financial firms before making a decision. Check that they are registered with the Financial Services Board and that they have a reputable track record.
Unit trusts and investment policies are ideal as education savings plans, depending on your savings behaviour and requirements.
Invest now to save later
Allan Gray recently analysed the cost of financing education for one child through pre-school, all the way to graduation from a tertiary institution. They found that if all the fees were paid from a parent’s salary, the total cost could amount to around R2,4 million.
The good news is that if parents begin to invest R3,500 a month at the birth of their child, and use the investment to fund all of the child’s education fees, the impact on those parents’ budget would be 29% lower (assuming an investment return of 3% above inflation).
Even if investment for a child’s education begins when they start school, and the investment only earns enough return to keep up with inflation, investing would lower the impact on the household’s budget by 13%.
Today, far more children set their sights on going to university than in the past, and a tertiary education if far more than a nice-to-have. In today’s highly competitive job market, it is becoming increasingly important to continue one’s studies to honours level or towards another postgraduate qualification after the initial three-year degree has been completed.
Knowing how much is enough
The first step in formulating an education savings plan is to figure out how much you will need to save for your child’s education. There are online education calculators to help you find out. Such a calculator will give you an indication of the costs you need to take into account when planning for the education of your children.
Education savings products
Keep in mind that investments will need to provide returns that keep well above inflation and education inflation. These typically are available in balanced funds or growth funds, which can be accessed via education policies and unit trusts.
Saving cash may not be the most effective way to save for longer-term goals, given that in the current low-interest rate environment, its returns over time barely keep up with inflation. Instead, unit trusts and investment policies provide ideal products to use as part of an education savings plan.
If it is an important requirement to have flexibility and early access to your money, then unit trusts offer these benefits. If you decide to go the education policy route, this option provides you with a more structured savings plan that allows you limited access during the first half of the term. It does have the added advantage of value in the full term, access to leading asset managers, benefits for your child on your death or disability and access to funds that offer guarantees on your savings.
Whether unit trusts or an education policy, the only way to give your child the brightest of futures is to begin to save now for their education now.