How to save for your child's education

While most parents dream of sending their children to the best schools and universities of their choosing, the prohibitive and increasing cost of education in South Africa forces many to settle for the most affordable schools and universities.

Available figures from Stats SA shows that education costs are rising much faster than inflation. The cost of education rose by 9,3% in March 2015 compared with March 2014.

Karin Muller, the head of growth market solutions at Sanlam points out that generally, a rate 3% above CPI is usually assumed when planning for education costs. "As for tertiary education, it currently costs just shy of R30 000 and up to R62 500 per year to study for a BCom degree in one of SA’s top universities. A child who’s starting Grade 1 in 2016 and will start university in 2028 could pay a minimum of R84 400 per year, assuming an increase of 9% per year. This excludes residence fees, meals, books and other administration costs," says Muller.

Start As Early As Possible

Many parents pay school fees, as with most household bills, on an ad hoc basis. At the rate the rand is going, very few parents will be in a position to save the huge sums needed to put their children through further education. Experts agree that time is the most important aspect of your children's education savings programme.

Helena Conradie, chief executive officer at SATRIX says that the earlier parents start, the more capital they are likely to accumulate over a lifetime. "Even small amounts put away now can make an enormous difference years from now."

Stephan Buys, head of strategic collaboration at FNB Savings and Investments says the more time parents allow themselves to save, the bigger the contribution they can make and it also allows for adequate time for the money to grow by earning a return or interest on the original contributions made.

Investment Options

Figuring out where to start when it comes to saving for your children's education can sometimes be intimidating. You can save for any way you choose, however, the emphasis should be on stable, long term investments that preserve the capital you put in, and return steady income or modest growth over the duration of your holding.

Danelle van Heerde, the head of advice processes at Sanlam Personal Finance says that TFSAs (Tax Free Savings Accounts) are ideal for longer term goals like a child’s education because your money will grow faster there than in a regular savings account. "Furthermore, the tax relief means the effect of compound interest, or earning investment return on investment return, is increased."

Experts encourage parents to assess the amount of risk they’re comfortable taking and choose a suitable investment tool accordingly. "Parents must look for an investment product which is flexible – you need to be able to add and withdraw funds, start, adjust and stop debit orders if necessary – without incurring any penalties or charges. An example would be a unit trust investment where you typically have a choice of various different unit trust funds to suit your needs and risk appetite," says Belinda Boardman, financial planner at Verso.

Stephan Buys, head of strategic collaboration at FNB Savings and Investments agrees with Boardman's assessment. "Look for a product that offers capital and return certainty, like a cash savings or investments account, where there is no risk and their original deposit and quoted returns are 100% guaranteed."

A second element to consider is affordability. "Some products require minimum deposit lump sums or minimum monthly contributions. Parents need to be aware of products where they charge high initial and ongoing fees so they should try to negotiate or avoid these if possible," says Buys.

So what do you do if your children are a few years away from college/university and their current education fund is not enough?

"Parents should try and cut down on monthly expenses aggressively – this could free some money which could be set aside for tertiary education. Your child could apply for a bursary if possible or consider taking out a student loan. Another compromise could be for your child to work and study part time – some companies even offer internships which could be a viable option," says Boardman.

Boardman also adds that parents must try and save more by re-looking their budget and cutting on unnecessary expenses.

"If this is possible the extra contribution on a regularly basis might assist. If this is not enough there are academic bursary options available from tertiary educations. A further option could be a student loan from a bank. These loans normally have a favourable interest rate and only the interest component needs to be repaid whilst the child is studying. The capital amount is only due for repayment once studies are completed," says Buys.

 Remember, a really good financial advisor can help you map out a savings approach.