NASTASSIA ARENDSE: I’m joined by Gareth Friedlander, the head of research and development at Discovery Life to discuss the cost of education.
GARETH FRIEDLANDER: The numbers are quite staggering. When you take a view of the actual quantity, private education in South Africa today costs about R2.2 million per child. So for the average family about R5 million in present-value terms, which is quite scary.
NASTASSIA ARENDSE: In terms of the cost, to what do you attribute some of the costs, because I can imagine that this increases yearly, with the laptops and other technology that are needed and sports and other activities that come with it.
GARETH FRIEDLANDER: Exactly. So there’s a number of things that we’ve seen in this space. The first is that kids are going to school earlier. So gone are the days when you start in grade one. Now kids start school almost in creche at age one or two. Then, as you mentioned, there’s all the supplementary costs associated with education. So it’s no longer the tuition fees alone, but technology such as laptops, iPads, extra lessons, tutoring. We estimate that these kind of supplementary expenses can add about 50% to the basic tuition fees.
In addition to that, as everyone knows, education inflation is incredibly steep. Each year it’s about CPI plus 2 or 3%, which obviously over the course of the child’s schooling has an enormous impact.
NASTASSIA ARENDSE: And this, I can imagine, outpaces salary growth, because if you are not getting an increase every year, depending on the kind of job you are doing, education still outpaces what you are able to catch up with salary-wise.
GARETH FRIEDLANDER: Exactly. And again, when you start putting that into numbers, it reveals quite a scary picture. So the average South African household today at kind of Grade 1 level will spend about 18% of their net income on education. But by the time that child reaches matric, because their education is increasing year in and year out in excess of salary inflation, they’ll be spending about 72% of their salary on education. So it’s quite remarkable how that actually plays out.
NASTASSIA ARENDSE: One thing you mentioned in your report, which I found quite interesting is that people are having children later in life. You would think conventionally that maybe you need enough money to be able to save up so that when you have kids you are able to take care of yourself and them as well. But at the same time it kind of gets in the way of you being able to save enough for retirement.
GARETH FRIEDLANDER: Yes, exactly. So you would think, as you say, that having kids later would be a good thing because it would allow you to save with a longer lead time for education funding. But in reality that’s not what happens. When young couples have kids later, the last thing they are actually doing is using their money pre having a baby to start funding for education. So all it means is that you are funding your child’s education much later in life, at older ages, and that starts eating into retirement funding, etc, which is obviously not ideal.
The other impact of people having children later is that of life-changing events. One of the stats that we’ve uncovered is that about one in four children will have a life-changing event happen to one of their parents while they are at school. A death, disability or severe illness will happen to 25% of parents while their kids are at school, and you can imagine the impact that that has in terms of education planning and funding for education.
NASTASSIA ARENDSE: Do you find that we disregard the value of financial planning for education? A lot of the time when we have experts coming on the show they talk about financial planning in terms of you saving enough money, dealing with your debts, saving for retirement and various kinds of things. But we never explore the financial planning that comes with education.
GARETH FRIEDLANDER: There is no doubt that that’s so. And the stats show it. So we’ve seen that about 56% of households have absolutely no formal education planning policy in place – and it’s an incredibly complex thing to plan for. So it’s something that we need to start thinking about in a lot more detail.
NASTASSIA ARENDSE: Where do I start though? They always say “it’s never too late for you to get on the right track when it comes to retirement planning,” but where do I start when it comes to educational planning for my children? What should I be saving or aiming to save?
GARETH FRIEDLANDER: There are a number of policies that exist in the market today. We’ve obviously just released a new range of products in the education planning space, where it will fund or indemnify your child’s education if something were to happen to one of the parents. There are different levels that you can choose – private-level education, public-level education or even international education. But that’s obviously in the event of something happening to you.
But I think what’s really exciting is that we are looking at new and innovative ways to release funding in the education space that never previously existed. An example of that is that, as an insurer, if young parents are healthy that creates a surplus for us, and w’vee able to channel that surplus into funding their children’s education. So, for example, each year that parents demonstrate their health and wellness, in our case through their Vitality status, they’ll earn an extra 5% off their child’s future tertiary education.