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How do I prepare financially for my child’s education?

Q:
How much on average should you put away each month? 

A reader asked the following …

I have a question regarding education policies. I’m saving for my child’s university fees. What happens to that policy if you start contributing to it and, (God forbid), that child passes away before they go to university? Or they decide not to pursue tertiary studies and start their own business. There are so many variables in life, one can never be too sure.

 Secondly, how much on average should you put in such a policy per month? 

Please note that the information provided below does not constitute financial advice. Generic information has been applied in the context of your question. We have limited detail about you and your circumstances, and such detail may impact any advice provided.  

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The first distinction we need to make is the difference between an education insurance policy and an education investment. Although both can be paid for through monthly premiums and both are for securing your child’s future education, what happens in the event of the death of a child is different.

An education investment plan is primarily for the ongoing education of your child, from the time they enter school until they graduate out of university, ready to take on life. An education insurance plan on the other hand will provide full-term amounts or compensate the child on maturity and allow them to continue their studies in the event of the unfortunate death of a parent. I make the distinction simply to inform you that there is a difference and you have options outside of an investment when planning for your child’s education.

From your question, you’ve referred to savings, so I’m inclined to assume you’re referring to an education investment plan. Here are a few questions to ask before you invest in an education investment fund:

  1. Fees What fees will you be charged?
  2. Contributions How much do you need to invest and how often do you need to contribute? Can other people, such as grandparents, also contribute?
  3. Investment options What investment options are available, and do the suggested timeframes for these options meet the timing of your children’s education needs?
  4. Fund purchases What can you use the savings for? For example, can you use them for primary, high school or tertiary studies? Do they cover expenses such as clothing, laptops and excursions?
  5. Access to funds What criteria need to be met before you can access your funds? What happens if your circumstances change, and you can no longer contribute to the fund – do you lose everything that you’ve invested, or will you need to pay a penalty fee? How difficult it is to withdraw your money if your children’s priorities change? For example, what happens if your children decide they don’t want to study at tertiary level?

Now let me answer your question as to what happens in the event that your child passes away prior to maturity. It depends. Is the investment in your name? Or your child’s name? If it’s in your name, life goes on. I don’t say that to flippant but rather to make the point that in most cases your child’s death has no bearing on the investment. You can choose to use those funds for something else at maturity if there’s a restriction period, as in the case of endowments, a common investment vehicle for education investing.

If the investment is in your child’s name, your child would be known as the policyholder, or the owner of the investment. You as the parent would be the payer and authorised signatory (for as long as your child is a minor). You can then make various nominations depending on your estate planning needs. You can choose to appoint no life assured, one life assured or multiple lives assured. Your child can be the life assured, or you can nominate other people. If you have chosen to nominate one or more lives assured, the endowment will come to an end when the last life assured dies. The money will be paid out directly to the beneficiaries. You can also nominate a beneficiary for ownership to inherit the investment and become the new policyholder should your child pass away.

How much to save

When it comes to saving for education, every little bit helps. Each rand you save is one rand you won’t have to borrow or rely on someone else to provide. So even if you get a late start or are only able to save a small amount each month, you’ll still be better off than not saving at all.

A realistic goal is to try to save a third of your child’s expected university costs. Wondering where the other two thirds will come from? The idea is to spread the rest of the cost of paying for university over a lifetime to make the hefty price tag more manageable. So, while one third comes from past income (in the form of what you’ve saved), another third comes from current income at the time tuition needs to be paid (along with grants and scholarships), and the last third from future income (in the form of loans that you or your child will pay back later).

The best monthly savings goal is the one that you’ll stick to, so choose one that fits your budget. For many families, this is about 10% of discretionary income. Beyond that, ask yourself: Who are the important people in my child’s life? Most likely, many of them would love to help, and there are many occasions when they can: birthdays, holidays, early school graduations, and other personal milestones. Ask relatives to swap out a gift for a birthday or holiday and instead give a small contribution to university fees.

If you’d like to double-check your advisor’s calculations and arrive at an illustrative figure, simply Google Education Calculator South Africa. There are hundreds of these online tools that will give you an accurate estimate of how much you should save, over what period, at what investment return and paying what fees to be able to realistically achieve your maturity goal.

  

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