How to alleviate the financial pressure of education costs in 2023

29 Dec 2022

As times get tougher, parents are re-evaluating education choices, with the Old Mutual Savings & Investment Monitor 2022 reflecting that 9% of respondents had chosen to move their children to less expensive schools in the past year.

School fees and education costs were also the third most common reason for saving, with 29% of those using a stokvel indicating that this was their end goal. Where saving for education once meant saving for a tertiary education, fees for primary and secondary school have climbed such that parents need to save for these costs rather than trying to cover these fees from their monthly salaries.

Annual fees for state schools range from R8,000 to R20,000, while Business Insider reports that some of the more prestigious private schools now cost more than R173,000.

André Wentzel, solutions manager at Sanlam, has previously cautioned that parents will probably need more than R1-million in today’s money. This included fees of between R30,000 and R60,000 a year for public schools, between R100,000 and R200,000 for private schools and up to R300,000 for a four-year degree.

“Historically, education costs have increased by [between] 2% and 3% above general inflation, meaning that, over time, they become a larger proportion of a household’s budget,” he says. This merely highlights the importance of saving or investing to reach an attainable end goal. Relying on a “pay-as-you-go” approach could result in you eventually having no capital saved up for your child’s future studies, which means you will most likely be forced to apply for prohibitively expensive credit.

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According to Old Mutual, if your child is eight years old today, a four-year tertiary degree starting at the age of 18 is likely to cost R674,525, while the parent of a three-year-old today will need to save R991,099, based on an 8% inflation rate.

The numbers can make saving for education seem like an intimidating, impossible goal. Saleem Sonday, head of savings and investment at Allan Gray, says shifting your mindset away from saving to match the total cost of education or not saving at all, to saving as much as possible, is the first step towards alleviating the impact education fees will have on your future salary.

While it makes sense to start saving as soon as you have a child, the reality is that few parents are in a financial position to do so. “If you are a late starter, like most parents, don’t despair. There are other steps you can take to alleviate the financial pressure,” Sonday says.

These include making a payment upfront in January for the whole year’s fees. Schools often offer discounts of between 5% and 7% for these upfront payments and it means you can save for the next year. If you have more than one child attending the same school, sibling discounts can also apply, further reducing your costs. Parents who are lucky enough to still receive a 13th cheque or December bonus often push this money towards school fees to free up money in their monthly budget during the year.

If you are looking at saving for your child’s education, options include:

Unit trusts: A balanced unit trust fund will have some exposure to the four asset classes – property, equity, cash and bonds – so that your investment is diversified, and you are protected from losses. For example, if equities perform badly in a year, then you can recoup your losses because property might have outperformed the market in the same year. You could also save in a unit trust that caters specifically for education. Benefits of a specialist education unit trust could include flexible payments, the option to skip payments for up to a year and a tracker that calculates whether you need to change the amount you are saving in order to reach your saving goal;

Bank savings accounts: Shop around and compare interest rates as well as fees. However, the interest rates on bank accounts are typically lower than other savings options; and

RSA retail savings bonds: These are long-term savings bonds that you can buy from any Pick n Pay, the Post Office or directly from National Treasury. You can buy a fixed-rate bond or an inflation-linked savings bond. The interest rate you earn is then either determined at the time you take out the bond or linked to the inflation rate. For example, if you took out a five-year, fixed-rate bond today, you would earn interest at a rate of 10.5%, while a five-year, inflation-linked bond would earn interest at a rate of inflation plus 4.5%. The minimum investment amount for these two types of retail bonds is R1,000.

Liberty’s chief specialist of risk products, Kresantha Pillay, points out that the life assurer includes an educator benefit on its life insurance policies which covers children’s future education costs if their insured parent is no longer able to provide due to death, disability or critical illness. At least R25-million in claims was paid out through this benefit in 2021 and 14% of all claim amounts paid covered supplementary allowances for other expenses such as textbooks, uniforms and transport to school. BM/DM

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