Cost of education: Save for your child’s future

By Drum Digital
22 June 2014

As parents we recognise the importance of a good education for our children. Often we want to put aside funds to provide for their education, but then life gets in the way. Living costs, vehicle repairs, holidays . . .

As parents we recognize the importance of a good education for our children. Often we want to put aside funds to provide for their education, but then life gets in the way. Living costs, vehicle repairs, holidays . . .

But the message is clear: the cost of education escalates more than inflation, which means that your dream of putting little Sipho or Sannie through varsity, becomes more and more unachievable if you don’t start saving now.

“Currently the cost of education is at 3,5% above inflation,” warns Sinenhlanhla Nzama, an Investment marketing actuary at Old Mutual.  “Most parents do not know that the cost of education increases by about 9% every year,” he says.

“A three-year-long bachelor of commerce degree at university will now cost around R144 000 in fees alone, excluding books, travelling, accommodation and allowances.”

If your child is only starting high school this year, this amount will soar to R221 000 five years from now, and parents of grade ones will have to pay an estimated R440 000 12 years from now.

This is a sad reality for Nozipho and her husband Mike Modisha, who realized the money they have been saving up for the past 15 years for their son, Kamogelo’s, tertiary education was not enough. Nozipho, a nurse in Pretoria and Mike, a policeman, in the end had to take up a loan to help pay for their son’s engineering tuition.

Even though they started saving early on, they didn’t adjust premiums annually to keep up with the increasing cost of education. So the amount saved over the years was not enough.

So how much is enough? Sinenhlanhla says parents of children born this year should save about R460 a month for university tuition, assuming an average of 10% growth per year. This should be increased by at least 9 % each year.

Here are Sinenhlanhla’s tips:

1.      UNIT TRUSTS

“Many people who choose unit trusts are attracted by the wide choice one has across different unit trusts, with some specifically focused on beating the rate of inflation. Your money is invested in a mix of local and overseas markets so that the targeted growth is achieved,” says Sinenhlanhla.

However, your savings are very easily accessible. This means you must be disciplined and avoid the temptation of dipping into your child’s funds.

2.      SAVINGS POLICIES

“These are fixed savings for a certain period of time, say 5 to 15 years, depending on when your child will go to school or university. You can either pay fixed monthly premiums or make a lump sum payment into your child’s policy.”

He adds: You have limited access to the savings and generally have your savings invested in a wider range of leading unit trust funds of your choice.

3.      FUNDISA

This is a government initiative enabling you to save for your child’s education towards an accredited qualification at either a public college or university. You’re paid an annual bonus on your savings, which can be 25 per cent of the money you save annually up to a maximum of R600 per child. “Say you save R100 a month (R1 200 a year in total) you therefore get another R300 a year. To receive the maximum bonus of R600, you have to save R2 400 in total a year. The bonus can only be used by the learner. If you can withdraw your own money for other purposes, you will lose the bonus.”  Fundisa is only available to South Africans with an income not exceeding R180 000 per year. To open an account, one should visit one of the three participating banks (Standard Bank, ABSA and Nedbank) or download an application form on the Fundisa website.  For more information log onto www.asisa.co.za/fundisa

4.      BANK SAVINGS ACCOUNT

These are not suitable for education saving, as they are unlikely to provide growth above inflation. “One of the main challenges with saving through a bank savings account is that the interest is generally too low and cannot match the education inflation of 9%,” says Sinenhlanhla. “For example, one of the best interest rates you can get at the moment is 6.5% with one of the bank’s fixed–term savings account. But it is only 1% above normal inflation. Saving in a unit trust or education policy invests your money in shares and property, which can give you returns close to or even better than education inflation of 9%.”

Tips on ensuring that you save enough for your child’s education

  1. It is best to start as early possible. Smaller amounts in the beginning will add up over time
  2. Avoid making withdrawals from your policy as this will affect the accumulated amount
  3. Find out what the cost of education will be in the future when your child goes to university.
  4. Use education tools and a qualified financial adviser to assist you determine how much to save each month.
  5. Increase your payments every year when you get your salary increases.

Use a portion of your annual bonus from your employer to add to your child’s education savings

- Koketso Mashika

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