Education inflation

The cost of raising your child is always increasing, and as parents do their best to build their finances and fight against inflation, one of the largest, ongoing expenses is education. Last year, it was widely reported that the cost of educating a single child – from Grade R through university and taking inflation into account – could set you back R1.6 million. Double this if you plan on sending your child to a private school and want them to pursue a postgraduate degree.

Each year, Statistics South Africa gathers data on the annual increases in education costs, and in 2020, even though inflation on tertiary fees was lower than usual, they still climbed by 4.7%.

Overall, schools were costing parents about 6.4% more than the previous year, and notably, crèche fees increased by 6.7%, higher than the 2019 rise of 6.2%. Meanwhile, the Covid-19 pandemic has introduced new hidden costs to education, and while we may be saving on transport and uniforms, the tools for digital access to enable distance learning aren’t cheap.

For most parents, education is about unlocking as many options for your children’s future as possible, allowing them the opportunity to pursue their lives in any way they choose.

So how do we prepare parents’ budgets to ensure the education fees don’t become too overwhelming? Henk Appelo, Lead Specialist for Investments at Liberty, says that – in an ideal situation – parents need to be decisive about their children’s schooling future before it begins.

“You have to decide on what is financially feasible from the get-go. Will your child go to private school? Will they go to university? If they do, will it be far from home? Considering education inflation, accommodation inflation, and the other associated costs, these questions all have different budgetary requirements,” he said.

Many parents often underestimate the costs associated with tertiary education, he explained, as textbooks, accommodation, food, and lifestyle costs can cut deeply into so-called “college funds”.

“Whereas most parents base their savings plan around the tuition fees, I would recommend doubling that to take into account other education related costs,” said Appelo.

When it comes to saving, however, some parents may not have the luxury of time, which means that certain short-term investments could be a possible option to ensure education funds grow in time, though this would be best considered with the guidance of a Financial Adviser.

“Linked Investment Service Providers (LISP) can offer investors access to collective investment schemes, such as unit trusts, though finding the right one for your unique financial situation can require some outside help. Ideally, a Financial Adviser (FA) can point you in the right direction to ensure that even in the short-term, you see some growth on your investment to cover education costs,” said Appelo.

To guarantee that you can make lump sum investments in this shorter-term investment, he recommends that it might be best to put off luxury purchases, such as renovations or a new car, and to invest any extra income, like a salary bonus, to help the fund grow.

“However, the absolute best option would be to start an education fund even before your children start school. The longer you have, the more flexible your options.  Even if it’s in small amounts, a parent who puts away money each month from when their child is still young will have a much less stressful time growing those funds,” said Appelo.

An FA can also help you to see how much money you’ll need at which point in time to pay for an education and how much you’ll need to save to have those amounts when they are needed.  This can be done in a way that remains affordable, starting early would mean that the plan may have a15-to-20-year period. This means a parent can take advantage of compound interest as they save each month.

“However, over such a lengthy period of time, it is also important to make sure that if anything happens to you – if you die, or if you’re unable to work – your child’s education is protected. There are certain education insurance products that can make sure your child’s future is safe,” said Appelo.

In the event of a tragedy, Liberty’s recently restructured EduCator benefit will cover your children’s schooling and assist with related expenses from pre-primary until they complete university.

“Looking after yourself, and your personal finances, through lifestyle protection and insurance, means that you minimise the risk that your children will be put into financial jeopardy in the future,” said Appelo.

While saving for education is important, he recommended that it’s also vital to look after your own finances, particularly your retirement fund.

“The last thing you want is to have gone into deep debt to afford an education for your children, and then they graduate and have to immediately start worrying about supporting their parents or family. Education is an important priority, as is making sure you can be self-sufficient in your financial stages of life,” he said.

This article does not constitute tax, legal, financial, regulatory, accounting, technical or other advice.  The material has been created for information purpose only and does not contain any personal recommendations. While every care has been taken in preparing this material, no member of Liberty gives any representation, warranty or undertaking and accepts no responsibility or liability as to the accuracy, or completeness, of the information presented.  Please consult your financial adviser should you require advice of a financial nature and/or intermediary services.