Private education costs squeezing the wealthy

The rising cost of a superior private education is putting a squeeze on high-net worth individuals, who are increasingly having to consider lifestyle tradeoffs in order to send their children to a private schools.

“Previously, education was not a major factor in the budgeting of the wealthy, who often could afford to manage the expense out of their monthly income,” says Jason Bernic, Financial Planning Coach at Old Mutual Wealth.

“However in recent years – kicking off a trend we expect to continue for decades to come – even the wealthy have been feeling the pinch of rising private school costs.”

Bernic notes that although individuals with an income of above R80 000 a month are considered to be in the top income bracket, it would appear that education costs continue to rise ahead of inflation and their monthly salaries. The reality is that it will continue to impact significantly on their disposable income.

“Increasingly, parents need to forego this year’s holiday away to pay a hefty registration fee, or hold off on upgrading cars to the latest model to enrol another child,” Bernic says.

He adds that although in many instances, private schools offer discounts for annual fees paid upfront, these amounts are often so steep that even the wealthy elect to rather make monthly payments.

“Unfortunately, the reality is that affording a private school education is going to become harder, not easier in future. And with the phenomenon of parents having to pay maintenance and school fees for more than one family where divorce has become a factor, many HNWIs are facing a real dilemma,” says Bernic.

“For a significant segment of the wealthy, private schooling is the only option they will consider for their children, but it is important that even they start making sufficient provision in order to be able to afford this expense in the future.

“Currently, the cost of a private high school education can set parents back about R1 million in fees over five years, nipping at even affluent purses. But this figure will have dramatically increased by the time today’s toddlers start studying for their matric exams.”

He says parents whose children are set to receive their education between 2020 and 2035 should have an investment strategy specifically for education, regardless of other investments, in the face of soaring education costs.

“Illustrating the need to plan ahead for education, Bernic says that drawing down on the investment to pay for school fees could erode capital faster than it can possibly grow. “Parents need to start their education savings as early as possible, giving the money time to grow and accumulate.”

“Financial planning is daunting and the goalposts keep moving, so it is important to have a holistic strategy for determining how much is enough to afford the essentials while at the same time maintaining a desired lifestyle,” Bernic says.

“An integrated wealth management plan can assist in determining if and where trade-offs are required to realise a certain lifestyle and life’s goals. While the realisation that a serious rethink of strategy is in order where people are not investing enough might not be a pleasant one, parents will at least finally be in a position of empowerment - knowing what action is needed, and how the situation can be rectified.

“These trade-offs, like saving more or spending less, or taking on more or less risk or in fact changing the goal parameters, is a very necessary part of helping parents realise the hopes and dreams they have for their family, and an important way to manage the future impact of rising costs. For those parents who want to ensure a top-class education for one or more children, a proper financial strategy must become a top priority,” he says.