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The Costs of education: making your sums

15 March 2012 Nico Coetzee, Executive: Business Development at PPS Investments
Nico Coetzee, Executive: Business Development at PPS Investments

Nico Coetzee, Executive: Business Development at PPS Investments

With 2012 already in full swing, those of us with younger children would already have shopped for new uniform updates, would have packed a good few weeks’ worth of school lunches and would long-since have started with our afternoon activity runs…. But

Consider that a realistic estimate for annual tertiary tuition fees at a South African university currently lies between R30,000 and R40,000 a year. Once you factor in living expenses, transport costs and learning material you’re looking at around R60,000 a year – and that’s still relatively conservative. (The University of Cape Town estimates that incidental expenses, excluding tuition fees, for a self-sufficient student will amount to roughly R120,000 a year.)

Of course, this is how it stands at present… When considering the impact of inflation, these costs are likely to escalate substantially by the time your children matriculate. In fact, assuming a constant inflation rate of 6%, the total cost of a four-year degree at R60,000 a year could jump by close to 80% in ten years’ time:

Cost of 4-Year Degree

Current

R 240 000

In 5 years’ time

R 321 174

In 10 years’ time

R 429 803

So if your child has only just started school, you can expect to pay a little under R430,000 towards a tertiary qualification when he or she matriculates in ten years’ time. Should your child have entered high school this year, expected total fees after the next five years will amount to about R320,000.

How then do you go about financing your children’s university careers and setting aside such substantial amounts?

As we’ve emphasised before, it pays to start saving early. By investing towards your children’s tertiary tuition as soon as you can, your cumulative investment contributions could likely amount to less than the cost of tuition by the time their studies commence. Not only would your investment have been boosted by potential investment returns but, due to the impact of compounding, you would have earned returns on all returns you’d previously generated as well.

Here you could choose between a structured investment vehicle, such as an Endowment Plan, or a discretionary investment product that offers more flexibility. In both instances, the low investment minima required and the cost savings associated with a unit trust based investment offer significant advantages when compared to a traditional education policy.

An Endowment Plan supports disciplined investing, by allowing you to set up regular debit orders or set aside a lump sum for a fixed investment period (with a minimum of five years). This will ensure that your savings remain untouched and exposed to growth opportunities until they are needed. As investment returns are taxed at 30% within the policy and investment proceeds are tax-free in your hands, it also presents a significant tax advantage for investors with a marginal tax rate of over 30%.

On the other hand, a discretionary investment allows you to structure a personalised investment portfolio tailored to your individual requirements. The PPS Preferred Funds product, for example, allows you to invest directly into a premium selection of rand-denominated unit trusts and further allows you to customise your portfolio by deciding how much you’d like to invest, how often you’d like to make your contributions and over what length of time.

A second alternative would be to finance the costs of a tertiary education by means of a loan. However, interest charges will mean that you ultimately end up paying a great deal more than the amount you originally borrowed.

The impacts of the options you have when financing your children’s university fees are illustrated below. For an investment, we’ve assumed annual investment growth of CPI+4% and, if making monthly contributions, an annual debit order escalation rate of 6%. For a study loan, we’ve assumed a borrowing rate of 9% over four years. Inflation has been kept constant at 6%:

Investing in Advance

Loan

Cost of 4-Year Degree

Lump Sum Required

Monthly Debit Order Required

Total Loan Repayment Required

Current

R 240 000

In 5 years' time

R 321 174

R 199 424

R 3 932

R 383 637

In 10 years' time

R 429 803

R 165 708

R 1 333

R 513 393

Based on the figures above, you’ll clearly be saving when investing in advance – exactly how much you’ll be saving is highlighted below:

Saving on Loan Amount

Lump Sum Investment

Total Debit Order Investment

Saving over 5 years

R 184 213

R 147 726

Saving over 10 years

R 347 685

R 353 384

If you have the capital available, you therefore stand to save the most on your children’s tertiary tuition by investing an appropriate lump sum as early as possible. And if such a large lump sum amount seems daunting, breaking your required capital down into more manageable debit order investments also has the potential to result in a significant saving. So it may be well worth considering setting university savings aside ahead of time – and well ahead of time if possible.

You do the math.

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