How to save for your child's education

Five ways for you to ensure your child is in safe financial hands, writes Mapalo Makhu

The cost of education is increasingly becoming expensive and with year-on-year hikes of about 8% it is now more important that ever to include your kids’ education into your long-term financial planning.

The perceived quality of education is driving more parents to put their children in private schools, some of which are as high as R300 000, including boarding. So education comes with a hefty price tag.

Read: Your child's education or your retirement?

Personally, my son is turning four in June, but his tuition is R4 000 a month already. This does not include the extra curriculum activities, lunch and any excursions they might have. In many cases
pre-primary and aftercare are more expensive than the actual school.

So what are the options available to save for your child’s education?

1. EXCHANGE-TRADED FUNDS (ETFs): An ETF is a passively managed investment that tracks a basket of shares. It gives you low-cost access to invest in the market. From as little as R500, you can start putting away money for your kid’s education.

2. UNIT TRUSTS: Unit trusts are also called collective investment schemes, investing in unit trusts gives you access to invest in the four asset classes: equity, property, cash and bonds.

Also with unit trusts, you can start investing from R500 with any asset manager.

3. TAX-FREE SAVINGS ACCOUNT (TFSA): Investing for your child’s education through a TFSA is ideal because both the growth and income you receive on your investment are tax free; no capital gains tax and no income tax are levied on the dividends and interest received.

You are limited to contribute up to R33 000 a year into a TFSA and a lifetime contribution of R500 000.

For you to see the true benefits of TFSAs, it’s therefore advisable to invest for the long term. So, one would start using a TFSA to fund tertiary studies if you started saving when the kids were still young.

With unit trusts, ETFs and TFSAs, you can stop and start contributions as you wish, offering you flexibility. You can invest monthly or invest a once-off lump sum; it really just depends on your goal and your finances.

4. ENDOWMENT: Most popularly known as an “education policy”. Insurance companies often provide endowments and they have a five-year restriction period in which you cannot access the funds. If you do, it comes with a penalty.

Endowments are normally sold as “tax free” but they are not really tax free.

They are taxed within the fund at 30%, so if your tax bracket is less than 30%, an endowment might not be the best solution for you.

5. MONEY MARKET ACCOUNTS: For short-term education savings goals – for example if you are saving for next year’s school fees – a money market account will do. Just shop around for a high-interest account; many of the banks offer attractive interest rates for holding deposits longer than 32 days.

The above options are great to build capital over time, but what happens if you haven’t built enough capital and one or both parents die or become disabled?

We have seen all too often kids in private schools having to leave the environment they are used to once the breadwinner dies.

That’s when an education protector comes in. An education protector is an ancillary benefit to your core benefits, such as life cover.

In the event of the insured parent’s death or disability, the education protector will pay for the child’s school fees all the way to university, whether in South Africa or globally.

Whether your child is in private or public school, the education protector will pay directly to the school.

The premium for an education protector is based on whether your child is in a private or public school. If it is a private school, the premium will be higher.

Most insurers do provide the education protector benefit, you just need to shop around for the most cost-effective and holistic one among insurers.

Before you go to an insurer to get the education protector, it’s always advisable to check with your employer first to see if you have the education protector as an existing benefit on your corporate risk benefits.

Having both the investment option and the risk benefit provides a holistic education plan for your child’s education.

It ensures that you are covered from all sides, not only when you are alive and you are able to provide the best for your child but also in the event of death or disability.

It gives you the peace of mind that your children will still attend the schools you had envisioned for them.

Makhu is a financial coach