Paying for education is likely to affect most parents and their student offspring. Many are already paying college and university fees, and this trend of rising fees and falling local authority grants looks set to continue. School fees present an additional burden – estimates show that is currently costs over £100,000 to fund a child through private education.
There are four basic ways of paying school fees:
• savings from an early age so that enough capital has been accumulated when the child starts school;
• taking a loan when the child starts school;
• paying school fees out of income; and
• using a combination of these methods.
The key to most school fee planning will be to start saving as soon as possible in conjunction with the range of tax-efficient investment tools currently on offer.
Saving capital
Whether a particular investment is suitable for you depends on your attitude to risk, the investment term, and the taxation situation. Some of the investments that are typically used for saving school fees include Individual Savings Accounts (ISAs), fixed term annuities, and National Savings (see www.nsandi.com for details on the current range of products). In addition, Educational Trusts and Composition Fees, which you pay to the school of your choice, have tax advantages, but only if the child eventually goes to that school. The rules regarding these types of trusts are highly complicated and quite inflexible.
Taking a loan
There are several ways of taking out a loan to finance school fees, including some specialist school fees plans. For homeowners, given current low interest rates, the most cost-effective way of raising capital may be to extend an existing mortgage. However, individuals should always be aware that if they do this their home will be at risk if they do not keep up the repayments. Mortgage payment protection cover may be worth considering for coping with potential unexpected changes to circumstances, such as redundancy. Borrowers also need to be sure that they can meet repayments if interest rates increase.
Paying out of income
A parent or guardian may be lucky enough to have sufficient income to pay school fees entirely out of his or her income. However, school fees also have a habit of increasing faster than earnings, so provision will have to be made to ensure that the fees can be met throughout the child’s period of education. The effect of redundancy on ability to pay fees should also be considered. Consideration should also be given to protecting the ability to fund or pay for private education in the event of death, critical illness or being unable to work through accident or illness. Types of insurance policy that may be considered include:
• Family income benefit, which aims to replace an income on death for a set term;
• Critical illness assurance, which pays out a lump sum on diagnoses of a recognised condition; and
• Income protection, to replace an income in the event of being unable to work through accident or illness.
Practical Tip :
Parents with a new-born baby would need to save around £112 a month or a £13,167 lump sum to cover the total expected cost of a three-year university course starting in 18 years (£47,631). Parents with a child of 10 who have not started to save would need to save around £187 a month or invest a £16,531 lump sum.
Sarah Laing
