How to try avoid education related debt
31 October 2016
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On mobile, on digital, on demand, this is Old Mutual Live Money Coach. Hello and welcome, my name is Chris Gibbons. Here’s a question that many new parents will have to face. We now have one, or two or even more bundles of joy. We love them to pieces, but how do we provide for a good education. Especially at a time when government education, state schools, may not necessarily be the best option. It is a tough one.
We’re joined now by an expert in the field, the Chief Executive of the South African Savings Institute, Gerald Mwandiambira. He was also a professional Chartered Financial Planner, author of the book, My Money, which deals with this and a host of other topics. Gerald, welcome to Old Mutual Live Money Coach, thank you for your time. What do you recommend, how should parents approach this question of funding a good education?
Gerald Mwandiambira: Thank you Chris, education is indeed one of the biggest expenses which any parent will incur with regards to a child that they’ve brought into this world. Whether the child actually undergoes private schooling or state schooling, there is definitely a very high cost associated with education. Sometimes this may be transport, sometimes this may be in the form of boarding, but often it’s just the tuition which we all need to consider for our children.
How to prepare of your children’s education
There are various ways you can go about looking at the whole education preparation. The first thing which the more prudent parents should do is that before they’re even parents, they ought to start up a fund or some sort of savings vehicle. Where they start putting money aside, even before they’ve had a baby. Even at marriage, you can have a fund where you say this is going to be for our children’s education.
Being that prudent, when the children do come, you carry on the savings process and you already have a little bit of a lump sum for primary school education. In addition, even before you’ve given birth, you can also take out an education policy and these policies vary from different providers.
Some policies provide right from primary education, through to high school, through to university. Whilst most common are usually targeting university because university gives the most amount of time to allow a saving to happen before it occurs. The most prudent parents, number one, plan before you’ve given birth, start saving. The second one, okay, you’ve missed the boat, the child is here, you haven’t saved. They’re maybe in primary school, start planning ahead. Start planning for high school or university. Often you may end up funding the primary school from your normal recurrent income. But that doesn’t mean you should ignore the fact that you can start saving ahead for university or for high school.
Another thing, I’ve missed the boat, I never saved before the child was born, the child went through primary school, we were fine, we’ve kind of got through high school. We’re now at university, how do we cope? When the child is now this old, it’s obviously too late to take up a savings vehicle, there are other options.
Trying to avoid the dreaded bank loan
One of the options is definitely to take out the dreaded bank loan. But study loans are common, they’re not unique to South Africa. They’re very common across the world that many students take up study loans with their parents as guarantors. When they start working, they pay these off. You can take out a study loan from a commercial bank.
Option two, we have the National Fund, NSFAS, which funds education, which is sponsored by the state. Again, you can borrow from here. But remember, with NSFAS, this is on a needs based application. Most parents from middle to upper income households can’t apply for NSFAS because it’s definitely aiming at those who can’t afford university.
If you are in the upper income or middle to upper income bracket, your only options might be taking a study loan in the name of the child, or what you might have to do as a parent. Which is a last resort and least recommended. Is you taking out your own loan in your name for the child’s education. What we want to recommend is simply this, getting into debt for education, although it’s a noble cause, if it’s going to prejudice you financially, it shouldn’t be done.
Sometimes you might have to look at more cost effective education options such as going to a TVET college where a child can go and acquire technical skills. Which they defer university for a few years, but allow them to work a little bit and then start working into university. Because you really don’t want to carry a debt on education forever.
CG: Let’s just be clear about this Gerald as to why mum and dad should not fund the university education if possible. It should be left to the child, to borrow the money or to work for it. Because mum and dad will more often than not be dipping into their own savings to do so. That’s money they’re going to need for retirement and because of their age, they have no chance of replacing it. While the youngster will have 30-40 years to pay back any loans, is that right?
Funding education should not come from retirement funds
GM: Indeed, that is the exact reason. Because we’re all having children later on in life, you’re tending to find that a child going to university often coincides with the time the parent is actually retiring. Many parents take this opportunity to use retirement funds to pay for university. This should never be done because you might still live for another 30-40 years.
As you said Chris, it’s better for the child to simply apply for a study loan and the parent acts as a guarantor, hopefully they’re good financial stead in terms of credit. Then the child can own that loan and then pay that back once they start being employed.
As a parent, the last thing you want to do in your later working years is to take up a study loan which is usually a huge financial obligation. Because study costs are escalating at such a rapid rate, and letting the child get away scot-free. Rather let the child assume that debt because they will be working and you just act as a guarantor.
CG: What role is played in all of this by education policies, savings vehicles, things like that?
GM: Savings policies and education vehicles as we said Chris, have to be taken out early. If you don’t give these vehicles time to grow and accumulate money over time, you won’t reach that point where you have enough of a sufficient cushion or lump sum to start de-cumulating when you start paying off the fees.
If you really want to consider the education policies, this must be done as early as possible in the child’s life or even prior to the child being born. There is absolutely no reason you can’t take out a policy before the child is born, in terms of planning ahead. You also have to consider things like even an RA, as an action and savings vehicle for a child.
You can take out a retirement annuity on a baby and you can pay a nominal amount into that retirement annuity and when the child starts working, they pick it up. R200 over a lifetime, at age 65 is R15 million towards retirement, without having worked a cent, with daddy and mummy having opened an RA at R200. We need to start thinking outside the box and applying some of these solutions in how we plan for our children’s future.
CG: You’re listening to Old Mutual Live, the Money Coach edition, on demand, visit dogreatthings.co.za. I’m talking to the Chief Executive of the National Savings Institute, Gerald Mwandiambira. Gerald, before I let you go, we need to remind parents, of course, that things like bursaries exist.
Hard work can lead to bursaries
GM: Indeed, if you have a child is gifted either from a sporting perspective or even an academic perspective, there are plenty of bursaries out there. You need to start looking around as the parent because you have access to the internet and can understand these things and search. There are bursaries available from even primary school for gifted sporting children and academic children.
I have a friend of mine, their daughter, their university funding has already been approved and offered at the age of 12 because they won a spelling bee competition. There are ways around it. If you are nurturing a gifted child, there are bursaries and other avenues which would allow you to definitely pass on the burden of education to another funder.
CG: And there we’ll leave it for today. This has been another edition of Old Mutual Live Money Coach, my name is Chris Gibbons. With me on the line from Johannesburg has been the Chief Executive of the National Savings Institute, Gerald Mwandiambira. Gerald, if anyone wants more information or indeed, a copy of your excellent book, My Money, where would they go?
GM:askgerald.co.za and you can get in touch with me.
CG: Gerald, appreciate your time. Remember, please feel free to get in touch any time you need. If you have any questions for me, topics you’d like covered here on Old Mutual Live Money Coach, please feel free to send them direct to me at email@example.com. I’d be delighted to hear from you. Until the next time, thank you for listening. Old Mutual Live, on mobile, on digital, on demand.