It Pays To Plan Ahead For Your Children's Education


Most, if not all, parents want to provide tertiary education for their children. But the cost of tertiary education can be hefty.

Recognising this, MoneySENSE would like to share a few tips on what you can do to start saving for your child's tertiary education.

MoneySENSible Tips

Tip 1: Take stock of how much funds you have currently provided for your child's tertiary education.

 
Here is a simple template for you to use.

  Current Value Projected value* when your child turns 18 or 21
Bank Savings    
Life Insurance Policy*    

Unit Trust

   
Others    
Total    

*Note: To project the future value of your funds, you need to make some assumptions on the rates of return and additional amounts you intend to save or invest. For life insurance policies, you can ask your insurer for the policy's latest projected policy value. Take note of how much of the projected value is guaranteed, and how much is not. As the actual returns could vary from the assumptions, do monitor your portfolio regularly and make adjustments to your financial plan.

Tip 2: Estimate how much your child's tertiary education would cost

Consider how much the tuition fees, living and other expenses might be. One way to do this is to work out how much it costs today, then factor in inflation.
Here's a snapshot of the current tuition fees for a four-year non-laboratory-based programme at a few universities.

National University of
Singapore (NUS) or
Nanyang Technological
University (NTU),
Singapore

University of
Manchester,
UK*

University of
Melbourne,
Australia*

University of
California,
Berkeley, USA*

$27,560 $121,000 $151,000 $176,000

*Note: Estimates are based on the exchange rates published in MAS' website as at July 2010.

As indicated above, the tuition fee at NUS or NTU is today about $27,560. Based on an inflation rate of 1.6% per annum, which is the average annualised increase for courses for most students in Singapore, this would increase to about $38,000 in 20 years' time.

The cost of education in overseas universities would be substantially higher. A Straits Times article* in July 2010 quoted financial industry practitioners estimating that the bill for overseas university education, including living expenses, could range from $200,000 to more than $500,000 in 20 years' time. Do note that the cost of eduation overseas would also be subject to currency risks.

* "The dollars and sense of parenthood" by Lorna Tan, Straits Times, 4 July 2010.

Tip 3: Work out the shorfall (if any)

Is there a shortfall in the estimated cost for your child's education and how much you expect to have based on your current savings, life insurance and investments?

Example: Your child is one year old today, and you estimate that you need about $38,000 for his local university tuition fees in 20 years' time. The current value of your savings, investments and life insurance policies is $5,000, and you expect this to grow to about $9,000 in 20 years' time. You have a shortfall of about $29,000 (i.e.$38,000-$9,000)

If you are thinking of an overseas education for your child, the projected shortfall will be much higher given its higher cost.

The earlier you start saving, the more you can benefit from the effect of compounding to accumulate your savings. So work out how much you need to set aside and what return you would need to have in order to cover the shortfall. One good way is to review your current expenses, consider which areas can be trimmed and start saving a higher fixed amount each month. Here is a snapshot of how much you can accumulate if you save $100 a month based on different interest rate assumptions. In the example above, if you save $100 per month over a 20-year period, you would need to earn a net return of 2% p.a. in order to accumulate the shortfall of $29,000.

Time period Amount aved per month Total amount saved

Future value at end of time period based on different interest rate assumptions

2% p.a

5% p.a 

7% p.a 

10 years $100 $12,000 $13,272 $15,528 $17,308
15 years $100 $18,000 $20,971 $26,729 $31,696
20 years $100 $24,000 $29,480 $41,103 $52,093

While it may be attractive to place money in products that offer higher returns, remember that the higher the potential return, the highter the risks. If you place your money in a risky investment, you run the risk of losing some or all of the money you need for your children's education.

 
Tip 4: Think carefully before you place your money in a financial product

Many financial products and investments claim to help you save for your child's tertiary education. Before you decide whether to place your money in such a product, work out your goal, assess if the product meets your needs, how much you can afford to set aside, the rate of return you need and how much risk you can afford to take.

Below is a quick overview of some common financial instruments and a few key points you should consider before deciding whether to place your money in them.

Life insurance plans:

For participating endowment or whole life policies, note that only part of the policy value is guaranteed. The remaining non-guaranteed value depends on the performance of the insurer's participating fund. If the insurer revises the bonuses for a policy, the policy values will be affected.
For investment linked policies, note that the fund values are not guaranteed. The values depend on the investment performance of the underlying fund(s). The investment risks vary from fund to fund.
Find out who and what is covered under the policy you are considering. For example, does the policy cover the child and/or the parent? Would any proceeds be payable in the event that the parent passes away or is permanently disabled?

Unit trusts and Exchange Traded Funds (ETF)

The value of your investment depends on the underlying assets that your unit trust or ETF is invested in. The value of the fund’s investment may be affected by the economic and political factors affecting the sector or country or region the fund invests in, as well as changes in exchange rates.
Do not assume that all unit trusts and ETFs come with simple structures that invest in a basket of assets based on their benchmarks. Some contain derivatives and have complex structures. If you do not understand the product, do not invest in it.
Given that your investment horizon is fixed by when your children enter tertiary education, select a unit trust or ETF that suits your investment objective and timeline.

Equity investments

Share prices are volatile and can be affected by systematic risk and non-systematic risk factors. Do not invest based on rumours or hearsay.
Do your homework to understand the company’s business and risks, before making a considered decision whether to invest.
If you are nearing the end of your investment horizon and cannot afford to take risk, you may switch to deposits or a more conservative investment like bonds.

Bonds

Bonds are mainly fixed income-securities. Simply put, when you purchase a bond, you are effectively lending money at a fixed interest rate to the issuer for a stated period. On maturity, you receive the bond face amount.
Bonds are generally regarded as less risky than shares. However, low risk does not mean no risk.
Bond holders are subject to credit default risk of the issuer. A falling credit quality of the issuer may cause its bond price to fall. As such, do consider the credit quality of the issuer before deciding whether to invest in a bond. Note also that bond holders are subject to interest rate risk. Bond prices move in opposite direction to interest rates. So if interest rates rise, the price of a bond may fall below the purchase price.

Tip 5: Review regularly and make adjustments

Monitor your progress at least once a year. Take stock of the current value and projected value of your savings, insurance and investments, and the estimated amount you need for your child’s education. Diversify your investments.

Revise your portfolio and move to conservative assets as you approach the time when you need the funds. For example, a few years before the time when your child enrolls in a tertiary institution, you may want to consider moving your funds to fixed deposits, Singapore Government Securities (SGS) and Treasury Bills.

In additon to the above, there are loan options that you can consider to fund your child's tertiary education. For example, there is the Tutition Fee Loan Scheme for approved institutions, whereby the loan is interest-free during the period of study. You can check with the institutions on this scheme. There is also the CPF Education Scheme which allows you to borrow from your CPF Ordinary Account to pay for your child's local tertiary education at approved institutions, subject to the withdrawal cap. Your child will be required to repay the amount withdrawn, plus accrued interest which you would have otherwise earned on your CPF savings. You can find out more at www.cpf.gov.sg. In addition, some banks provide study loans. So do shop around and assess which loan option is better for you.

Tertiary institutions may also provide subsidies, grants and scholarships for students. There is a range of government scholarships available. Besides, it is common for students to work part-time or during term vacations to help pay part of their education.

Saving for your child’s education is a priority for many parents. It pays to take charge and start planning now!