As the costs of tertiary education increase – amid rising inflation and interest rates, drought-induced food price hikes, and higher fuel and electricity prices – parents are finding it increasingly difficult to save and pay for their children’s education.
As the costs of tertiary education increase – amid rising inflation and interest rates, drought-induced food price hikes, and higher fuel and electricity prices – parents are finding it increasingly difficult to save and pay for their children’s education.
It is therefore increasingly falling to grandparents to chip in to help fund their grandchildren’s education, and contribute toward their family legacy.
Iain Anderson, a portfolio manager at Sygnia Asset Management, said the financial implications of saving for a child’s education differ between parents and grandparents. In some cases, the cash flow implications of saving are far greater for parents managing peak expenses, – including bond repayments, school fees and other costs associated with raising children – than for those grandparents who have most likely passed their peak expenses, own their own homes and have their savings in order.
According to him, helping to fund education is a great way for grandparents to set their grandchildren up for later in life. “The sooner you start saving, the better,” Anderson said, adding that saving over a longer time period would minimise risk as savers would be able to ride out slumps in the market. It would also ensure that savings are in place if grandparents pass away unexpectedly.
By Anderson’s calculations, three years’ of university education – including tuition, books, accommodation and other expenses such as a computer, cell phone and internet access – currently costs between R300 000 to R350 000. “Adjusted by real education inflation of 3%, it equates to R850 000 to R1 million by the time a six year old attends university,” he said. The cost of Education in South Africa increases by 8% to 9% a year – which is around 3% higher than consumer price inflation.
A simple way to save would be to invest the maximum amount of R30 000 per year – into a tax-free savings account as soon as a grandchild is born. Investing the maximum amount in a low-cost, passive vehicle for a number of years, should be enough to save for tertiary education, he said.
Anderson also recommends investing in an equity index fund such as the Shareholder Weighted Index (SWIX).
To reach a savings goal of around R1 million by the time your newly born grandchild turns 18, monthly contributions of between R2 600 to R3 000 would be necessary, provided the real rate of return on an aggressive equity investment is 6%, he said, adding that individual tax considerations also affect savings.
For grandparents looking to help grandchildren about to start university, there is little by way of investing that can be done. They should carefully consider their own financial position before dipping into their savings accounts. One option for grandparents to assist, without comprising their own finances, would be to act as guarantors for a study loan, said Anderson.
He counselled that grandparents and prospective students should also take heed of the fact that funding an education doesn’t necessarily guarantee getting a job. “Unfortunately with the current low-growth environment, providing financial support to grandchildren does not necessarily end after graduation. You do not have to wait until you are gone to pass on your legacy,” said Anderson, adding that every grandparent should consider saving for a grandchild’s education as a long-term investment.