How to save for the €44,000 college bill
At €700 a month, savings for a child's college bills could be your second mortgage, writes Louise McBride
Many parents need to earn an extra €17,000 a year to be able to save enough money to send a child to college.
That's the amount of extra money you would need to earn if you are a higher-rate taxpayer with only five years left to save up for a child's college bills from scratch.
You could easily face a bill of €11,000 to send your child to college each year - if he is living away from home, according to a recent survey by DIT. That adds up to €44,000 over four years (the duration of many college courses) and the bill could be a higher if your child is renting in Dublin. To hit a savings target of €44,000 over five years, you'd need to save €700 a month - or €8,400 a year. Those who are just making ends meet with their current salary would need to earn an extra €17,000 to be able to save €8,400 a year.
With tomorrow marking the deadline for tens of thousands of Leaving Cert students to accept college places under the first round of CAO offers, even if it will be a while before your child starts thinking about third-level education, get saving.
So how much would you need to save to cover your child's college bill - and what are the best ways of doing so?
Class of 2020
Let's say you want to save up the full cost of a four-year college bill by September 2020. Assuming that bill is €44,000 and that you earn 2pc interest a year (after tax and charges) on your savings, you'd need to save €691 a month over the next five years to hit your target, according to Ross Curran, managing director of Curran Financial Services and father of two young children - aged five and three.
The best way to save this money would be through a regular savings account which pays better-than-average interest, such as those offered by Nationwide UK (Ireland) and KBC Bank, according to Mr Curran. As regular savings accounts usually have a limit on the amount of savings they will pay a good interest rate on, you might need to pay into two or more accounts - as you have a savings target of €44,000.
Nationwide UK's Regular Saver account, for example, pays 4pc interest a year on savings up to €15,265 - any balance over that amount only earns 1.05pc interest.
KBC's Regular Saver account pays 3pc interest a year on savings up to €50,000.
Remember you will lose almost half of any interest you earn on your savings to tax. Those opting for a regular savings account should also keep an eye on the interest rate paid on the account - as banks usually chop the rate over time.
Life assurance companies also offer regular savings accounts. Remember, however, if you go through a life assurer, you must pay a 1pc government levy on your savings - on top of the tax paid on your investment return. This will eat into your investment return. Some life assurers offer products which absorb the cost of the 1pc levy.
"I would recommend the life company savings plan route as it offers a choice of funds with varying degrees of risk," said Gary Connolly, founder of the financial advisers, iCubed - and father of eight-year-old twins. "Regular savings into a deposit account will deliver you a negative return (after inflation) - and the cost of education is inflating at a higher rate than bank deposits. I have had a regular premium life savings policy in place for my twins' education since shortly after they were born."
The charges on life assurance savings policies can be complex so understand them before you invest in something - and know how those charges can eat into the value of your investment.
Don't take on too much risk if you have only five years to save. Parents with a five-year window should choose a product which guarantees to give them back all of the money they save into it - even if they lose out on the chance of making a higher return, according to Mr Curran.
"Parents with only five years until college are not in a position to recoup any losses they may make with riskier investments," said Mr Curran. "A short-term investment product that offers a chance of higher returns, but does not guarantee capital at maturity, is never a good idea for money you know you will need for certain, such as money saved for a child's college education.
"This is good advice for anyone, but in particular for those parents who will need to access the money in the next five years. Property and other illiquid investments [that is, investments which cannot be cashed in easily] should be avoided."
Class of 2025
You'd need to save €328 a month over the next 10 years to hit a target of €44,000 - assuming you make an investment return of 2pc a year, according to Mr Curran.
"Parents with 10 or 15 years to save are in a better position as they can save a smaller amount each month and can face more market exposure," said Mr Curran. "The major concern is charges and taxation, which often have a greater impact than investment performance."
Investing in an Exchange Traded Fund (ETF - essentially a basket of shares) portfolio through Davy Select could be a wise move for those with 10 or 15 years to save up for college, according to Mr Curran. Be clever about the ETFs you choose and you'll cut your tax bill.
"You can specifically choose ETFs that will be taxed at 33pc capital gains tax rather than the 41pc exit tax some other funds incur, as well as allowing losses from one fund to offset against gains in others," said Mr Curran. ETFs worth considering, according to Mr Curran, are global equity funds such as the 'Vanguard FTSE All World ex US' and the 'iShares MSCI World Index'.
Mr Connolly recommends a regular life assurance savings plans for those with 10 or 15 years to save. Parents with this amount of time should initially invest their money in equities - and then consider reinvesting the lump sums that build up elsewhere, he advised.
"Take the risk of equity investing with regular savings," said Mr Connolly. "Look at the capital value every couple of years and then decide on a potentially different level of risk for the cash built up." Some examples of life assurance savings plans include Aviva's Regular Saver Plan and Zurich Life's LifeSafe Savings Plus plan.
Class of 2030
Parents who have 15 years to go before sending a child to college would need to save €208 a month to cover a €44,000 college bill - if the investment return is 2pc a year, according to Mr Curran. You would only need to save €176 a month if your savings make a return of 4pc a year.
As well as ETFs such as the 'Vanguard FTSE All World ex US' or the 'iShares MSCI World Index', real estate investment trusts (REITs) could be an option for those with 15 years to save for college, said Mr Curran.
"For long-term investment in property, the Green REIT offers the underlying asset without the hassle of direct ownership," said Mr Curran.
Green REIT, which is listed on the Irish Stock Exchange, invests in commerical property. Hibernia REIT and Irish Residential Properties REIT are other REITs listed on the ISE.
Mr Connolly also recommends commercial property for long-term investors - and this is an approach he has taken himself.
"All of the regular premiums paid into my life savings plan are going into equities, but the lump sum that has been built up is going into commercial property," said Mr Connolly. "I suspect the low-hanging fruit has already been plucked from commercial property, and any growth will have to be delivered by rental growth, but at a 5pc yield, I'm happy to invest in it for now."
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