Tuesday 19 September 2017

Your toddler's college bills could cost you €70,000 in 15 years' time - best start saving now

 

Chewitel Ejiofor 12 years a slave
Chewitel Ejiofor 12 years a slave
Louise McBride

Louise McBride

Looming college bills will be very much on the minds of the parents of students starting their Leaving Cert this Wednesday.

Yet parents of young children should also be preparing for these mammoth bills - it could cost almost €70,000 to put your toddler though college by the time they reach college-going age.

It currently costs about €11,064 a year to put a child through college - if he or she is living away from home, according to DIT's latest cost of student living survey. As college undergraduate courses typically run for four years, the total bill for putting a child through third-level education could easily come to €44,256 today.

However, once inflation is taken into account, the cost of college could climb to €17,287 a year by 2032 - the year that today's three-year-olds can expect to be starting college, according to Eoin McGee, managing director of Kildare financial advisers Prosperous Financial Planning. This would bring the cost of four years' college education to €69,148.

McGee's figures assume that the cost of third-level education will increase by an average of 2pc a year over the next 15 years.

With the prospect of a €70,000 college bill on the table by 2032, should you have young children whom you wish to send to university, the earlier you start saving, the better. Be careful, too, exactly how you go about saving up for those bills - you could cut the amount you need to save by as much as €9,000 if you choose the right product.

Class of 2032

Should you expect your child to start college in 15 years' time, you're facing a bill of about €69,148 for four years in college. Provided you choose your investment wisely, it should be easier to save for this bill with an investment product, rather than a deposit account. For example, let's say you are saving into a deposit account which pays 1pc interest (after tax). You would need to save €356 a month into that account over 15 years to hit a savings target of €69,148 by 2032, according to McGee. However, choose an investment product which makes a return of 3pc a year after tax and charges, and you'll need to save €304 a month over the next 15 years to hit the €69,148 target, according to McGee. So you'd be able to save €52 a month less - or €9,360 less in total over 15 years - with the investment product than the deposit account, and still hit your target.

Most investment experts will advise you to steer clear of deposit accounts if you have 15 years to save up for something - and instead, to choose an investment product with a moderate amount of risk, which is likely to deliver reasonable annual returns. The interest paid on deposit accounts today is at record lows. You'll struggle to earn more than 1pc deposit interest a year on a lump sum today. Although you can earn up to 3pc interest (before tax) on some regular savings accounts, there are usually a raft of conditions which must be met to earn such interest. Furthermore, the interest rate is often chopped once you have been saving for a certain amount of time, or have saved a certain amount of money, into a regular savings account. Inflation is also a major challenge and will eat into the value of your savings over time.

A good life-assurance savings plan should beat the returns you would make on deposit - as long as you're investing for more than five years, according to Nick Charalambous, managing director of financial advisers Alpha Wealth.

Charalambous, who has three young children, is using Zurich Life's Easy Access Savings Plan to save for his own children's third-level education, and this is the plan he recommends to parents with more than five years to save for college bills. "Whilst there's an element of risk in this product, you can vary it depending on the amount of risk you are prepared to take on," said Charalambous. "You can invest in a moderate-risk life assurance plan, where the potential to lose money is small and the returns are moderate."

With the Easy Access Savings plan, you can choose where your money is invested (within the suite of funds offered by Zurich) - and how much risk you would like to take on. You can save as little as €75 a month and there are no exit penalties should you need to withdraw money from it.

Zurich Life's LifeSave Savings Plus plan and Aviva's Regular Saver plan are some life-assurance savings plans recommended by McGee to parents who have between 10 and 15 years to save.

With LifeSave Savings Plus, you can save as little as €75 a month. With the Aviva Regular Saver, you save a minimum of €100 a month. You can also invest a lump sum of between €5,400 and €50,000 at any stage. There are no exit penalties on Aviva Regular Saver.

For an alternative to a life assurance savings plan, a good Canadian or US-domiciled Exchange Traded Funds (ETF - essentially a basket of shares) could be worth considering if you have 10 or 15 years to save for your child's education, according to Gary Connolly, managing director of the investment consultancy iCubed. Such ETFs will usually be taxed less heavily than equity-based life assurance savings plans, said Connolly.

Be careful which investment product you choose: pour your savings into the wrong investment and you could lose much, if not all, of it by the time your child is ready for college. Watch out for charges, too - you need a product which will deliver a reasonable return once tax and investment charges have been paid. Don't invest in a highly risky product.

Class of 2027

In 10 years' time, the cost of sending a child to college will have risen to €13,486 a year - assuming a 2pc rate of inflation, according to David O'Connell, financial advisor with Dublin firm Acumen & Trust.

This would bring the cost of four years' college education to €53,944. You'd need to save €386 a month over 10 years to hit a target of €53,944 by 2027, assuming you make an investment return of 3pc after tax and charges, according to O'Connell. The products recommended to an individual with 10 years to save would be the same as those for an individual with 15 years to save, such as a life assurance plan or Canadian-domiciled ETF.

Class of 2022

In five years' time, the cost of sending a child to college will have increased to €12,216 a year - assuming 2pc inflation, according to O'Connell. This would bring the cost of four years' college education to €48,864. Should you have five years or less to save up for college fees, you can't take much risk with your savings - so a regular savings account, rather than a life assurance savings plan, is probably your best bet.

At 3pc, EBS's Family Savings Account and KBC's Extra Regular Saver pay the best interest on regular savings. Check the interest rate on your regular saver account each year, however, as the rates are often chopped over time - and be sure, too, to meet the conditions of the account.

Should you secure a deposit account which pays 2pc interest after tax, you would need to save €775 a month over the next five years to hit your target of €48,864 by 2022.

Last-minuters

Parents who have left it until the last minute to prepare for college bills could take out a personal loan to cover the costs - as long as they can afford the monthly repayments. KBC, Bank of Ireland and Ulster Bank offer the cheapest personal loans for a parent borrowing €40,000 over four years - while AIB and Permanent TSB are most expensive. It would cost €5,206 to borrow €40,000 from KBC over four years (as long as you have a current account with the bank).

It will cost you much more to borrow money for your child's education than to save up for it in advance, so avoid loans if you can.

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