Tuesday 24 April 2018

How to foot your child's €44,000 college bill

You must save €700 a month to put a child through college in five years time, writes Louise McBride

Those who haven't yet started saving to send a child to college this September may have no choice but to borrow the money (Cartoon by Tom Halliday)
Those who haven't yet started saving to send a child to college this September may have no choice but to borrow the money (Cartoon by Tom Halliday)
Louise McBride

Louise McBride

Many of the 120,000 parents of students opening their Leaving Cert results this Wednesday are now facing a bill of €11,000 to put their child through their first year in college.

Courses often last for four years - so the total bill for a child's third-level education could easily run to €44,000. State-backed student loans could become a reality here in a few years - but for the moment, most parents have to foot the bill for college costs.

Those who haven't yet started saving to send a child to college this September may have no choice but to borrow the money. Parents who still have a few years to go before their child starts college should start saving now.

So how much would you need to save to cover your child's college bills - and what are the best ways of doing so?

Class of 2021

Save €715 a month

Let's say you want to save up the full cost of a four-year college bill by September 2021. Assuming that bill is €44,000 and that you earn 1pc interest a year on your savings (before tax and charges), you'd need to save €715 a month over the next five years to hit your target, according to Ross Curran, managing director of Curran Financial Services. Should you be making a 3pc return on your savings, you'd need to save €679 a month.

You can't take much risk with your savings if you have five years or less to save up for your child's education. So a regular savings account is usually your best bet here - but you need to shop around to get a good rate.

Most of the main banks are only paying around 1pc interest on regular savings - the only ones paying 3pc interest or more are KBC Bank (as long as you meet certain conditions) and EBS Building Society. KBC's Extra Regular Saver Account pays 3.5pc interest and EBS's Family Savings Account pays 3pc interest. (Remember, you will lose about two fifths of the interest earned on your savings to tax.)

AIB's Junior Saver Account, which pays 2.26pc interest a year (before tax) on savings of up to €1,000 a month is another account you could consider, according to Curran. Its 2.26pc interest rate is one of the best returns you'll earn on regular savings - and is much higher than the interest paid by some other banks on dedicated children's savings accounts.

Bank of Ireland only pays 0.25pc interest on its Young Saver account while Permanent TSB's Children's Safari Saver pays 0.65pc interest on savings of up to €19,999 - and 0.15pc interest on the entire savings if the balance is over €20,000.

Only children between the ages of 7 and 11 can open an AIB Junior Saver Account. Once the child turns 12, the name of the account changes to Student Saver - though the rate remains the same.

EBS's Children's Savings Account pays 2pc interest a year on savings of up to €5,000 and can be opened from birth.

"Considering the availability of the AIB and EBS accounts, I would no longer recommend the State Savings' Childcare Plus option," says Curran.

Childcare Plus can seem attractive to parents because child benefit can be paid directly into this account - however, it only pays 0.98pc interest a year (tax-free) and you must lock up a year's savings for five years to get that rate.

Class of 2026

Save €349 a month

Should you expect your child to start college in 2026, you'd need to save €349 a month over the next 10 years to hit a target of €44,000 by then - assuming you make an investment return of 1pc a year, according to Curran. Should you be making a return of 3pc a year, you'd need to save €314 a month.

Class of 2031

Save €226 a month

Parents who have 15 years to go before sending a child to college would need to save €226 a month to cover a €44,000 college bill - if the investment return is 1pc a year, according to Curran. You only need to save €193 a month if your savings make a return of 3pc a year.

You can afford to save into an investment product that carries some risk if you have ten or more years to build up a nest egg for your child's college fees. As long as you choose the right investment, it should deliver better returns than a deposit account will. Be sure however that you understand and are comfortable with the amount of risk you are taking on. As this is your child's education fund, you can't afford to take on too much risk.

Anyone saving each month for a college start in 2026 or 2031 should invest all of their money in equities, says Gary Connolly, managing director of the investment consultancy, iCubed.

A good Canadian or US-domiciled Exchange Traded Funds (ETF - essentially a basket of shares), such as the iShares MSCI World ETF could be worth considering in this instance because such investments will usually be taxed less heavily than equity-based life assurance savings plans, advises Connolly.

"There are a plethora of regular premium savings plans available from life companies," says Connolly. "The unfortunate thing with such investments is that the government is going to step in and take a 1pc levy on your initial premium - and then take 41pc of your profits in tax.

"To mitigate some of this, you could invest regularly in Capital Gains Tax-based investments. Tax here is lower at 33pc - and you can earn capital gains of €1,270 a year tax-free (or €2,540 for a couple). You can also offset past losses against your capital gains tax bill - and there is no 1pc life levy.

"The Revenue Commissioners made an interesting intervention in the CGT market recently by making Canadian and US domiciled ETFs taxable under CGT."

As a result, any profits you make when you cash in a Canadian or US-domiciled ETF usually attract a 33pc rate of CGT - rather than 41pc exit tax. (You must however usually pay income tax, the universal social charge and PRSI on any dividend income earned).

"The iShares MSCI World ETF is one of the most diversified of the ETFs and so, within the context of equity funds, it carries one of the lowest risks," says Connolly.

Another ETF tipped by Connolly is the Vanguard FTSE Developed Europe Index ETF. For parents with more of an appetite for risk, the iShares Core MCSI Emerging Equity ETF could be worth considering, according to Connolly. To get the lower tax bill, be sure to choose either the US - or Canadian-domiciled versions of either of these three ETFs. Go for the Canadian-domiciled version if your investment could be worth more than US$60,000 (about €54,000) in the future - otherwise, you could get hit for inheritance tax on your US-domiciled ETF.

Check how the ETF is performing after a couple of years to ensure it is delivering the returns you expected, advises Connolly. Should you be losing a lot of money, you may need to switch into a less risky product.

Curran also recommends stock-market based investments if you have ten or more years to save up for your child's education. "Most of the life companies offer dedicated savings products that bundle different assets together - but they can often be quite costly, with total fees approaching 2pc in some cases," says Curran.

"Use a platform-based account, such as Davy Select or Conexim, where you can log in and see exactly what your funds are returning and what fees are being charged."

Curran tips the Dimensional World Allocation Fund as one fund worth investing in through these platforms - if you have an investment window of ten years or more.

John Lowe, author of The Money Doctor 2016, believes managed funds such as Irish Life's MAPS, Standard Life's MyFolio and Zurich Life's Pathway are worth considering if you are willing to take a bit of risk with your savings - and have ten or more years to save. "You can stick to your risk 'lane' with each of these funds," says Lowe.

Should you have a lump sum which you wish to invest for your child's education, and you like to play it safe, the State Savings' 10-year National Solidarity Bond pays one of the best long-term deposit interest rates, though at 1.5pc interest a year, it is still very low.

The earlier you start saving for your child's college fees the better, so make a decision and start putting aside what you can afford to now.

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