How to save up to €40,000 to get your kid to college
In three days' time, the Leaving Cert results will be out. For many parents those results herald the beginning of their child's third-level education - and the massive bills that follow.
If your child must move out of home to attend college then you could easily face a bill of €10,000 a year to pay for that. As many students go to college for four years, the total bill could stretch to €40,000 - or more.
With a bill like that, the sooner you start to save for your child's college education, the better.
So how much would you need to save a month to have enough of a war chest together by the time your child goes to college? And what type of investments should you consider to get you there? The Sunday Independent lined up some top financial experts to find out.
CLASS OF 2018
You need to save €808 a month over the next four years to have €40,000 together by September 2018, according to Ross Curran, investment advisor with Curran Financial Services.
A regular savings account is probably your only option if you have four years to save up. Remember, you are up against a hefty tax on savings interest and you will need to shop around to get a reasonable interest rate.
KBC Bank's Regular Saver Account has one of the best interest rates on regular savings, at 3.5pc before tax. You must save between €100 and €1,000 a month to get that rate and you can withdraw money from your account at any time.
You can take two payment breaks from that account a year - that is, you can skip saving into the account for two months a year.
Permanent TSB's 21-day regular saver account, which pays 2.65pc interest before tax, is another option.
EBS Building Society offers a number of regular savings accounts worth considering, said Curran. Its Family Savings Account, for example, pays 2.25pc interest before tax.
Those who have six years or more on their hands could open an instalment savings account with An Post. As long as you can save regularly for one year, and then leave that money invested for another five years, you can earn 1.75pc interest a year tax-free. The most you can save into this account is €1,000 a month.
An Post's Childcare Plus Account, which pays 1.75pc interest, is also a good idea - if you can afford to save your child benefit each month for a year and tie that money up for another five years.
The main drawback of this account, however, is that you can only save your child benefit into it. As the monthly child benefit for one child is €130, you can't rely on this account to deliver savings of €40,000 after six years.
"The An Post accounts are not a bad option if you are saving for a very short term, as the growth is not taxed," said Eoin McGee, principal of Prosperous Financial Planning. "However, the rates are not great, so over the long term inflation will eat away at your money. It could end up being a costly mistake."
CLASS OF 2024
The high tax on savings interest, coupled with the paltry deposit interest rates paid, means you should look elsewhere if you have ten years or more to invest for your child's college education, according to Alan Morton, managing director of Moneywise financial advisers.
"Look outside the ordinary run-of-the-mill savings accounts," said Morton. "Equities are the way to go."
Morton advised parents to consider Irish Life's Pinnacle savings plan, where you must save at least €250 a month.
"If a parent invests €250 a month into Pinnacle, and increases their monthly contribution by 5pc each year, they will have put €37,734 into the plan after ten years," said Morton. "This €37,734 could be worth €42,630 after tax by 2024 - assuming an annual return of 5.4pc, which is a reasonable assumption."
Before investing in Pinnacle, remember you are putting your money into a range of investment funds - so you could lose money if any of those funds performs poorly. You will also be hit with exit charges of up to 5pc if you take money out of this plan in the first five years. The annual management charge on Pinnacle is 1.25pc - but this is reduced to either 0.75pc or 1pc (depending on the amount you are saving each month) if you lodge a lump sum of €7,500 or more into the plan within the first year of opening it.
Steer clear of tracker bonds when investing for a child's third-level education, said Morton. "Most tracker bonds are garbage," said Morton. "The chances of making a return on them are slim."
CLASS OF 2030
Those who have 16 years or more to save up for their child's college education will find their savings a bit more manageable than those who leave it until the last minute.
You need to save €170 a month over the next 16 years to have enough money to send your child to college in 2030, according to Curran.
"Assuming an inflation rate of 2pc, the current €10,000 annual bill would be €13,727 by the time 2030 comes - making the total bill for four years €54,911," said Curran.
"With a 16-year investment horizon, I would recommend a predominantly equity-based investment strategy, such as the Vanguard All World fund, along with a smaller amount of government bonds and some investment in the likes of an Irish REIT for added risk and reward."
McGee recommended the Aviva Regular Saver plan and Zurich Life's LifeSave Savings Plus plan for parents who can save regularly for ten to 16 years.
"What I like about the Zurich plan is the fund choice," said McGee. " I prefer to invest client money in international investment houses as opposed to domestic fund providers. As a general rule of thumb, they tend to perform better. There are always the exceptions, but Zurich are making a concerted effort to offer not just their own funds, but a platform with several external international fund managers on it.
"Charges, levies and how much of your money is invested are important, but the crucial part of the saving and investment puzzle is fund performance. Get guidance on how to invest your money, which funds to choose and how to blend one fund with another. You could have the cheapest contract on the market, but it will be useless if the fund performance lets you down."
You'll pay €12,000 more for college if you borrow
If your child starts college this September then it's too late to start saving the €10,000 you'll need to put them through their first year of third-level education. That money will probably have to be borrowed from a bank or relative - unless you have a nest egg handy.
So, if you have to borrow the money to send your child to college, what's the cheapest way to do so?
"Top up your mortgage if you can," said Alan Morton of Moneywise. "However, if you have a tracker mortgage, be careful you don't lose your tracker rate by getting a top-up loan."
Your bank might be reluctant to offer you a top-up mortgage to fund your child's college costs. However, by topping up your mortgage you could get a loan with an interest rate of 4.6pc - or less. This is relatively cheap when compared to the cost of personal loans.
Let's say you want to borrow the €40,000 upfront to put your child through college for four years. If you borrow that money through a personal loan you could pay almost 12pc interest. That means you could pay up to €12,000 in interest on the loan, which pushes up the college bill for your child from €40,000 to €52,000.
Bank of Ireland charges 11.5pc interest on a standard five-year loan of €40,000. At that rate, the monthly repayments come to €867.72. The total cost of credit on this loan therefore comes to €12,063.20.
Permanent TSB charges 10.5pc interest on a five-year personal loan of €40,000 while Ulster Bank charges 10.3pc interest. The monthly repayments on the €40,000 Permanent TSB loan come to €849.88, which brings the total cost of the credit to €10,992.80. The monthly repayments work out at €846.42 with Ulster Bank, which brings the cost of credit on this loan to €10,809.20. AIB charges 10.14pc interest on loans of €25,000 or more.
Remember, you can cut the cost of borrowing by only getting the loan you need for this academic year, and by now starting to save the money to put your child through college for the other years.
Sunday Indo Business