Getting a good education is a key area of investment that potentially delivers outstanding returns, not all of which can be readily calculated in dollar terms. It’s often our own level of education that largely dictates how much we earn, how we live, the quality and fulfillment we enjoy in our lives and the sort of expectations we pass on to our children. However, in today’s society it doesn’t come cheap.
A recent study showed that in New Zealand students from schools in rich communities are nearly five times more likely to attend university than those from poor areas. So affluence and the environment are important, but there is also the issue of student fees. A significant amount of students now leaving tertiary education have some level of student debt. Some say the system is creating an entire generation of educated people steeped in debt and that’s even before they get a mortgage. Others say the system is causing people to leave the country for better paying jobs elsewhere and for others it means delaying their decisions about starting a family.
As student debt is becoming a big part of our lives and more and more parents are recognising they may need to help their children fund their tertiary education. With the costs of education being quite significant, how do parents deal with the financial challenge of this? As with other aspects of savings, the key to success is deciding what the goal is and then starting early. Below are some examples of how much you would need to put aside over which timeframe to help provide for this financial commitment.
| Timeframe | $ per month | Rate of return | Total |
|---|---|---|---|
| 10 | $100 | 4% | $14,923 |
| 15 | $100 | 4% | $24,873 |
| 20 | $100 | 4% | $37,022 |
The funds would need to be put aside in a separate account. There are a number of options of where you can put this money:
Bank Accounts – This would have the lowest return but would be ideal if you were starting to save. Given how low interest rates are and allowing for tax and inflation you may get less than a 1% return over a long time period.
Managed Funds – you would probably look at a balanced growth fund. Generally speaking if you had a timeframe of more than 5-10 years you could choose a fund which had more shares and had exposure to international shares. This is because shares usually have the highest return over time but are also the most volatile so you need to ensure you have enough time to smooth out the market fluctuations. Most NZ based managed funds today are PIEs (Portfolio Investment Entity). You would need to consider whether you put the investment in the name or yourself or your child depending on the PIR tax rare (Prescribed Investor Rate).
Education funds – there are funds specifically designed for this purpose. There are a few options available. The key thing I would advise here is to make sure you understand how they work and more importantly the terms and conditions of the fund as they often have many restrictions and there are a few that I have come across that are very complicated which always makes me nervous.
KiwiSaver – My personal view is that it’s a good idea to get your children into Kiwisaver. Unfortunately, the free $1,000 kickstart stopped a few years ago. As soon as they start working, even if is part time, they can start contributing to their KiwiSaver and their employer will also contribute 3%. Given KiwiSaver’s main function is to save over the long term for retirement with a secondary benefit to help members get into their first home, it means it is not the right type of savings vehicle for an education fund as you can not access the money for education.
Key tips:
- Flexibility is important. It would be ideal to have a fund that if you children decide not to go onto tertiary education you could give them the funds for something else, like a contribution to advice from an adviser to help you choose an appropriate option.
- Start early. As with all savings, taking the long-term approach clearly lessens the monthly burden and allows the power of compound interest to start working in your favour.
- Family contribution. Education funds are a great option for grandparents to contribute to. The family could pool together and each contribute a small amount.
What better payout could there be for everyone, than a person who has been helped to access the quality of education they need to reach their potential, and for them to be able to start their working life without the shadow of a student loan hanging over them.
