How to save for your child’s tertiary education

If you’re about to welcome a child into your home, you may have wondered what his or her future holds. Perhaps you picture your child as a doctor or scientist, or as a creative designer or movie producer.

But achieving these dreams comes at a cost – a combination of your child’s dedication and your money. Justmoney finds out how you can prepare for your child’s tertiary education.  

1. How much does tertiary education cost?

Before you start saving for your child’s future, you need to know how much money you will need by the end of his or her high school career. 

South Africa has approximately 25 universities, each of which offers numerous degrees and programmes, which are all priced differently. For example, the cost of a Bachelor of Arts is significantly lower than the cost of a Bachelor of Engineering.  

Have a look at the below table to find out how much you can expect to pay for these degrees per annum in 2019 (compiled by BusinessTech):

Similarly, the cost of a diploma is less than the cost of a degree, and the cost of a certificate is less than the cost of a diploma.

However, beyond the cost of tuition, parents also need to consider living costs. This includes rent, food, and study materials such as textbooks and notebooks.

Wits University estimates that students require between R2,000 and R4,000 per month for groceries and meals, between R1,000 and R2,000 for textbooks, and approximately R5,000 for rent. Overall, they estimate an average cost of R8,500 per month.

Note that this number will vary, depending on the kind of lifestyle your child intends to lead at university – or the one you’re willing to sponsor. They can, for example, save money if they cook for themselves, buy their textbooks second hand, and share housing with other students.

Every year, the cost of tertiary education rises. According to Statistics South Africa (StatsSA), the average annual increase in tertiary education fees was nearly 9% between 2008 and 2015. The cost of living in South Africa also rises annually, with the inflation rate currently standing at 4.5%.

This means that the above numbers will have increased significantly by the time your child is ready for tertiary education. When deciding how to save for your child’s future, it’s important to keep this in mind.

According to Old Mutual, a university degree could cost R176,000 per year by 2030 and R253,000 per year by 2035. This is based on a 9.5% annual increase and the average cost of South African university degrees. 

2. How does compound interest work?

Without the exponential effect of compound interest, many parents would be unable to save for their child’s tertiary education.

Imagine putting R10,000 into a savings account and leaving it there for the next 18 years. Let’s assume that the interest rate is 5% per month and that you don’t add anything further to the account.

By the time your child turns 18 and is ready to start their journey towards a tertiary education qualification, that same savings account will hold R24,550.08. This means that, by leaving the money in an account, you could increase its value by just under 150%.

Alternatively, if you decide to place R10,000 into a savings account, also with a 5% interest rate, and you add a mere R100 to it each month, you will end up with R59,615.79. Of this amount, you would have made a total deposit of R31,600 and received R28,015 in interest.

If you decide to raise your monthly contributions to R1,000 per month, you will have R375,207.11 in your savings account within 18 years. Based on Old Mutual’s prediction of tuition fees, this will allow you to save enough for your child’s tertiary education, as well as part of his or her living costs. 

Have a look at the below table for an outline of these figures:

However, it’s important to realise that changing any of the above figures will have a large impact on the final amount. When considering savings plans, you should keep the following in mind:

2.1. Starting Amount

If you open a savings account and start placing monthly amounts in it without including an initial lumpsum, it will have an impact on your final investment.

For example, if you paid R100 into a savings account, without an initial lumpsum, you would only have R34,715.05 in 18 years. That’s just over 40% less than it would be with a lumpsum of R10,000.

Alternatively, if you put R1,000 into your savings account each month, without an initial lumpsum, you would have R350,657.03 in 18 years. This is just over 6% less than it would have been with a lumpsum of R10,000. Have a look at the below table:

This means that, even if you don’t have a lumpsum to kick-start your investment, you will still be able to save for your child’s tertiary education. Starting with a reasonable lumpsum will help, but you can still succeed without it.

2.2. Monthly Contribution

Assuming you do not start your investment with a lumpsum, how could your monthly contributions contribute towards the final amount? This is quite intuitive, since the more money you’re able to contribute each month, the higher the final amount will be.

Here are some examples of different monthly contributions:

2.3. Interest Rates

The higher the interest rate of your savings account, the larger your final amount will be. When choosing a savings account, make sure you select one with the highest possible interest rates. Have a look at the difference a change in 1% can make:

The difference between an interest rate of 6% and 8% is nearly R100,000. If you choose a savings account that offers you a decent interest rate, you will be able to accumulate more money without doing anything else.

If you receive an interest rate that’s above inflation, you will not lose money. However, if you opt for an interest rate below inflation, your money will not grow in line with the rate at which it loses value.

Also note that savings accounts usually offer interests rates of around 6%, and that your interest rate will increase if you decide to fix your account for a period. Have a look at our article about which savings accounts offer the best interest rates.

Would you like to see how changing the starting amount, monthly contribution, interest rate, and time period changes your final amount? Test your ideal values in the below compound interest calculator:

3. What types of accounts should you consider? 

There are several different kinds of accounts that you can make use of when saving for your child’s tertiary education. Each one offers its own parameters, which have various advantages, and disadvantages.

Opening a savings account for this purpose may not offer you the best possible returns. It’s therefore important to consider different kinds of accounts and investment vehicles.

3.1. Tax Free Savings Account (TFSA)

These are accounts that were set out by the government in 2015 to encourage South Africans to save, as well as to allow them some tax breaks. These accounts are offered by most local banks.

They allow account holders to place up to R33,000 per year into their TFSA, and it can hold a lifetime maximum of up to R500,000. The unique aspect of this account lies in its name – it’s tax free. This means that, as opposed to other savings vehicles, you won’t pay dividend tax or tax or interest.

The advantages of having a TFSA include having access to your savings at any time, because the account does not need to be fixed, and you can adjust the amount you choose to invest as you go.  

Note that if you add more than the stipulated amount to your TFSA during any given year, the South African Revenue Service (SARS) will charge you a 40% tax on your final investment.

To find out more about the advantages of TFSA, have a look at the following article.

3.2. Money Market Account (or Fund)

These are also available from most South African banks, as well as local investment firms.

The money market is where the government and large companies trade in short-term loans. For example, if the government wants to raise money, it can sell money market instruments to investors, who will then earn interest on their purchase.

South Africans can invest in either a money market account or a money market fund. The former is offered by banks, and it makes use of their internal money market, while the latter is offered by investment firms, and it makes use of a variety of external money markets.

Money market accounts are considered a safe investment if you work through an established and secure bank that’s not at risk of going under. Money market funds, on the other hand, are considered a more diversified portfolio and may make you larger returns in the long-run.

Have a look at this article about the risks of investing in the money market.

3.3. Unit Trust Funds

Just like the previous two options, unit trusts are offered by most South African banks and investment firms. What makes them different from other investment vehicles is that they pool money from numerous investors into a single fund, which is divided into a range of assets.

A unit trust leverages the joint buying power of multiple investors and allows them all to have a stake in property, bonds, and shares, which are selected by the fund managers.

Each unit trust has its own unique risk profile, and investors can decide whether they are willing to take more or less risk on their investment. While saving for your child’s tertiary education, it’s wise to ensure you don’t take too much risk.

To find out more about unit trusts, have a look at the following article.

4. What can your child do to help?

For most of the 18 years that you save for your child’s tertiary education, he or she will be too young to assist you in your plight. However, this does not mean your child cannot help at all.

When your child is old enough to understand the family’s financial situation, it’s important to discuss his or her tertiary education. Your child needs to understand whether the family will be able to offer financial support during this period, and what he or she can do to help.

Achieving good grades can lead to scholarship opportunities and/or bursaries. Decide with your child which institutions he or she is interested in, visit the open days, and collect brochures and information that will help your child understand the requirements to receive these scholarships and/or bursaries.

In many cases, institutions require community service or successful entrepreneurial pursuits in order to qualify for these opportunities. If your child only considers these criteria in their matric year, it may be too late for him or her to become a competitive candidate.

If your child is interested in postgraduate studies, take a look at this article and the information on the following map to find out how to apply for funding through universities:

Besides this, your child could also take on some part-time work after school or over the weekends. Although your child may not make a large amount of money, it may give him or her a sense of accomplishment to assist you with the tertiary education fees. And at the end of the day, every rand counts.

However, according to AfricaCheck, less than 30% of pupils achieved a bachelor pass rate in 2017. If your child struggles academically, it would be wise to insist that he or she focusses on school work rather than working part time. Without a decent rate, it wouldn’t matter how much money you’ve saved, your child will not be allowed into his or her chosen institution.

5. What about loans?

If your child is already on the backend of his or her high school career, you might want to consider a student loan. This does not mean you should completely discard the idea of saving. If you start saving now, you will still have a small lumpsum that can be used towards livings costs. But it would be wise to consider a student loan for the larger expenses, like tuition.

If you and your child decide to take out a student loan, you will have to choose between one of two options: a state funded student loan or a privately funded student loan.

The former relies on the National Student Financial Aid Scheme (NSFAS), and the former relies on private institutions, such as banks and social organisations. In order to apply for NSPAS, you and your child will have to undergo the Means Test, to show that your family cannot afford tertiary education, while the latter is available to anyone.

In most cases, you will have to sign as surety for the student loan. This means that if your child does not pay back the loan, you will become responsible for it. Make sure that your child understands this and agree that both parties need to be transparent about the funds.

Find out the value of a student loan by clicking here.

6. Life Insurance as a backup

If something were to happen to you while your child is still young, who will make sure that his or her tertiary education is being saved for? Perhaps you think the other parent would take care of it, but what if you both pass away in the same accident?

In order to be prepared for the worst, it’s best to take out life insurance on your own life and to select your child as your beneficiary. You can then also select a guardian you trust to oversee the lumpsum that will be paid out if you passed away.

You can instruct the guardian to place the lumpsum into an account of your choosing, or to invest it with an institution you trust, until your child is ready to study further. This will ensure that, even if you’re no longer around, you will be able to offer you child the best possible future.

To get a better understanding of life insurance, have a look at this page.