The multi-faceted layers of educational costs

Dave Johnson
Independent Trustee

 

 

 

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The multi-faceted layers of educational costs

I am sure that many financial plans include the provision for educating children and getting them started in life.  Having gone through this with my four sons (actually still going through it), I realise that my original planning was considerably inadequate.  Back then, I based my views on the costs my parents incurred getting my siblings and I started in life.  I have since discovered that the world has changed significantly since then.

Some of my experiences and observations relate specifically to my own situation whilst others are first-hand experiences of other parents.

Years of study

My original financial planning anticipated a student being at university for three to four years.  I got this one wrong.  For example, to qualify at UCT as a Chartered Accountant requires a four-year Business Science degree, another year for the Post Graduate Diploma in Accounting, and then three years of articles on a minimal salary.  It’s actually eight years before this child of ours becomes self-funding!  Lawyers require a three-year undergraduate degree, two years for the LLB and then two years as an articled clerk – earning even less than the accountants.  Doctors spend six years at university followed by two years as interns and then a year of community service, albeit medical interns are at least reasonably well remunerated.

While many degrees and diplomas are indeed structured so that a student graduates after three years, it is also increasingly true that these degrees or diplomas are in themselves not sufficient for young graduates to compete within the marketplace and they accordingly need to study further to improve their employability.

From a financial planning perspective, I believe a more accurate assumption is to plan for children to require eight years of financial support before they become self-funding.  This provision should not necessarily be based on the duration of an undergraduate degree.  This has become the ‘Eight-year Rule’ in our household financial planning.

Providing for one’s children’s education requires another financial planning procedure.  In our family’s financial planning this is called the ‘Catch-up Rule’.  By this, I mean the period between ‘children-related costs’ and retirement.  It goes without saying, but it is a reality that spending money on children is an emphatic and immediate spoiler as regards your own retirement savings.

During the period after children expenses are completed, at a time when one should have extra disposable income, the Catch-up Rule applies.  This is often psychologically difficult, requiring discipline when so many other more exciting opportunities present themselves rather than the objectives of funding retirement.

Getting married later in life (a trend which continues – late in life for my generation friends and peers was in their early 30s, it’s even later nowadays), meant that you had children when you were older and the Catch-up Rule was reduced.  If you then factor in my Eight-year Rule the window of opportunity almost disappears.  I turned 60 when the youngest son finished school.  I will be 68 when his Eight-year Rule finally expires…

Cost per year

Obviously, children-related costs differ widely depending on the choice of learning institution, and the selected course.  Based on typical middle-class Capetonian standards the annual fees that I am seeing are getting close to R100 000 per annum – and another spoiler, that’s just the cost of tuition.  I would not suggest that any financial modelling assumes access to bursaries or scholarships – which seemed so readily available back in the 1970s when I was building my financial plan.  And then there’s accommodation.  This is going to double your costs.  Recent discussions with colleagues centered around the accommodation and food budget for Stellenbosch students as being over R100 000 per annum.

So, you can plan for them to stay at home, though you must then also plan for restocking the continually emptied fridge of anything edible or drinkable.  You may save on rent, though you will need to provide for the cost of transport.  At one stage in the recent past, our family driveway was occupied with six cars.  I’m sure the neighbours thought we were running an Airbnb.  Apart from the acquisition costs of the vehicles, I’ve learned to budget for petrol, insurance, licensing, and servicing.  And repairs!

Reviewing my financial plan a while ago, I arrived at a sobering calculation:  4 sons x 8 years x R200 000 per annum = R6.4 million!  I concede that during the final few years when they were working – for a minimal wage, the funding was less than R200 000 per annum per child.

Getting them out of the house

I started my working life in the days of employer-subsidised housing loans.  Such benefits no longer exist and the banks have become seriously risk averse when it comes to credit. The requirement for a first-time buyer to pay a 15% deposit seems crazy.  In Cape Town currently for R2 million, you can buy a flat only slightly bigger than a walk-in cupboard!

To be eligible for purchasing said walk-in-cupboard/apartment a prospective buyer will need to pay R300 000 as the minimum deposit.  Few first-time buyers – who are also first-time employees – have R300 000 in the bank.

I recently heard of a case where, in addition to the 15% deposit, the bank required the parents to provide security against the loan!  What happened with the flat being the security?

If you (as the parent) are unable to assist with the home loan (because you spent all your spare savings getting them educated…), they may move home to save money to enable them to accumulate funds towards that deposit!  I think we might all be surprised to learn how many 30-something-year-olds are living at home (and not paying rent or contributing to the household costs).

Weddings

I am not sure if as many relationships end in weddings as before, and many people are getting married later in life – but the cost of weddings seems to have gone crazy!

Whilst the tradition of the bride’s parents paying for everything is long gone, it’s still true that many young couples have wedding dreams which are aligned with either their or their parents income.

Grandchildren

As both a parent and professional retirement fund trustee, I am amazed at how many grandparents need to fund their grandchildren’s education from their pensions, on the basis that the parents of the children at school simply cannot afford to send their grandchildren to the same school they went to.  These same grandparents would rather give up some of their hard-earned pension than see their grandchild at some ‘lesser’ school.

Akin to electricity, it seems that the cost of private school education has risen at a rapid rate, and it is often true that private high school is materially more expensive than university.

Grandparents are also often free babysitters and school transport services, though I’ll agree these are usually actions of love and not commercially calculated.

Financial planning

Of course, I encourage everyone to have a proper financial plan and to work with a professional advisor.  I also want to remind readers that they must make provisions beyond the cost of three years of tertiary tuition.

Note from the CEO editor: Dave Johnson is an independent trustee and, whilst GTC shares many of the opinions passed, this is Dave’s article. 

We invite you to discuss this with either your GTC retirement benefit consultant or one of the GTC MAPS team.