49% say they have no funding in place – Aviva 2017.
35% of parents have a dedicated savings account for kids college education – Aviva 2017.
87% of students fear having to drop out of college because of the cost of education – USI 2016.
63% of students have missed lectures to go to work – USI 2016.
Aviva 2017 suggests it costs €10,000 per annum if the child lives away from home and €5000 if they live at home. DIT 2017 suggests this figure to be €11,000 and €7000 respectively.
Our fees are second highest Europe -USI.
CAO offers which were released yesterday are a mixed emotion for many parents. Parents are delighted their child has gotten a place in third level but this emotion can be diluted by the fact that the next 4 years must be paid for.
The cost of sending a child through college varies depending on many different factors:
- Where they will go to college?
- Will they live at home with you?
- Or will they have to find a place to stay?
- Will they be happy to take on a part time job?
- Do you want them working part time?
A recent survey by Aviva suggests it costs €5000 to put your child through college, you can double that if they need to live away from home. These figures are in line with DIT’s figures which suggest €7000 and €11,000 respectively. So, you could be looking at a total bill of €44,000 over a 4 year period.
Whatever way you look at it the cost is substantial and although student loans may be one solution being offered now, however good or bad that this option may be, it isn’t currently an option that’s available.
You could mitigate the cost by getting your child to work part time. It is a big question for many parents and one for each person to decide for themselves but it is interesting to note that a survey by the Union of Students in Ireland found that 63% of students have missed lectures due to work commitments.
Let’s face it, without student loans and with or without part time work the burden of the expense generally falls to the parents. So how do you pay for it all?
My child is starting next month, what do I do?
If you are arriving to this day and you have made no provision at all then you may still have some options. You can borrow money:
You will have to borrow the money in your own name as it is unlikely the student will get it. Don’t stick things on your credit card and hope for the best, go to your bank or credit union. No matter how hard it seems to pay the loan back in 12 months don’t be tempted to stick it out over a longer term than that. That’s because remember you will have to borrow again in 12 months’ time to pay the year 2 fees!
You might be tempted to take out a 4-year loan for the full €44,000 today. This makes no sense. Firstly, you will be paying interest on money you don’t need right now. Remember ¼ of the €44,000 won’t be needed for another 3 years until the start of year 4, ¼ isn’t needed for 2 year… and so on.
Secondly life changes, your darling son/daughter may decide to drop out.
The cost of repaying a 12-month loan of €11,000 is about €962 per month, hefty! It means you will pay €544 in interest.
If you are using the Aviva figures of €5000 for a student who lives at home then the repayment drops to €437 per month. This would mean a total interest bill of €244.
This is based on a 9% interest rate for your personal loan.
If you start doing this on a credit card and we take the example of the cost being €11,000 then you will pay €1019 per month and pay total interest of €1228. (assumes 20% interest)
If you get lazy with the credit card and only make the minimum payment of 2% then it will take you just over 9 years to clear the debt for your child’s first year in college.
My child isn’t going to college this year but is going in the next 5 years:
If you have less than 5 years before your child attends college then you have some breathing space but not much. You do however only have one-real option when it comes to saving money, you should use a deposit account or some type of An Post savings account.
One thing we need to consider if your child is going to college sometime in the future is inflation, but not just ordinary inflation. That’s because the cost of going to college will likely rise by more than inflation. We could argue all day by how much more but we believe that inflation will go up by 2% per annum and we believe using a “cost of going to college increase” of 5% covers all bases.
That means if your child is going to college in 3 years’ time the €44,000 we expect today for will have risen to €50,935
If your child is going in 3 years’ time and you manage to get 0.5% net interest and you want to have the €50,935 available to you the day they start then you need to start saving €1404 per month.
I’ve loads of time my child is going to college in 5+ years:
Great, you are ahead of the curve but even better now you have a 5 year+ time horizon available to you, you can afford to turn up the risk volume slightly on where you invest your money.
By investing in a well- constructed, well-diversified portfolio you can expect over the long term to get better returns than you would in An Post or a deposit accounts.
You are turning up the risk but because of the power of Euro cost averaging and the fact that you have a long period of time this risk is very diluted.
If you assume the same 5% cost of college increase and we take a 10 year time frame the monthly commitment required changes. Using a well-constructed portfolio, we can turn up our return expectations, to let’s say 4% net.
The cost of going to college in 2027 could be as much as €71,671 (based on it costing €44,000 today). By saving €486 per month over the next ten years you should reach that goal. But I would suggest €500 per month to be safe!
I’ve a newborn is it too early to worry about this stuff:
It’s never too early to start. In fact often people feel the best thing to do is stick the children’s allowance away from birth and “sure won’t that do the job for college”. No it won’t.
Saving just children’s allowance every month from the day a child is born until they reach college going age is a great idea but it won’t be enough if you simply stick it in a bank account.
Again, let’s assume the current cost of €44,000 increases by our “college cost increases” of 5% per annum. In 18 years’ time that cost will be €105,891.
If you save for this using a bank account and get 0.5% per annum net interest on the account you will need to save about 3.5 times the children’s allowance, in other words €468 per month. Do it in a well-constructed portfolio and you will have to save €335 per month.
Summary - it’s all in the numbers.
In summary college is expensive and even if you start saving when your darling child is only born it is still a huge amount of money that you need to save. However, one thing I will say is that these figures should cover all eventualities, we have assumed 4% growth on the portfolio account. The US Stock Market has averaged over 10% per annum long term. Some people will tell us we are being too conservative. We don’t think we are!
We have also assumed 5% growth on the increase in college costs, don’t underestimate the power of this. It dramatically increases the figures.
For example, if a new-born today started saving and the cost of college remained stagnant at €44,000 and the fund somehow completely miraculously did 10% per annum (please note it won’t!!!!) then you would only need to save €75 per month of the children’s allowance.
This just shows how different figures change the numbers dramatically, but it also shows another thing and that is the power of compounding. If you’ve got a child going to college at any stage in the future now is the time to start saving. Get a good financial planner to help and you will be a lot further along the road than if you do nothing.