How – and why – to invest in your child’s education

It has become increasingly important to invest in your child’s education in the inflationary environment we live in and not simply try to fund school or university fees from your salary. Now is the time for strategic financial planning and to consider key factors when navigating the rising costs of education.

Parents can expect little relief in 2024, with reports suggesting that fee hikes for South African schools will yet again come in above general inflation, which is currently sitting at 5.5% based on the November 2023 print, Shaheed Mohamed, head of Group Savings and Investments at Allan Gray, says.

If you have a child in a government or private school, you must brace yourself for fee increases of between 6% and 10%, according to various reports. This is not unusual, with an economic bulletin published by the South African Reserve Bank (Sarb) noting that school fee increases in South Africa have, on average, been roughly 2.6% above inflation every year since 2012, aside from 2021.

Mohamed says in an environment of already high consumer inflation, this packs an extra punch. “Many of us rely purely on our salaries to pay for our children’s education. We absorb the cost from month to month, tweaking our budgets to accommodate the ever-increasing expense. But the problem with this is that the cost of education typically grows at a higher rate than the average salary and inflation in general.”

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Growing education costs

Over time, this difference effectively means that a greater portion of your salary will have to be set aside for your children’s education, he says.

Many families who are concerned about the quality of education in the country are actively investing offshore to eventually access premium international education opportunities, according to news reports quoting stats from various local investment managers who offer offshore portfolios.

“If sending your children overseas is a consideration, it is a good idea to invest a portion of your portfolio offshore. Costs are likely to be more palatable if you are saving and spending in the same currency,” Mohamed says.

According to cross-border specialist Sable International, an average of 11 000 South Africans study overseas each year, with reports indicating that college tuition fees in the US are between $32 000 and $60 000 (approximately R587 800 to R1.1 million) a year.

Studying in the UK could cost anything between $14 100 to $38 000 (approximately R259 000 and R698 000) a year. These costs do not include the average cost of living.

Therefore, Mohamed says you have to keep these five factors in mind when investing for your child’s education:

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Start saving at the birth of your children

A little goes a long way if you start early enough, Mohamed says. “Although you may be able to afford your child’s primary school fees today, it does not mean you will be in the same position when they reach high school or university.”

The good news is that if you invest to fund your child’s education, even a small amount per month, the growth on your investment can lower the future impact of education costs.

Allan Gray’s research suggests that you could reduce the impact of high school and university education costs by more than 45% if you invest when your child is born and only withdraw when they start high school, as the table below shows. 

	Investment performance	Child’s age at start of investment
		0	3	6
Impact of investment on education cost compared to paying all fees from salary	13.7%	-47%	-24%	-11%
Assumptions: 5% inflation and 10% education inflation Nominal return of 13.7% in the Allan Gray Balanced Fund (three-year return) Based on a monthly contribution of R2 100 per month Includes cost of education for 2023 from pre-school to tertiary education

The research indicates that delaying investing for your child’s education to when your child is six, for example, reduces the cost of education by just 11%. This shows that the earlier you start investing, the greater the impact on the education costs.

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Investing is a long-term journey

Time is an essential ingredient for successful investing. Mohamed says the sooner you start, the more time you have to make contributions and benefit from the magic of compounding: earning returns today on the returns you earned yesterday.

Parents can choose from various investment accounts and policies to save for your child’s education, including education policies, unit trusts, tax-free investment accounts and endowments.

“The challenge for many parents is taking the first step. Starting to put some money aside as soon as you can, will extend the level of financial flexibility you will enjoy in the future.”

Aiming for real returns to beat inflation

Education inflation is typically higher than headline inflation and this means that your education investments must deliver a real (above-inflation) return.

To achieve this, Mohamed says, you will need some exposure to higher-risk assets like equities, which have historically delivered stronger returns than other asset classes. “How much risk you can take on, will depend on your time frame and risk appetite.”

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Avoid credit if you can

Mohamed says the negative implication of “pay-as-you-go” education is that you will have no capital saved up for your child’s future studies. This means you may be forced to apply for credit, which can be prohibitively expensive if you use an unsecured personal loan. The effects of compounding, which work for you when investing, work against you when you have accumulated debt.

Consider the impact of currency

When investing offshore to finance your child’s international education, you must consider the impact of currency.

If you plan to spend on tuition and living expenses in foreign currency, it is useful to understand the profound effect exchange rates have on the returns of international investments and your overall budget, Mohamed says.

“If you are paying fees in dollars and the rand drops by 10% against the dollar overnight, your fee bill will be 10% more in rands. A well-diversified offshore investment portfolio can help protect you against these fluctuations.”