Do you have a spare €60,000 knocking around? That’s roughly the cost of sending a child away to college. A State grant will help some households, but for many working parents, finding the money is a problem best tackled sooner rather than later.
How much does it cost?
If you’re saving for something, it’s good to know how much it’s going to cost. Parents of children studying away from home are spending up to €58,000 over a four-year degree.
That covers dedicated student accommodation at an estimated €8,384 a year, college fees of €3,193, financial support of €2,448 and transport of €505, according to figures from Zurich. That works out at about €14,529 a year.
Living at home while studying is a big saving. But you’ll still need to support your young adult to the tune of €24,580, according to the Zurich estimates.
TU Dublin has its own cost-of-living estimates for students bound for college this year. It puts the cost of studying away from home at between €12,162 and €19,479 a year, depending on whether you stay in purpose-built student accommodation or five-day digs. That’s up to €78,000 for four years, including the student charge.
Those living at home will pay about €32,000 over four years including the charge.
Government grants toward fees and living costs can help cut the cost. These grants are currently paid on a tiered basis, linked to your household income, your number of children and whether you live 30km or more from the college.
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Rates of maintenance range from €612 a year for higher-income households living within 30km of college to a full maintenance rate of €4,292 a year for those on lower incomes living farther away, with a special rate of €7,586 for those on the lowest incomes.
The annual ‘student contribution’ fee, currently at €2,000, is free to lower-income households and discounted on a tiered basis for others.
So Government grants for living costs and fees can help, but many households have to plan to greatly supplement this or bear the full cost themselves.
Better start early
The worry of paying for third-level education is real, but putting even €100 a month aside if you can while the kids are small will spread the load.
“Some are just getting through buying uniforms and materials for primary and secondary school,” says Keith Dundon, head of financial services with SYS Financial.
For many, college costs can get put on the long finger.
“They are trying to pay the mortgage, which might be in the middle of its life cycle; they are trying to fund a pension; and they are just trying to cover day-to-day costs,” says Dundon.
He urges clients to zoom out from the daily game of whack-a-mole and break things down into short-, medium- and long-term goals.
The first step is to examine your current incomings and outgoings to see if you can free up any cash, says Dundon. Switching your mortgage to a better rate, or cutting a second car that’s hardly used, can help you ‘find’ money.
Some people mix up budgeting and financial planning, says Ciara Ryan, head of wealth and insurance at AIB.
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“Budgeting is how I’m spending my money today on the things I have to spend money on. Financial planning is about what I want to be able to do in five years’ time, or 10 years’ time. That’s where your kids’ education comes in.”
“Think about a college fund early and even really modest monthly contributions made the earlier the better can add up,” says Ryan.
“The idea is to support your kids’ future without compromising your own financial wellbeing.”
The deposit account solution
The most effective way to save for college will depend on what stage your children are at.
“If the kids are still in primary school, you are in a great position to act, because any timeline over five years from now you can think about investing and not just savings.” says Ryan.
Using a regular deposit account to save college can be alluring – you can see the balance increasing with each lodgement, there’s a bit interest on it and you can access the money for emergencies should you need to.
While your balance can look like it’s increasing, the value of too much left on deposit for too long can erode due to inflation.
“Ireland is one of the best countries in the world for saving, but we are saving ourselves poorer,” says Ryan.
“Every year, that saved money is deflating by 2 or 3 per cent, or whatever the rate of inflation is, so if you are not making that much in interest on it, effectively the value of the money is less,” says Ryan.
“If your money doesn’t grow faster than the rate of inflation, then it’s eroding over time.”
Money kept for too long in an on-demand deposit account, one you can readily withdraw from, is probably going to have interest in the sub 1 per cent range. This is a college fund fail.
Inflation is running at 2 per cent and State Savings and deposit accounts are more or less returning that, so your money is going to stay as it is – what you are putting in is what you are going to get out in future value terms, says Dundon.
If you children are midway through secondary school when you start to save for college, the timeline can be too short to gain from investing, so fixed-term deposits can give you some growth at least.
“AIB has a two-year fixed-rate deposit account at 2.26 per cent, so that definitely helps, but if you are more than five years out from college the rule of thumb is that investing in the market is a better idea,” says Ryan.
So, €25,000 kept on fixed-term deposit for two years with AIB at 2.26 per cent AER will earn €1,138 in interest. You’ll pay 33 per cent tax on the interest, leaving you up €760 for your trouble.
If you can put that amount away for three years, you’ll do better with State Savings – over the fixed term you’ll earn 1.32 per cent, or €1,000 in interest, tax-free.
Lock your €25,000 away in State Savings for five years at 1.74 per cent AER and you’ll come out with €2,250 for your trouble, tax-free.
The investment route
If you have more than five years to go before your child hits college and you can afford to save about €100 or more a month, using an investment product can be a good savings vehicle.
“Once you have more than five years to go, certainly investing helps that money to outpace inflation,” says Ryan.
There are no guarantees with investing money but, given enough time, returns can exceed money held on deposit.
Investment products from the likes of Zurich, New Ireland, and Aviva are available through financial advisers and the main banks offer products too – some are available through their banking apps.
By investing like this, your money is locked away, so you can’t dip into it without a penalty, this can be an upside and a downside for savers.
How much would you need to put away every month and for how long to achieve a €64,000 college fund?
“If you put away €250 a month for 18 years with a growth rate of 6 per cent gross per annum, that would lead to €54,000 paid in and the value it could achieve after tax is €69,047,” says Dundon.
Returns aren’t certain with investing, of course – your money may not grow as much as you hoped, and unlike saving into a deposit account, you could lose some of your own contributions. But given enough time, the markets can outperform a deposit account.
Over 10 years, investing in the medium- to high-risk iFunds 5 fund has seen 7.9 per cent annualised growth, says Dundon. Zurich’s Prisma 5 fund over 10 years has returned 8.5 per cent, says Dundon.
AIB’s 360 Invest savings and investment product will invest your money in a mix of shares, property and Government bonds – with different levels of risk and expected growth.
To invest, you need to have enough for an initial lump sum investment of €20,000, or be able to contribute at least €125 per month.
“The average monthly contribution of college saver parents is about €200 to €240,” says Ryan.
You can raise or lower your monthly contribution, just not below €125 a month.
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You should be comfortable putting this money away for at least five years and be able to take some level of risk with it, says Ryan.
“This is investing, not saving,” she says.
Your money may go up and down during the investment period, but typically the longer it is invested, the more those peaks and troughs even out to put you in positive territory overall.
“We would ask, if your investment went down by one third in value in the morning, what would you do? Would you take it all out, or would you think, ‘I know that in the markets, this happens and I’ll stay in’,” says Ryan.
But if tolerance for bumps is low, you might be better off with a deposit account, says Ryan.
“We don’t encourage you to invest for less than five years, we can’t say you will get the returns before that,” says Ryan.
“Once you have more than five years, certainly investing helps that money outpace inflation.
“With investing, it’s about ‘time in’, it’s not ‘timing’,” she says.
Tax and charges
Those saving for college using investment products should know about the taxes and charges.
First up, know that at the moment you will pay 41 per cent tax to the Government on any gains when you exit the investment.
The Government charges a 1 per cent levy on your contributions to these savings products too. This is deducted by the broker or financial adviser and forwarded to the Government. Ask the broker if they will cover this fee – after all, they get paid fees for selling these products.
There are fees and management charges to consider too.
Fees for the same investment product can vary widely by broker and can eat into your returns, so shop around and get the fees in writing.
If you are putting in €100 a month, or a lump sum, ask how much of that money is actually going into the savings account. The ideal is to get all of that invested, that’s called the ‘allocation rate’.
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Ask the broker or financial adviser about management charges.
Management charges can be about 1 per cent per annum for a lump-sum investment. For monthly contributions where you pay in €100 a month, for example, it would be about 1.25 per cent.
Charges can be as much as 1.5 per cent or 2 per cent, however, so be sure to ask. That may sound small, but extrapolated over time as the fund grows it can amount to a big difference.
If you withdraw all or part of your investment in the first five years, there may be an early access charge.
