This piece first appeared in Reader's Digest in June 2001
The text here may not be identical to the published text
The Prime Minister may be committed to education, education, education and the Chancellor may have announced another £1 billion - over three years – for schools in his March Budget but more people than ever are choosing to pay to have their children privately educated. One pupil in every 14 – well over half a million children in Britain – attends a private school. And it is a big financial commitment. Up to age seven you can pay from £2000 to £3500 a year. From 7 to 11 or 13 – a ‘prep’ school – it will cost twice that. And once they go to a senior school, expect to pay £5000 to £10,000 a year. And that is for day pupils. If you want boarding, you can almost double it. So over a full school life from 2 to 18 you can pay – wait for it – up to £125,000 and add another £50,000 if you want boarding school. Then you must add another 10% for ‘extras’ – that can be anything from lunch to the cost of cricket training or violin lessons – and perhaps the same again for uniforms and clothing. As school fees are rising faster than inflation, the final bill could be £200,000 or more. And remember that University will probably follow and that is expensive for everybody nowadays. Experts suggest that with ten years to go before fees are needed, you will probably have to save £500 a month to pay for school fees from 11 to 18.
The first thing to consider is can you bring the cost down? You could limit private education to some years – perhaps to senior school from 11 or 13 leading up to the key exams, and use a good state school for the other years.
You may be able to get a scholarship to pay for part of the fees. They are given by individual schools to pupils who are gifted academically or in things like music, art or sport. Many schools may also offer what is called a bursary, a reduction in the fees which does not depend on the ability of the pupil. Some schools do special deals for the children of the clergy, teachers, or service families. Some will do a cheaper rate if another member of the family goes to, or has gone, to the school.
Paying for it
There is no magic nowadays about making financial provision to pay for school fees. Some years ago it was possible to use covenants and the charitable status of schools to save up tax-free. But those two avenues have been closed and there are no longer any new places paid for by the state. There are three ways to pay – out of your income, from savings, or by borrowing.
If you pay from income you may still want to borrow to help with cash-flow. While your pay normally comes in once a month, fees usually have to be paid three times a year at the start of each term. One specialist company, Holmewood’s Termtime Collections, will pay the fees and then take a quarter of the payment in the four subsequent months out of your salary. However, it charges 3% of the termly fee – and that turns out to be a whopping 27% APR interest. Other ways are to use a flexible mortgage and borrow extra out of that each term, making extra payments each month to keep your overall loan at the end of the year on target.
Saving money to pay for school fees is different from other sorts of investing because you know exactly when you will need the money. That is an advantage in that you can plan a series of investments that will pay out as the child reaches certain ages. But it is also a restriction – investments linked directly to the stock market can go down as well as up and if the market is down when term begins you can expect little more than sympathy from the school’s bursar. So to pay for fees you should be putting your money into fixed term investments that are also protected from some of the ups and downs of the market.
One is a corporate bond. Many companies will borrow money from you, pay you interest at a fixed rate for a number of years and then guarantee to repay your capital in full at the end. Individuals invest in them through corporate bond funds. The only risk is that the company will go bankrupt and be unable to pay its debts. You must decide the risk you want to take. Some companies have a lower credit rating – are more risky – but they pay a higher return than those less risky companies with a high credit rating. Funds can mix them to that you get a broad spread of risk and returns. There are big tax advantages in investing in a corporate bond through an ISA. But remember you can only put £7000 into an ISA in a year – if you use it up for this then you don’t have an ISA for yourself. Perhaps a grandparent or relative could help?
Another good investment for school fees is an endowment. These policies are usually associated with mortgages and have had a bad press recently. But as an investment for school fees they can be very good. The money is invested with a life assurance company for a fixed period – 10 years is normally the minimum because the proceeds at the end of that time are all tax-free. It is invested in what is called a ‘with profits’ fund. These funds have a mixture of shares and other investments and although a lot of the money is in the stock-market they ride out the ups and downs by paying out a bonus at the end based on the returns over the whole period of the investment – a sort of average of the returns over the ten years of the policy. Historically, with profits funds have done very well. If you start the policy in August when your child is one, you know it will pay out in full when they start senior school in September aged 11. You can take out another policy a year later and so on. By paying the fees for the whole year rather than each term many schools will give you a discount – they call this Composition. Remember though that endowments are not very flexible – if you have to cash it in early you will not get a good return at all.
Another alternative is a Friendly Society Bond – you can invest £25 a month for each child and it will grow entirely free of all tax.
Anyone thinking of saving for school fees should contact an independent financial adviser who specialises in this subject. Get the views of more than one before you embark on long-term savings and make sure they are as flexible as possible – your circumstances may change over the next 20 years.
Not everyone can manage to save enough or earn enough to pay in full for private education. Many people do find they have to borrow to pay for some or all of the fees. Nowadays there are easy and fairly cheap ways to do that with a loan secured on your home. Flexible mortgages mean that you can borrow extra cash quite easily at the mortgage rate. Many people find that a mixture of early judicious investment and careful borrowing can enable their children to have a private education. Only you can judge if the cost is worthwhile.
Independent Schools Information Service 020 7798 1500
SFIA Mason & Mason 0845 458 369
Clarke and Partners 01202 889 707 or www.schoolfeesadvice.co.uk
Invest for School Fees 020 7488 8111 www.willisnational.co.uk/