By GRAHAM FROST 24/08/2007
It seems hefty school fees hikes are as certain as a rainy British summer these days. Over the last 10 years school fees have risen well in excess of inflation and average earnings (see chart below), a trend that looks set to continue. And this affects more than just a small minority of parents, over 600,000 children will be attending fee paying independent schools from September - that’s a lot of financially worried (and probably stretched) mums and dads. So how much will educating your child privately cost? And how might you cope while keeping your finances intact?
The 2007 Independent Schools Council (ISC) Census lists the average annual fees for a boarding school as £20,970 and a day school as £9,627. If we assume fees rise at 5% each year in future then the average cost of sending a child to boarding school between ages 5-18 would be £411,000, with equivalent day school costs of £188,700 – a small fortune!
Putting a child through private education is obviously a big financial commitment, hence not a decision to be taken lightly. When making this decision you need to decide how you will fund the fees, the most common routes are as follows:
1. Surplus income
The simplest option if you’re fortunate enough to have sufficient surplus income. Remember, school fees are paid out of income after tax, so a higher rate taxpayer will need to earn £34,950 gross (ignoring National Insurance) to fund annual boarding school fees of £20,970. Also, if fees continue to rise faster than earnings you could find yourself struggling in future.
2. Gifts from relatives
Gifts from grandparents or other relatives can be a practical way to fund fees while helping those relatives move assets out of their estate to reduce potential inheritance tax liabilities. Whether this is viable depends on the relatives having sufficient assets to gift without unduly compromising their ability to lead a comfortable retirement. Annual gifts of up to £3,000 fall immediate outside of their estate, as do gifts made from surplus income. Other gifts will normally fall outside of their estate after seven years.
3. Re-mortgaging
Re-mortgaging to a more competitive rate can make significant inroads towards paying fees. For example, the interest payments on a £300,000 mortgage at a typical Standard Variable Rate of 7.75% would be £1,938 per month. Re-mortgaging to a competitive discounted rate of 5.30% would reduce the monthly payments to £1,325 per month, saving over £7,000 a year. Homeowners with reasonable equity in their homes could also release some of this in the process as a low cost form of borrowing, lessening the pain by spreading repayments over the term of the mortgage. However, this should be treated with caution, as a fall in house prices might risk falling into a negative equity situation.
4. Investments
Parents wanting to fund fees solely from investments will have their work cut out. For example, assuming annual investment returns of 7% (net of charges) they would need a lump sum of around £260,000 (boarding) or £120,000 (day) to fund fees from age 5 to 18 (assuming this sum is invested throughout the schooling period and capital is run down to zero by the time the child leaves school). Obviously, this is unrealistic for many, but building up an investment portfolio before the child starts school could make a worthwhile contribution to school fees. Savings for school fees is really no different to any other form of investing, you simply need to establish when you will need to access the money and structure your portfolio accordingly.
| "In practice parents are likely to use a combination of all the above over the course of their child’s schooling." |
In practice parents are likely to use a combination of all the above over the course of their child’s schooling. While some firms offer ‘specialist’ school fees plans, there are no magical solutions and in practice these are little more than marketing ploys.
Finally, it is worth bearing in mind that if you instead invested the equivalent of school fees for your child’s retirement, they will likely have a very comfortable retirement indeed. Assuming day school fees (between ages 5-18) were instead invested with a real return of 3%, the child could enjoy an index-linked retirement income at age 65 of around £39,000 in today’s terms!