Saving For Education Costs

By Arlyn W. Cheng, LUTCF, CIS

Ayka was brimming with pride and joy as she took the first glimpse of her newborn baby six months ago. He is indeed the apple of her eye! Even her mom, Yna, a doting grandmother could not have enough of their new bundle of joy! But with a new baby in the family comes a new responsibility as a parent. Just like other parents, she wants to provide the best for her baby, not only for present needs but also a bright future for her child.

Aside from caring for the baby’s physical needs, parents strive to invest time and energy to build the child’s core values and character necessary for them to grow up as responsible adults and build a successful future career. To all Filipino parents, education remains to be one of the most important priorities. Based on Filipino values, this is perceived as one of the main legacies or “pamana” that parents can possibly bestow on their children.

In today’s business environment and competitive job market, large corporations and business owners place a heavy premium on graduates from esteemed colleges or universities that provide quality education. However, with the increasing cost of education and tuition fees in our country’s leading educational institutions, how can parents provide the financial support needed to ensure funds are there when their child goes to college? What preparations are necessary?

Factors To Consider In College Planning

A lot of parents do not realize the urgency of financial commitments necessary to provide for the college education of their kids. Most parents are focused on facing current issues and expenses. While the cost of education is increasing at a rapid pace, they hope that their children would be eligible for a scholarship grant. Some of them may be under the illusion that they can keep on postponing education savings once there is spare money left after paying all the bills and succumbing to the irresistible shopping spree.

When the college years eventually come around, whatever funds are available would be used to pay for college expenses. Then they resort to loans to cover up the shortfall. The consequences could be disastrous. This could impede the desire of the child to finish college and pursue the career of his choice. Worst, the “bahala na” attitude that prevails upon some folks has been causing an increase in the number of college dropouts.

If tuition continues to rise by an average of 12.25 percent annually, an effective college saving strategy would be to start saving right now. Here is a simple approach you can use. Initially, you have to work through these steps to help you figure out the expected costs.

Step 1: Calculate how much tuition will be needed to send your child to college.

Decide which university you would like to send your child to. Below are the average tuition and other fees of selected universities. The tuition fees depend on the course selected.

*Per annum *ADMU is based on 2009 rates while DLSU and UST rates are based on Academic Year 2010-2011; projected rates are based on an assumed 12.25 percent inflation rate. Actual figures will vary based on course and actual rate of increase implemented. These figures are for illustration purposes only.

Multiply these by four years and you have a staggering amount! This is just a bird’s eye view of how tuition will look like if they increase by 12.25 percent on average every year. Choose a university whose tuition and other fees you can realistically save for, based on your financial capacity and the location that is accessible to your home to save on costs.

Step 2: Calculate what the other expenses are during the application process and during the college years.

Aside from tuition, consider the following expenses in preparation for college – admission examination fees times the number of universities your child is applying to, travel expenses, airfare for those coming from the provinces, gasoline, meals, and lodging. You might even consider enrolling the child to an entrance exam tutorial to increase the chances of admission to preferred schools.

Once your child is admitted to a university, you have to decide: will he be traveling to school and back to the house daily, will he stay at a nearby dormitory, buy or rent a condominium unit? What will be the mode of transportation? Will he commute or drive a car to school? This entails transportation or gasoline expenses.

Then there are additional expenses on meals, books, supplies, clothing allowances, uniforms (for some universities), PC or laptop to do homework or research, printing costs, cell phone load, school projects, laundry, household items (if staying in dorm), health insurance, car insurance and other personal expenses. Finally, there are hobbies or special interests that are non-academic in nature which the kids wish to pursue like singing, dancing, martial arts, sports activities or learning to play musical instruments. All these co-curricular activities entail nonetheless huge amounts of money and add up to the overall cost of education. In reality, the tuition fees comprise about 30 percent of the total cost of education. Nevertheless, it is the biggest issue when the enrollment period in May or June comes around as it is considered as a major expense item by majority of the parents.

Here is a tool called “Total Education Costs Worksheet” (see table below) which you can use to estimate the total education costs. Add or delete items that are applicable to your situation. Since the education costs will be incurred in the future, you need to account for inflation. After calculating the expenses taking into consideration the inflation factor, you may be flabbergasted by the amount you arrive at. Now, take a look at what you have prepared so far in terms of educational fund. Is the funding adequate after projecting the yield of your current savings program until the time your child is ready to go to college? How much is the shortfall? With this information, you can decide and plan your next step.

Step 3: Fund the education gap.

To address the gap, how do you go about it? Saving for your child’s education requires a financial commitment over a fixed term. For instance, a newly born child will go to college 16 years from now. Therefore, the appropriate financial instruments or investments you select should be based on the number of years before the money is needed to maximize the return or value of the money invested that will eventually finance the costs of education.

Structuring a tax efficient savings plan designed to provide money at key educational milestone is the ideal way to tailor a responsive education plan. Moreover, it should also allow you to secure or shield your child’s future in the event of disability or death of the breadwinner.

While there are different ways by which you can save for the education of your young kids, buying an education insurance plan is one of the most pragmatic way to guarantee a fixed amount of cash that is available when needed. Cash value insurance is one of the most tax efficient and guaranteed ways to accumulate funds without the risk of stock market fluctuations that can affect the value of your investments especially for those who are conservative or risk averse. These are accessible and tax-deferred vehicles that help fund college education. It works best for younger children due to the fact that life insurance policies require a certain period to accumulate a significant amount of guaranteed cash values that generates cash benefits.

In the past few decades, life insurance companies have been offering packaged education plans that are crafted to provide pay outs during the college years of the insured kid. These plans are structured to pay guaranteed cash benefits on specific dates normally coinciding with the enrolment period every semester. The number of periodic cash pay outs depends on the design of the plan. To sweeten the deal, some education plans provide extra cash as graduation gifts or dividends for extra expenses. One of the intrinsic value of these education solutions is the protection benefit which will excuse further premiums in the event of death or disability of the policy owner thereby making the plan self completing.

Furthermore, what makes it appealing is the special feature called “Contingent Elementary and High School Benefits” offered by the leading insurance companies. This means that aside from the guaranteed college stipends, the insured child will receive cash assistance for the remaining elementary or high school years in the event that the policy owner (usually the breadwinner parent) becomes permanently disabled or passes away before the premium paying years are completed. This assures that the child will have additional funding to complete his pre-college education that will enable him to avail of the college educational funding as originally envisioned by the parent. An additional enhancement is the supplemental accident benefits and term life insurance for the policy owner.

There are other types of insurance plans that can be tailored fit to your requirements such as other endowment and variable universal life products. Depending on the risk appetite of an individual, a variable universal plan could provide more value by potentially outperforming the traditional products and the tuition rate increases since its performance is linked to equities or bond and at the same time provide life insurance protection. However, the down side is that the volatility of the market should be within the risk tolerance level of the parent. Perhaps, a more diversified range of portfolio could help minimize the risks involved through creative product solutions. In other words, these insurance plans offer you unique features that provide you protection against certain life’s risk while helping you to achieve your child’s dream and your objective for a good education if properly packaged.

Buying an education plan is something that wise parents should take time to discuss and crunch the numbers ahead. The best time to start investing in an education program is when a child is born. This will ensure that a certain amount has been earmarked for the bright future of the child. Additionally, premiums are cheaper at a younger age. The longer you vacillate in your decision to buy an education plan, the higher the premiums you may have to shell out. Hence, the earlier you start, the better you can enjoy the benefits of long term planning.

Most people cannot afford to buy the complete or total coverage in just one sitting to answer for the total education costs. However, this can be programmed in segments that are realistically within your income level. For those who have not started their education savings, it is better late than never. Professional financial advisors can provide you advice by calculating the coverage needed and how to allocate and maximize resources available to reach your education objectives. They can show you the various financial instruments or options available within the remaining time frame. Through proper financial planning, you can turn your dreams into reality.

The journey to life is full of challenges. We have a choice to smoothen the road towards financial freedom by making a right decision now for the future of our children through education planning. After all, they are the next generation of your clan. Who knows? They may be the next basketball superstar, the next President of our country, or the next Thomas Edison, etc. Time is of the essence. Why procrastinate when the future of your kids is at stake? Let us be inspired by the famous slogan of Nike which goes, “JUST DO IT!”

Arlyn W. Cheng, LUTCF, CIS is a certified Philamlife Financial Planner. A a graduate of the Registered Financial Planning Institute of USA, she is also engaged in the advocacy for financial literacy. For comments or clarifications, kindly email arlyn_moneysense@yahoo.com