What to consider when saving for education

Look beyond the obvious choices when considering how to save for your child’s education.  There are other options than education savings plans marketed by financial institutions – although one of these might be the best choice for you.

Education is becoming more expensive and often parents who had the benefit of free university/college provided by the taxpayer may not have anticipated the introduction of fees and started saving early for their own children’s education.

Factors to consider in choosing a savings option are:

- age of the child and how long you have to save until the money is needed.  This might affect the suitability of various plans as many will be designed to operate for 10 to 15 years.

- flexibility of the plan.  Can you use it for vocational training as well as university?  What happens if your child decides not to attend university or wants to study abroad?

- how much can you set aside and how regularly.  Might other relatives be prepared to contribute?

- how expensive are the fees.  Savings programs marketed as education plans have been criticized for unjustifiably high fees.  Also consider how costly it will be to withdraw the money if there is a family emergency.

- how will your money grow?  What have been the fund/plan’s returns to date and what style of investment does it use?

- how do the returns and fees of an education plan compare with other long term savings options such as insurance bonds or similar investments offered by friendly societies, mutual funds and insurance companies?  Might one of these work just as well for you?

- How secure is the investment product you have chosen?  The type of investment will affect the level of risk and whether your savings might drop in any year.

- Are there tax benefits with the plan and are they suitable for you?  Many education savings plans are tax free after a period of time, both for income and capital gains tax.  The tax benefits may not be so great for parents/students on a low income.

You need to shop around to see what is available and consider whether there is a student loans program available.  Many parents want to fund their child’s education rather than see a son or daughter leave college saddled with a huge debt for years, but there may be benefits associated with taking out a student loan.  Weigh the costs against other borrowing alternatives such as a home equity loan.  Obviously credit history will be important here and parents might have a better credit record than their child.

Education savings plans are designed for the long-term and the earlier parents get started, the less the financial pain when the bill arrives for the next term’s fees.  That means parents need to do their homework first when choosing the best savings option.

Source:

US:  www.collegeanswer.com
UK:  www.savingforchildren.co.uk
Canada: www.hrsdc.gc.ca/eng/learning/education_savings/index.shtml