The Importance Of Planning For Your Child’s Education

While planning to become a parent, apart from putting money aside to purchase certain necessities such as crib, diapers, baby food etc, you must begin to prepare for other responsibilities, one of the most significant being your child’s education which can stretch over two decades or more. The most expensive part of your child’s education will be the tertiary education.

Government education subsidies are reducing almost every year as a percentage of the full economic cost of the education. Student loans, which are increasingly difficult to come by, are challenging in terms of interest burdens and frequently still do not cover the student’s needs. By the time your child is nearing college or university age it is usually too late to begin making up for this shortfall. The planning process and commitment must be carried out in an informed, disciplined, and systematic manner

Why is it important to start right away?
Time is one of the most important advantages of investment planning. With the framework and discipline of education plans, you have the potential of realizing significant gains from seemingly minimal contributions. The power of compounding returns cannot be ignored. Consider the following scenario: Beginning when a child is newborn, Parent A invests $20,000 per year over a period of five years, and then stops. Parent B doesn’t start investing for the child’s education until it has reached the age of eight, but then invests $20,000 per year over the next ten years. Even though Parent B contributes twice as much as Parent A, when the child is ready for college or university Parent B’s investments will still not be worth as much as Parent A’s, and in fact they will never catch up. When the child is aged 18, the education savings will be worth $446,360 under Parent A’s plan, whereas Parent B’s will only be worth $350,400!

Taking of advantage of tax efficient instruments is of paramount importance as these investments will allow you to earn a better return on your investments over a longer period of time. These investments also encourage discipline and teach you to appreciate long term investments because of the benefits they afford.

Clearly, procrastinating can result in a costly price when it comes to planning for your child’s education. As the saying goes, time is money! You should also note that the more you or your child has to borrow for university or college is the power of compounding will work against you rather than for you.

Steps to consider in planning for your child’s education

Assessing your needs
Since the desired end result of every education savings plan is a stream of income that can adequately cover the costs your child will incur in obtaining his or her education, the first step is to estimate the outlays that you will have. You should consider tuition, books and other materials, and basic living costs. If the school to be attended is in another country, you should remember that travel costs might be substantial. You also have to consider devaluation of the Jamaican currency and you therefore need to protect your investments by investing in foreign currency instruments.

Understanding risk
When determining which financial instruments to incorporate into your investment plan, consider both the amount of risk involved and your own comfort level. Are you comfortable with taking calculated risks? Investing in stocks and mutual funds may serve you well. Or would you prefer a more moderate or low risk investment? Then you might want to consider bonds and money market instruments. Whatever financial vehicles you finally decided to put to work for you, bear in mind that experts generally recommend a balanced and diversified investment portfolio to mitigate against devaluation, inflation and risk.

Virtually all investments carry some level of risk. Even cash held in a savings account runs the risk of losing value due to inflation. Persons planning for their child’s education should consider that the younger the child is, and therefore the longer they have until college or university, is the more risk, relative to their own inherent tolerance that they can safely take on. This is more important in ensuring that the education fund is secured prior to the parents approaching pensionable age. This means that there will be more education funds available to the child along with higher returns due to the longer investment time period. This allows the parents to invest more and also benefit from the compounding effect of their investment. However, this also means they should be careful to consider reducing the risk level of their investments as the child gets closer to the tertiary level.

Investing
Once you have an idea of what you will need to provide for your child’s education, it is now time to explore your investment options and the options you choose will determine the expected returns. Your investment advisor will assist you in deciding how to allocate your investment dollar among the various options to achieve the highest possible return based on your risk appetite. Once the advisor has discussions with you with regards to your objectives, he or she will be able to recommend a diversified portfolio to assist you in attaining your objectives.

Ten tips to planning for your child’s education:

1. Save money as early as possible to help pay for your child’s tuition. Remember the power of compound interest and tax efficient products.

2. Encourage your child to make high school count, preparing academically for higher education. These years will determine what options and career paths are available later on. They may also determine whether your child qualifies for scholarships that would defray some of the costs of education.

3. Assist with honing your child’s skills and interests early in his development; introduce to him career options and the schools he may be interested in attending.

4. Meet with the high school guidance counselor to determine what schools match your child’s academic abilities.

5. Gather information about the schools your child may be interested in attending including information on available financial aid.

6. Assist your child in applying for admission at various and help him or her to manage expectations concerning acceptance into a particular school.
7. Explore scholarships, grants, bursaries and work-study programmes; complete any necessary applications or forms on time.

8. Consider education and/or student loans only after you have done the necessary research of all the sources of free financial aid. While a loan may be expensive, lack of education is even more expensive.

9. Research the loan programs available to you and your child which may include those offered by the Students Loan Bureau, loans by private lending institutions, commercial banks such as First Global Bank or credit unions, or loans offered by the school or organizations related to it.

10. Help your child to manage his or her student loan debt by deciding how much you and your child can afford to borrow and repay.