Ireland: Save for college by degrees

Given that the total cost of sending just one child to college can add up to nearly €30,000, it is sensible for parents to start budgeting for this expense even before their offspring have started junior infants.

“I have had clients coming in who are panicking because their child is 16 and leaving school in six months’ time,” said Liam Ferguson, of Ferguson & Associates, a multi-agency lenders intermediary. “They have no provision made and they want to know what the cheapest form of borrowing is in order to pay for these costs. It is always preferable to fund college costs in advance.”

Government grants

Happily, there is help available. Hamrogue says about 40,000 students are in receipt of a government grant. When planning for the cost of third-level education, it is important to factor in the likelihood of qualifying for grant assistance.

“Make sure you get all the grants to which you are entitled,” he said. “Explore all the options and remember that local student union welfare officers are always on hand to help.”

Grants are awarded depending on the reckonable income of the student and his or her parents. Full maintenance is either €3,110 for a student living away from home or €1,245 for a student whose family lives near the college. If reckonable income is above the threshold of €37,365 for a family with fewer than four children, €41,055 for a family with four to seven children and €44,580 when there are eight or more children, grants of 75%, 50% and 25% of these sums can also be made.

The reckonable income limits rise when there is more than one dependent child in a family in full- time third-level education, which includes student nurse or Garda training, Failte Ireland or Teagasc training and courses in Northern Ireland. The limits are also increased if one of the parents is studying full-time. Remember that child benefit of €150 a month will continue to be paid for children in full-time education until they are 19.

Start saving early

Once parents have calculated how much they are going to need to save, and any grant income that they may receive, they need to work out how they are going to save.

The earlier they begin to save, the better, says Ferguson. “One of the obvious ways of planning is to save the child benefit. If you get into the habit of doing that from when the child is born, you won’t miss the money. Putting that €150 into a savings plan for 16 years would be a good way to fund this expense.”

There are plenty of savings accounts out there, including with the post office and the credit union, traditional choices for parents saving for their family’s education. There are better returns available elsewhere, however.

Ferguson points to the regular savings accounts offered by AIB and Anglo Irish Bank as being particularly suitable low-risk options with a decent return. Both currently pay 5.5% interest. At that rate, saving the child benefit for 18 years will result in just over €55,000.

If parents add in the new €250 quarterly payment, introduced in the last budget and paid until a child is six years old, the savings should total almost €80,000 after 18 years, which should be more than enough to pay for college.

With Anglo Irish Bank, you must save for a minimum of two years, but the bank guarantees a minimum interest rate for that time of 4.5%. AIB’s account is instant access. It will pay a rate of at least 2.5 percentage points above the European Central Bank (ECB) rate until the start of 2008 and at least the ECB rate after that.

Parents who have less than 18 years in which to save need to put more aside each month. If they have a special savings incentive account, they could continue to save the monthly contribution once the fund winds up and could also consider re-investing some of their payout.

Consider managed funds

Another benefit to starting early is that you can afford to take more risk with the fund in the early years.

“Saving for college is a form of investment like any other, so therefore the usual investment questions will apply, such as ‘What is your attitude to risk?’,” said Ferguson.

“If you’re taking an 18-year view, I would be inclined to say that you could afford to invest in some sort of managed-fund savings plan. It is a relatively long-term investment horizon, so you could afford to take a slightly higher-risk approach in the early years. When your kid is 10 or 12, you could think about switching the money into something a little lower-risk.”

All the life and pensions companies sell savings plans that are linked to managed funds, such as Eagle Star’s Savings Plus, the Friends First Smartsaver or Irish Life’s BonusSave. These allow you to aim for a higher return by choosing more aggressively managed funds if you wish.

Ferguson gives the example of a parent saving child benefit of €150 into a typical managed fund for 15 years. If the gross return was 6% a year, after 15 years they would have €42,309, which would be equivalent to a little over €27,000 today, when inflation is taken into account.

By opting for slightly more risk, they could achieve an annual return of 8%, giving them a lump sum after 15 years of €51,158. Again, allowing for inflation, this would be worth almost €33,000 today, which would comfortably cover the cost of third-level education for one child.

An advantage to choosing managed-fund-based products is that they can be written in trust by the parents for the child. As the child technically owns the money, they can access it once they are 18 and it won’t be treated as a gift for tax purposes.

Choose carefully

There are dozens of managed fund options on the market and parents need to compare carefully before locking into one for five or six years. Examine the track record of each provider and consult an independent adviser if necessary.

Ferguson says it is important to research charges. “The same criteria apply as when you are picking a pension, only more so, because savings policies have a shorter time frame.

“It’s important not to get into a plan where the agent is getting a whopping commission in the first year if you are only getting in for 10 or 15 years. Commission and charges must be disclosed before the sale, so ask how much of your money is being invested and how much is being siphoned off in charges.”