Annual school fee discounts: can you put your money to better use?
Many fee-paying schools offer parents a discount to pay the year's school fees in advance instead of monthly or quarterly.
If you have the cash, you may be wondering if it is worth taking up these offers or whether you would be better off investing the money and withdrawing the fees from it monthly.
The answer depends on the discount and the returns you can earn on any investment, but your investment return needs to be a few percentage points higher than the discount rate before the discount becomes unattractive.
This is because when you use an investment to fund fees paid out regularly - many schools require fees paid monthly, and often for 10 months rather than 12 - the investment reduces over the year.
Old Mutual actuary Pieter du Toit says that to determine whether paying in advance will benefit you, you need to work out the monthly interest on the investment and apply it to the remaining investment each month after the monthly payment has been made.
After applying the interest and deducting the payments throughout the year, see how much of your investment is left at the end of year.
Never a good idea to invest money for short-term needs such as school fees in equity-linked investmentsNiel Fourie, Public policy actuary at the Actuarial Society of SA
If the rand amount of the discount is greater than the investment amount remaining at the end of the year, then the discount is worth more.
The same calculation can help you determine whether it is worthwhile drawing from an investment to pay the fees upfront, then replacing the investment by making monthly payments equal to the school fees you would have paid throughout the year, says Du Toit.
An informal survey conducted by Money this week found the discounts offered on annual fees at a number of schools, public and private, could be as low as under 2% and as high as 10%. The most common discount rate offered appears to be 5%.
One Cape Town high school is charging annual school fees of R41,300 and is offering a discount of R2,000, or 4.79%, if the fees are paid by January 1.
Assume you could invest R41,300 at 8.5% a year in an enhanced income fund from which you withdrew the monthly fees the school charges of R4,130 for 10 months (February to November).
At the end of the year you may be left with R1,625 of interest earned on the investment as it diminished over the year.
The discount of R2,000 is greater than the R1,625 earned in interest, so even though the return is higher than the discount, the upfront discount is still better - although only marginally.
A primary school that charges fees totaling R27,500 for the year is offering a R2,000, or 7.5%, discount to pay in full before the end of February.
Assuming an investment return of 7.5% that you could expect from a money market fund, which matches the discount rate, parents offered this kind of discount can still save about R1,100 by paying the fees in advance.
At one private school, where fees are typically higher, the discount of 6.6% if fees are paid in advance amounts to R7,000. But the R108,100 needed to pay the fees during the year fails to earn enough interest to cancel out the saving from the discount until the return is just over 14%.
In order to earn a return this high, you would need to be exposed to equities.
Niel Fourie, public policy actuary at the Actuarial Society of South Africa, says it is never a good idea to invest money earmarked for short-term needs such as school fees in equity-linked investments since these investments are subject to market volatility over the short to medium term.
If your child's school offers a generous rebate of 10% on an annual advance payment of fees, this exceeds the returns offered by most low-risk investments.
If you have the money, you may be wise to pay the fee upfront, says Fourie.
But if the discount is low, for example below 2%, you would be better off putting the cash available into your home loan account if you have one.
With home loan rates above 10%, your home loan will probably be the best bet.
Fourie also warns that if you, like many parents, have outstanding short-term debt such as credit card debt or retail cards, this debt will cost you more than any of the rebates offered by schools.
If your school fees amount to R37,700 and you could pay this amount in cash upfront and enjoy a 5% discount, you would have to pay R35,815 and the discount would amount to R1,885.
But if you were servicing credit card debt of R40,000 at an annual interest rate of 17%, you would be better off repaying this debt first and paying the school fees on a monthly basis.
Save credit card payments
Fourie says it would be wise to pay off the debt and save the monthly credit card repayments you are used to paying into a home loan account with an access facility.
This could save you some interest on your home loan during the year and at the end of the year you could withdraw the sum saved to provide you with a lump sum for the next year's school fees.
Only if you are debt-free and have the cash from, for example, a bonus, would it be wise to pay the school fees in advance and benefit from the discount, he says.
If you are not in a position this year to pay school fees upfront, work out how much you need to save every month to accumulate the lump sum for next year's fees and save this amount in a money market fund or your bond account, starting this month.
Not only do you benefit from the interest rate earned, but you also benefit from the discount offered, Fourie says.
Resist the temptation to spend any bonus or other additional money earned during the course of the year and use this money as the basis for saving towards school fees for next year, he suggests.