YOUR MONEY: Thinking of sending your children to varsity abroad? Read this

Question:

What’s the best way to go about investing for your child’s education — especially if you have the means to allow for that education to be abroad? For example, do you invest in rand for an offshore education, or would you convert to dollar or euro and then invest from there? And would you take an especially conservative approach or would the same principles apply as for any long-term investment?

— Name withheld 

Answer:

Parents need to navigate complex factors including currency fluctuations, cost estimation, investment vehicle selection and regulatory considerations. We have split the answer into various considerations.

Educational investment strategies

Parents need to consider the specific country, state and institution, as costs vary significantly across these factors. The cost difference even within the same university can be substantial, depending on the course or degree. Understanding the education-specific inflation rate in the chosen country is also critical. This often differs from the standard inflation rate and can greatly affect the total cost over time. It’s also important to factor in living expenses, accommodation, travel and occasional visits home. This comprehensive approach ensures parents are prepared for the actual costs, not just tuition fees. 

Currency investment decisions

Investing in the currency of the country where education will be pursued is highly recommended. This strategy aligns the investment currency with the expense currency, effectively mitigating risks associated with local currency devaluation and inflation. Investing in rand for an offshore education introduces a high risk of currency fluctuation, which can derail long-term financial planning.

Parents can practise a strategy of rand cost averaging. This approach smooths out exchange rate variations over time and aligns the investment with the eventual expense currency.

South Africans can externalise, or move abroad, up to R1m per person annually without needing special permission and this is generally enough for education funding. But merely holding these funds offshore is not enough. They must be actively invested in line with the required currency and financial goals.

Risk management

Education investments, particularly when the education start date is near, should be more conservative (more fixed income products) to ensure the availability of funds.

If the education decision is two years away or less, then being heavily in fixed income makes sense. As the time horizon approaches five to seven years, this would become multi asset, with global equities generally dominating the portfolio.

Cost estimation for overseas education

It’s essential to research the specific institution and location for an accurate cost estimation. At Yale University in the US, the estimated average cost of attendance for undergraduates is $87,705 a year. This includes tuition, housing, food, books and personal expenses. At Oxford in the UK, annual course fees for foreign students are estimated between £33,050 and £48,620. The institution also estimates likely monthly living costs of between £1,345 and £1,955. Parents should budget for potential inflation-related increases in living expenses of about 5% a year in the country of study.   

Financial planning timeline

The ideal timeline for financial planning for a child’s international education is from birth, offering an 18-year planning horizon. However, a 10-year timeline, starting when the child is in primary school, is also effective. At a minimum, planning should start when the child enters high school.

The earlier the planning begins, the more time there is for investments to grow, reducing the financial burden later on. 

Tax implications and benefits

While there are no direct tax benefits for international education investments, the method of investment can have tax implications. Options include direct offshore shares, offshore endowments and other structures, each with different tax considerations.

— Brandon Naidoo, lead specialist for investment propositions at Liberty

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