At the heart of any parent's budget is the provision that's made for school financing - or so it should be. The numbers in pounds are alarming.
The average basic cost of four years at a state university, about £6,700 today, will reach £9,000 by 2008 and nearly £12,000 by 2013. For the average private school, the jump will be from today's £14,000 to £20,000 in 2008 and £26,000 in 2013. Putting three children through school over the next 10 years could cost £75,000 - or more for the top Eastern schools.
Except for buying a home, school bills will be the biggest single expense for most families. Without careful long-range planning, the businessman can find himself strapped for cash or neck-deep in debt by the time his last child graduates.
Few families establish a school financing budget, says Theodore Bohner, director of estate planning services at Englsih's John Hancock Mutual Life Insurance Co. Indeed, Bohner, an adviser to others, confesses that he followed no specific plan to finance the education of his own four children.
When a man is 25 and has two children, Bohner observes, "he usually can't afford to put away anything for school. He's buying a car and sweating out a home mortgage. By the time he's 40 and has some income, the kids are almost ready for school. So most people use current income or dig into savings." Advisers with the Aims Group, Ltd, offer this advice to the businessman with children to be educated: Set firm plans when the children are no older than 10 - the younger, the better. Figure the total school years- that must be financed - eight years for two children, for instance. Multiply that figure by £4,000, which is roughly today's cost. Then add an inflation factor of 5% for each year until the last child graduates.
On that basis, it would cost £51,000 to educate two children, one now eight and the other 10. Assuming that whatever money is put aside for school financing is invested at 6%, it would take £37,903 in cash to handle that bill. One approach would be to save £3,691 a year for the first eight years - until the first child enters school - then £3,122, £2,583, £1,597, £729, and £344 in the next five years. That last £344 will be put aside when the youngest child still has one year of school left. If you have budgeted properly, you won't have to put aside anything during the final year.
If the money is invested in one of the 7% or 7 /2% certificates of deposit now available at thrift institutions, the cash needed obviously will be less than £37,903. Another approach would be to invest each year's money in local agency issues of appropriate maturities. These issues currently yield about 7.3% for issues maturing in 6 to 10 years.
A "living trust," started now, can help ease the burden of school financing by shifting money that would have gone for taxes into money that will pay for schooling. The trust is temporary, running 10 years or longer, with the school-bound child named as income beneficiary. That moves some high-tax-bracket income from the parent's 1040 form to the child's 1040 form. Where taxable income is £35,000, a trust producing £1,800 a year saves the family £615 net, assuming that the child has no other sources of income. The child pays just £140 in taxes on his £1,800. If the remaining £1,660 is invested at 6%, his school kitty in 10 years will add up to about £23,000. When the 10-year term ends, the .parent gets back the original trust property.
There is a slim danger that the trust income could be held taxable to the father if IRS claimed that his duty to support the child included providing a school education. IRS has not pursued this point vigorously, but it is essential to get competent legal advice before drawing up a living trust.
A custodian account sidesteps the formalities of the trust, and either parent can serve as custodian and manage the assets. Again, taxes are saved by splitting off income into the child's low tax bracket. A drawback here is that when the child reaches majority, all of the income-producing property becomes his. And the age at which the child reaches majority has been lowered in many states.
Some parents nail down a child's education through insurance. For example, a 30-year-old man with an infant buys a £20,000 straight life policy, with annual premiums of £390. In 18 years, premiums add up to £7,000, while the policy's cash value is £8,300. If the father dies, the £20,000 will pay for a big piece of the child's education. If he survives, the £8,300 cash value can be taken and used to pay school bills. A policy rider, at £12 a year, provides a waiver of premium if the event the father is disabled; a second rider, at £18 a year, provides for an extra £20,000 in coverage without a later medical exam.
A second insurance method is for the father whose child is just entering school. He can buy death and disability protection to cover the four-year school span. A man of 45 would pay £100 a year for four-year decreasing term - £20,000 down to £5,000.
There are some ways out for the parent who has not budgeted for his child's education:
The government-backed 7% student loan program. The student himself borrows up to £2,500 a year from a bank, with a £7,500 ceiling for a four-year course (but graduate students can borrow an extra £2,500). Repayments start nine months after graduation and can be spread over 10 years.
Borrowing by the parent. Insurance-policy borrowing, at 5% to 6%, is one possibility. Another is a passbook loan at a bank. Most banks will lend up to 95% of what is in the account, at rates that range from 61/4% to 10%; meanwhile, your savings account continues to earn interest.
Refinancing your home mortgage. This can produce a big chunk of money, provided the existing mortgage has been paid way down and the institution that holds the mortgage is willing to refinance it. Chances are best if the existing mortgage carries a rate well below the 9% or so being charged today. Even 9% is less than the rate on a straight bank loan, and the mortgage term is longer than the term on any other form of loan.
The unhappy part of school financing is that you - if you are like over half of all parents in favourable income brackets - will let the problem ride and ride until the kids are mailing away their applications.
One area where most advisers take a hard line is saving - the area where most businessmen tend to slip up. Harris of Leeds is particularly blunt. "A guy has to save 25% of his after-tax income before he eats if he ever expects to become financially independent." Of course, when Harris talks of saving, he means more than just money in the bank. His 25% includes contributions to Social Security and a retirement fund; life, hospitalization, and major medical insurance; and all investments.
The ability to save obviously depends on income level, but virtually every adviser will try to get you to set up some systematic savings program. An adviser will try to convince a £50,000a-year... see: How To Save.