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Birth is time to start saving for college, experts say

03 January 2015

The total cost of putting a child born today through a top four-year US university from 2032 through 2036 is expected to run to half a million US dollars (£318,000, €401,400) or more, according to various estimates and online college-cost calculators. Currently a year at a good US uni is running around $60,000, including living costs.

UK universities tend to be cheaper, with annual tuition at most institutions currently running at only around £9,000 (US$14,000, €11,300) a year, and likely to remain significantly lower than the US average going forward.

Even here, though, as a recent Centre for Policy Studies report noted, UK students often graduate after three years with debts totalling more than £40,000.

What’s more, children of UK expats can be expected to pay significantly more than UK-resident students if they look to study at a UK university, even if both they and their parents have British passports. That’s because they will be considered “international students” and as such, could end up paying up to three times more in annual fees than their UK-resident counterparts. In addition, they probably wouldn’t qualify for UK Government-sponsored financial student support schemes, such as tuition fee loans, while at the same time, being British passport holders, would be ineligible for certain scholarships and grants that would normally be available to international students studying in the UK.

To be treated as a domestic student rather than an international student by the UK authorities, children of UK expats must be able to show that they must have been “ordinarily resident in the UK” for a full three years before the programme they are hoping to enrol in begins.

As a parent of teen-aged children himself, Fleming says, he is only too aware how easy it can be to put off thinking about college costs.

Despite all this, it seems almost rude to suggest that parents ought to begin thinking about saving for the education of a child at a time when the age of the child in question is still being measured in hours or days.

And yet, as experts will tell you, at birth, or at least soon after, is precisely when parents ideally should begin to plan for the day when they will be bundling their little bundle of joy off to college. And if the planning doesn’t take place within the first few weeks of the youngster’s life, they say, then at least it should take place well before he or she hits his or her teens – which is when far too many parents are first broaching the subject of university costs with their wealth managers.

“That’s because people need to understand what they will be facing in, say, 18 years’ time, and the importance of laying the savings groundwork properly, and as early as possible,” explains John W. Fleming, the founder and managing director of Global Index International, the Rio de Janeiro-based wealth management company.

Fleming says he is a “firm believer” in the idea that it’s never too soon to think about where the money for college is going to come from. He says he’s also fiercely “anti-debt” – which includes any debt resulting from the failure to plan for a child’s university education soon enough.

As a parent of teen-aged children himself, Fleming says, he is only too aware how easy it can be to put off thinking about college costs. The mere presence of children in one’s life is a distraction in itself, he notes.

But he believes most parents can be persuaded to deal with the college education cost question by reminding them that the alternative could be having to watch their offspring saddled with tens of thousands of pounds (or dollars) of debt, in the form of student loans, at a time in their lives when they might rather be doing other things with their money, such as saving to buy a home, or simply paying the rent on time.

“Does anyone really want to see their children burdened with a big debt? I certainly don’t,” Fleming says.

“So that’s the message we are trying to get out: That education is expensive, and that those costs can last a long time, especially if you have more than one child. Also, that it’s not just the cost of the tuition that you have to take into account, but the general living costs, the textbooks, the costs of buying and maintaining computers and other materials that all students these days require.”

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Voice of experience

While it may not be surprising that Fleming sounds as though he knows what he’s talking about, he insists that he is not unusual in this respect from his colleagues at Global Index International, most of whom have a good understanding of the college education issue, as befits their years of experience.

This can be an advantage, Fleming notes, for the company’s young, often sleep-deprived new-parent clients, who, because of their youth, lack the perspective on life generally that those who are 10 to 20 years their senior possess, merely as a result of having lived longer.

“For example, if the new parents are expatriates, as most of our clients are, one of the first things we advise them is not to assume that their child’s first choice of university will be American or British or French, just because they, the parents, happen to be American or British or French, and this is where they think their child automatically will, or should, go,” Fleming explains.

“Because in the international arena, there are so many factors that will come to bear on a child over the next 18 years – and the course of their life, and those of their parents during that time – that are impossible to predict. We have seen this over and over here at Global Index.”

529 Plans

For American expatriates with children, the big question is whether or not to set up a 529 plan. These are tax-efficient investment products typically managed like conventional mutual funds, which enable parents or others to save for the future higher education expenses of a particular child.

The 529 plans, which get their name from a particular section of an IRS document, are administered by the individual US states rather than by the US government, and for this reason, can vary considerably between states.

This variety of plans, coupled with the fact that the 529 plan landscape has become increasingly complicated in recent years, has resulted in a number of organisations springing up to advise parents on their 529 plan options.

Not everyone is keen on the 529 schemes, however, including Fleming. For one thing, their chief appeal is to Americans with American tax obligations, a relatively small proportion of the Global Index International’s customer base. And even in the US, only around 3% of Americans make use of the 529 plans to save for college, Fleming notes, citing a recent Bloomberg report.

According to that report, 529 plans often have “limited investment options, high fees, complicated rules and anxiety-producing investment risks”, while some have fees so high that “they can wipe out any tax savings the plans provide, and then some”.

Those who do use the 529 plans are, according to Bloomberg, which cites as its source the US Government Accountability Office, “disproportionately wealthy, with 25 times more assets than those who don’t use the plans”.

The fiftysomething surprise

One of the reasons parents should start thinking about saving for their children’s college educations early on is because many couples’ peak earning years turn out to be when they are under the age of 50, Fleming stresses – a fact he says few realise. What’s more, costs typically begin to rise when individuals move into their 50s, whatever is happening on the income side.

“Suddenly the man who was 36 when his daughter was born is 54, and is facing, say, five years of college fees and other costs related to helping his now-18-year-old daughter to complete her education and find a job,” he says.

“At 54, he’s also starting to think about retirement, and is getting a bit panicked, and wanting to put more money aside for that. So to his surprise, his fifties are shaping up to be the most expensive decade of his life, when he had always assumed it would be easier than the decades that preceded it.”

People who talk about the day when their children will finally be “financially independent” of them are not looking as closely at the actual situation as they ought to, Fleming adds.

“What is really happening here is that you, as the parent, are looking forward to the day when you will at last become financially independent of your children!”