Future Planning: How to prepare for your children’s university costs

This is a topic we are frequently asked about. Many expats living in Europe will think ahead to when their children finish school and embark on university life. In this article we look at some of the variables that can influence the cost of supporting your teenage and young adult children, and how to manage this sometimes protracted expense without it causing a cash flow stress by planning for it now.

We will present two scenarios: the first, you have a child less than 5 years of age and the second you have children around the age of 13 who may have recently commenced secondary school.

How much will it cost to send my child to university?

We will first look at some of the cost variabilities around tertiary education. The first one is geography and passports. We can only present current information, which may change in the coming decade or more, as it has over the last ten to fifteen years.

There is a vast difference in tuition costs between universities of different countries. Attending a public university in many EU countries, if you qualify as an EU citizen or permanent resident of the relevant country, can be very low cost; often between zero – no cost at all- and €3,500 per year. if you are not a permanent resident, it could be more like €15,000 pa depending on the country.

By contrast the UK is currently around £9,000 per annum for British citizens, and the US can be anything up to $250,000 for a degree! The US does have a student loan system if you qualify but you might like to lessen the debt burden your children will take on.

Australia similarly has a federal government student loan scheme for those that qualify, and like the US students can leave with a sizable debt, that they must pay down when their income reaches a certain threshold.

The above only reflects the tuition costs.

Even if your child qualifies for and attends a low cost university, at for example €2,000 per year, there are also the living costs to factor in. These include rent, clothes, food, transport, books, computers, and for many undergraduate students, beer! These living costs can easily run beyond €1,500 per month in today’s money.

The other peculiarity of the costs of a tertiary education is that they tend not to increase with inflation, as the cost of living component will, but can experience step-changes in costs driven by government policy. It is good therefore to have provisions for such changes.

Situation 1: You have children around 5 years of age

When your kids are 5 you may have aspirations for them to go to university, perhaps to emulate their parents in a particular profession, and to generally lock in those foundations for success in their adult lives.  At this age, most children have no idea what they want to do when they are older, and looking at the last 30 years as reference, they may end up in fields that don’t currently exist!
So, you don’t know if they will go to university or not, if that will be the relevant path in the future, or if they will do something completely different.

Planning at this stage therefore, is about choice. You have around 12 years to build an asset that you can choose to use to support your children as they reach adulthood, or perhaps defer for a few years, and if they don’t undertake tertiary study, use it at your discretion to help them elsewhere.

Many parents would like to be in the position to be able to offer their your adult children a lump sum to go towards a property purchase or other life event.

When we are talking about saving for the university education of a 5 year old, we are really talking about saving for their adulthood to support them in a manner that is appropriate at that time.

When we plan with this time frame we are engaging the power of compound interest! First, we advocate for flexibility; we believe you should never be locked in to any savings or investment structure that does not allow you to change your mind, close it down or alter it without exit fees. As an expat you always need flexibility.

You can with a modest investment, done consistently over a 12 year time period, accrue a sizeable asset to meet this future cost.

Let us illustrate:

Option A: save €250 per month in your bank savings account. Over the course of 12 years you will have put away €36,000. If you keep that in your bank account at 1% per annum it could grow to around €38,232. Not bad except that if you are getting 1% and inflation is 3% you are actually losing purchasing power by 2% yearly.

Option B: Invest €250 per month in a flexible investment account targeting a reasonable 6% per annum. This is twice the rate of inflation and so real wealth will be being built. In option B as with option A, you will have added €36,000 across the 12 years, however at that rate of return, with the power of compound interest, your account would grow to around €52,535. That’s €16,500 more than you put in and €14,300 more than holding it in a bank account.

Utilising compound interest and making your money work for you can help you , can have a big impact in addressing this future cost, with a small and consistent investment starting now.

But what if you don’t have that much time?

We equally speak with people who have children that might be starting university in just 5 years.

The good news is you can still make decisions and employ some prudent financial planning now that can help your future self, as well as your child, and reduce some stress along the way.

The first is that the principles demonstrated above still apply. The longer you manage an investment the greater the impact of compound interest but that is not a reason not to do it if your timeframe is shorter.

We recommend you get specific and personalised advice to take into account market timing risk, short term volatility and to clarify both what you need to achieve and how you can go about it.

When your investment timeframe is shorter the impacts of a market downturn can be greater as you have less time for recovery so prudent active management is needed.

 A five year investment of €500 per month could still grow to around €35,000 and add €5,000 in compounding growth above what you put in. this can still have a material future impact on both your quality of life and the experience your child will have at university.

One final question: what if you don’t have children or don’t foresee this future expense. The goal of paying for uni fees can be seen as an example and you can supplant it with any medium term goal you have. The principle for growth and building wealth to achieve a life goal remains the same and can be applied to many circumstances- a new car,  taking 6 months off work to go sailing, to climb a mountain or to sit in your library and read.

In summary, get advice, speak with us at Black Swan Capital and get started as soon as you can. We would love to help you on the path to realising your life goals.