Three smart ways to save for your child’s college education

The cost of educating a child from primary school to college is estimated to be well over €60,000.

By far the biggest expense is incurred during the time when your child is in third level education.

As almost 59,000 students received their Leaving Cert results this week, HerMoney financial advisors are providing parents with advice on smart ways to save for their child’s college education.

Recent research estimates it costs approximately €12,000 a year to put a young person through college, if they are living away from home. As many students go to college for four years, the total bill could stretch to €48,000 - or more.

With a bill like that, the sooner you start to save for your child's college education, the better.

So how much would you need to save a month to have enough of a war chest together by the time your child goes to college? And what type of investments should you consider to get you there?

“The most important word when it comes to saving for your child’s education is ‘start’. The earlier you start, the easier it is to manage your finances,” said Karen Goodliffe, Director of HerMoney financial advisors.

“For example, if your child is starting college in 16 years’ time, and living away from home, you would now need to save €250 per month in order to accumulate €48,000 by 2035. Whereas, if your child is starting college in four years’ time, in 2023, you would now need to start saving €1,000 per month,” she added.

Of course, with professional financial advice, you can find the solution that works best for you and your family.

If you saved your child benefit of €140 per month for one child, from birth, you would accumulate just over €30,000 by the time they reached 18.

That’s still over €5,000 short of what you would need to cover the average three-year college degree or €17,000 short if you consider a four-year degree.

Therefore, where and how you invest your savings is important to ensure you earn growth on your money and that your money works hard for you.

1. Regular Saver Account (Short Term Saver)

The first consideration when looking at how and where to save your money is how long do you have? If your child is going to college in the next 5 years then realistically you only have one choice of where to save and that is into a bank or credit union deposit account.

This is because there is not enough time to look at investment options and you are foregoing growth for safety. The assets which tend to give the best returns over the long term – stocks and shares – can be volatile in the short term.

The best advice here is to save as much as you can afford and shop around the various institutions to try an achieve the highest interest rate possible. Comparison websites such as www.bonkers.ie are useful in helping you compare the various deposit interest rates depending on the amount you are able to deposit or save. At the time of writing, rates of up to 1.75% per annum are available.

Any interest on savings lodged in Irish banks is taxed - DIRT (Deposit Interest Retention Tax) at currently 35% (it will change to 33% in January). For PAYE earners under the age of 66 with unearned income exceeding €3,174, PRSI (Pay-related Social Insurance) will trim off a further tidy 4%.

2. State Saving Scheme (Medium Term Saver)

The State Savings Scheme is an attractive option for parents who want to save a lump sum of money for the medium to long term. The huge benefit with this type of account is your savings are not subject to any DIRT.

The interest rate is fixed. For example, it’s currently 1.5% AER fixed on a 10-year bond. For example, if you deposited a lump sum of €10,000, this means at the end of 10 years, if you do not touch your money in the account in the interim, you could earn interest of over €1,500. Once again, these accounts come with many terms and conditions, so read carefully before deciding what is best for you.

3. Long Term Savings and Investment Plans

Unfortunately, interest rates are currently at an all time low so if time is in your favour and there are more than 5 years before your child goes to college, there are alternative investment options to bank deposit accounts.

There are a number of investment vehicles available at all levels of investment risk. Our most popular options available are investment and savings policies through the various life companies.

These policies enable you to invest in a range of funds from low to medium to high risk and will accept lump sums of money as well as regular monthly savings from as little as €75 per month.

Many of our clients opt to invest in multi-asset funds within these policies which spread their money across a number of different asset types, such as shares, property, bonds and commodities.

Investing in multi-asset funds means the value of your investment has the opportunity to generate higher return over the longer term in order to both grow your money and also to try and ensure you beat inflation.

There are on average four or five different multi-asset funds available, which comes with various levels of risk attached. It’s our job, as financial advisors to properly evaluate and assess the needs of each client and advise them on the investment that will work best for them.

Growth on these policies is subject to exit tax of 41% either on encashment/partial encashment of the investment or the 8th policy anniversary if sooner. The growth is not subject to PRSI however.