If you’re a parent like me, one of your most important financial goals is to save and invest enough for your child’s college education. Even though there is an emerging trend in western and developed countries of people opting out of college, we in developing countries do not have the same luxury. If we ever want to ensure that our children stay out of poverty, have high paying jobs (if they choose to), and receive a modicum of respect from society, they need to attend and finish college. Periodt.
Not saving enough money for your child’s college education is the stuff of a parent’s nightmares. This post explores the important factors to consider when saving and investing for your child’s college education and some suggested strategies.
IMPORTANT FACTORS TO CONSIDER
When investing for your child’s college education, you need to consider the following factors:
1. Current tuition and other fees of the prospective program and university
If your child is still very young, they most likely do not have strong opinions yet about which degree they want to complete or what university they want to attend. On the other hand, there are also some parents who have very strong opinions about these matters.
My take on this is to consider which university and program you can afford and/or willing to pay for. Also consider if your kid has aspirations for business, medicine, or law school or other advanced degrees and whether or not you want to help them pay beyond a bachelor’s degree.
2. The average annual increase in university tuition and other fees
The average increase in tuition fees (which in this article includes both tuition and miscellaneous fees, for simplicity) of all higher education institutions in the Philippines this decade are as follows:
- 2017-2018, the average was 6.93%
- 2016-2017, the average was 5.25%
- 2015-2016, the average increase was 6.48%
- 2014-2015, the average increase was 8.13%
- 2013-2014, the average increase was 8.04%
- 2012-2013, the average was 10%
This means that for the 2010s, the average increase in college fees is 7.47%.
But, if we look further and include data from the 2000s, we will have a different figure.
|Year||Average Tuition Fee Increase
Data for the average tuition fee increase from 2002 to 2010 sourced from the Philippine Education Research Journal. No data from the school year 2011-2012 and 2018-2019 were found.
If we include data from 2002, then the average annual tuition fee increase nationwide is 9.13%
Of course, this does not mean that the university your child will attend will have tuition fee increases every year. The Commission on Higher Education (CHED) has final approval of all tuition fee increases of universities, both public and private, in the entire nation.
Further, CHED does not automatically approve all requests from universities. But, there’s also nothing stopping the universities from submitting to CHED their requests to increase their fees year after year.
So from my point of view, you should err on the side of caution and plan for the worst. Assume that tuition fees will increase an average of 9.13% annually.
3. How much investing time you have left
Don’t be like those people who leave saving and investing for their’s child’s future at the last minute or when there’s extra money.
The sooner you start, the less money you need to be able to meet the target amount. For long-term investing, including investing for your kid’s future, time and compounding are your friends.
Let’s say that your precious newborn baby girl needs to attend the De LaSalle University in 18 years to study business so she can be the Philippines’ next tycoon. As of 2019, the annual cost of attending DLSU is estimated to be around Php 205,000 to Php 220,000. Let’s use the upper limit for this exercise.
This translates to the following annual tuition:
- First year – Php 1,060,272.44
- Second year – Php 1,157,075.32
- Third year – 1,262,716.29
- Fourth year – 1,378,002.29
Which totals to Php 4,828,066.34 for a four-year undergraduate degree. To calculate the future value, you can use an online future value calculator such as this one by Investopedia.
If you don’t make any investments ahead of time and decide to pay directly out of pocket, you need to produce Php 4,828,066.34 from your income for a four-year degree in 18 years.
You have to earn that amount to pay for your precious baby girl’s college fees. That’s pretty steep and out of reach for most parents, even if we account for future increases in income.
Compare that to the parents who invest early.
Suppose these parents have the foresight (as well as the means) to invest as soon as their child is born. They can invest Php 1,000,000 (Php 250,000 x 4 years) in an instrument that grows at least 9.13% annually and leave it there for 18 years.
By the time their kid is ready to start college, they will already have Php 4,819,420.20 thanks to the power of compounding.
To make similar calculations, you can use an online investment calculator for compounding, such as this one from calculator.net
THE SIMPLEST WAY TO INVEST FOR COLLEGE
Now out of the three, two factors you can control while one is out of your hands.
You can’t have any control over how much the universities will increase their fees. And since we don’t have a crystal ball that will tell us how much the fees will increase in the future, we can only base on historical data.
But you can control (1) where the child goes to college and for what degree (at least for planning purposes) and (2) when to start saving and investing.
With these in mind, I think the most logical way to go about investing for college is to:
- Budget for the most expensive university and program you are willing to pay for. Compute how much the program will cost. (Current annual tuition x number of years = target number)
- Start investing as soon as the child is born
- Invest the money in an instrument that will gain you an average of 9.13% annually
Depending on the university and program you chose and where you are right now financially, this method may or may not be the best option for you. I just think this is the simplest and most logical way to invest for college.
If you’re lucky enough to be able to prepare for your kid’s college fund as early as they’re born, congratulations!
But for those of us who do not have the means, don’t despair. Again, this is the best-case scenario. Personally, I didn’t have the means to use this method myself; I only just started investing for my child’s college fund years after he was born.
You can still use this method even if it’s already a few years since you had your baby. Just know that you have to put in a bigger principal since your money has fewer years to compound.
WHAT DOES IT ALL MEAN IN PRACTICE?
So, taking these factors into account, we now need to ask the next question:
What investment vehicles can give us at least 9.13% annually?
In the Philippines, the only legitimate investment vehicle that has historically consistently produced returns higher than the 9.13% annual average tuition fee increase is the stock market. Specifically, the Philippine Stock Exchange index (PSEi).
From 1987 to 2018, the PSEi’s averaged a 15.41% growth rate annually.
If you invest 100% of your kid’s college funds in the PSEi (through an index fund such as First Metro Exchange Traded Fund), in the long-term, you make more than the average annual tuition fee increase.
But… the PSEi is also very volatile. It’s very rare for the PSEi to produce positive growth for 3-4 years consecutively.
As a matter of fact, in the PSEi’s 32-year history, it had positive growth for 5 consecutive years only ONCE in the period 2003 to 2007. It produced positive growth for 3 consecutive years in the 1991-1993 period.
So right before or during the time your kid is in college, there is a possibility that the value of your investment in the PSEi will drop.
My point is, although the PSEi is the best place for you to invest your kid’s college money, you need to either:
- Balance the portfolio with a more stable investment instrument such as retail treasury bonds (RTBs) or time deposits. Balancing will lower the growth rate of your money but will reduce volatility; OR
- Invest the entire fund in the PSEi but (1) keep an eye out as to when will be the best time to withdraw to place the fund in a more stable instrument (2) in the years leading to your kid entering college.
Opening a savings account or buying an educational plan to fund your child’s college years will not be enough. Even putting the money in the PSEi is not enough.
Parents need to be careful to withdraw their money from the PSEi at the right time and transfer it to a more stable instrument to account for the PSEi’s volatility. Something that is not easy to do because we don’t have a crystal ball to predict the movement of the stock market.
Some parents may not be comfortable investing for college by putting the entire thing in the PSEi. I understand.
But, I really can’t find another legitimate investment that historically outstrips the annual average tuition fee increase imposed by universities. If anybody can point me to one I’d be grateful. I will continue looking into ways to invest for college and plan on writing more about this topic in the future.
It’s just that the usual options: savings accounts, educational plans, and variable life insurance (VUL), will not earn enough to account for the annual tuition fee increases.
Educational plans and VULs also charge expensive fees for their products. Plus, I don’t want to be beating a dead horse but I know the fall of the pre-need college coverage in the Philippines is still a recent and painful memory to many in my generation. I had several friends from high school who lost their college money because of this fiasco.
There needs to be a balance between being extra careful in selecting the investment vehicle that will not lose your kid’s college money AND can grow at the rate of 9.13%, the average annual tuition fee increase.
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