How to pay for kids' varsity studies

Options for parents include taking up endowment plans and tapping CPF funds

Magdalen Ng

The value of an education is priceless, but it certainly comes with a big price tag.

Tuition fees for a four-year economics degree at a local university will set you back by at least $30,000, and a similar degree overseas may cost northwards of $200,000, after taking into account living expenses.

Most parents hope to be able to fund their children's education, but the hefty sums can be daunting.

Except for the very privileged few, coughing up a big lump sum is tough, which is why experts say it is important to start saving as soon as possible.

MoneySense, the National Financial Literacy programme, recommends that the first step to take is to assess how much you have set aside currently for your child's tertiary education.

Next, parents should estimate how much their children's tertiary education would cost, factoring in tuition fees, other expenses and inflation.

The final thing to do is to work out the shortfall and figure out how to make up for it.

AIA Singapore has an education planning calculator on its website, which allows you to factor in inflation and the effects of compounding interest when calculating how much you will need to save and for how long.

Prudential Singapore's senior vice-president and chief marketing officer, Mr David Ng, says the best way to save depends on expectations, time horizon and risk profile.

For example, those with a longer time horizon will probably be able to opt for a less risky and lower return product compared to those with a much shorter timeframe.

However, no matter what your timeframe is, it is important to note that there is no free lunch: the higher the potential return, the higher the risks.

A non-capital guaranteed product, for example, may mean that it is possible to lose some or all of the money that you have put aside.

CPF

Central Provident Fund (CPF) members can use part of their CPF savings to pay for their children's tertiary education at approved institutions in Singapore.

CPF savings cannot be used for overseas education.

CPF members can use only up to 40 per cent of their accumulated Ordinary Account savings, or the balance in the Ordinary Account after setting aside any amounts reserved for housing or other schemes (if any), whichever is lower.

Upon reaching 55, members may not be able to use their Ordinary Account savings for tuition fees if they have not met the Minimum Sum and the prevailing Medisave Required Amount.

From July 1 this year, CPF members who turn 55 between then and June 30 next year will need to set aside a minimum sum of $148,000 in their Retirement Account.

The money taken out from your CPF savings under the Education Scheme will have to be repaid, including the interest which you would have otherwise earned if the amount had not been withdrawn.

Your child will have to make the repayment in cash, and it will start one year after your child graduates, or one year after your child leaves the course, whichever is earlier.

Personal loans

Most banks offer personal loans that may help fund a child's education, but Mr Brandon Lam, senior vice-president and head of consumer investment and insurance products at DBS Bank, advises parents to plan ahead and start saving early rather than take up a loan.

Endowment plans

Prudential's Mr Ng explains that endowment plans generally offer a relatively more stable form of savings.

Some plans are capital guaranteed, while others are not, which means that you may not even receive the total sum of money that you originally put in.

For example, the PruSave Limited Pay plan allows the customer to pay annual or monthly premiums for either five or 10 years.

The policy will mature in 15 years from the time the first pre-mium was paid.

"One of the advantages is the potential for an extra non-guaranteed bonus feature of the product, which varies according to the performance of the participating fund," he says.

Mr Ng notes that many endowment plans may include a protection element, unlike pure savings plans such as fixed deposits.

Mr Lam says there are some endowment plans that provide insurance coverage on death, total and permanent disability or accidental death.

"In the unfortunate event where the parent dies or comes down with a critical illness, the claims proceeds can still fund the child's education, unlike other investment alternatives, which are likely mark-to-market upon liquidation," he says.

The downside is that endowment plans are more illiquid than bank savings or fixed deposits.

Currency risks

Mr Lim Wyson, head of global wealth management at OCBC Bank, points out that one of the key risks in preparing for an overseas education would be foreign exchange fluctuations.

For example, he says, since 2008, the Australian dollar has traded widely against the Singapore dollar, between a low of around 0.9 and current levels of around 1.225.

He adds that there are ways to hedge against excessive currency strength, such as dual currency investments, which are short-tenor instruments that allow investors the chance to get the investment converted into an alternate currency at a lower rate while generating yield in the interim.

However, this is quite a risky product as there is no cap on the downside risk potential.

Parents can also regularly purchase currencies.

DBS Bank offers the DBS Multi-Currency Autosave, which allows them to plan ahead and purchase currencies they need when the rates are most advantageous to them.

"They can continue to enjoy interest earned on their savings and later remit the necessary funds without having to incur additional currency conversion charges," Mr Lam explains.

Insurance coverage while overseas

Ms Joanne Yeo, head of product and funds development at AIA Singapore, says that while parents focus on investing for their children's education and future, they tend to overlook the need to protect their children against unexpected medical bills.

Most life insurance policies provide worldwide coverage as long as they are in force, but most medical insurance policies in Singapore provide the cover for hospitalisation in Singapore, with substantial reduction in coverage when hospitalisation happens overseas, according to Great Eastern's chief product officer Lee Swee Kiang.

Most overseas universities also require students to be covered by hospitalisation and medical insurance schemes during enrolment.

DBS' Mr Lam says: "Students may also wish to consider a personal accident plan for added protection, but they will need to ensure that the plan will cover them while they are overseas as most of the personal accident plans offered in Singapore only provide local coverage."

Invest, The Sunday Times, May 19, 2013, Pg 35-36