Key Post Saving for a "College Fund" - 3 to 20 year term.

[Brendan Burgess]

This comes up a fair bit, so here is a Key Thread on the topic.

1) You should look at your entire financial position when doing any financial planning.
2) You should not have a separate account for a College Fund.
3) The best way to fund college fees payable in 10 years is to maximise your overall wealth in the meantime.
4) If you have a mortgage (or other borrowing),the best way to maximise your overall wealth is to pay down that mortgage
5) If you pay off your mortgage earlier than planned, you will have lower repayments when it comes to paying college fees and should be able to fund them out of income.
6) You should also consider maxing your pension contributions instead of parking money in a College Fund account. Although you probably won't be able to access this fund when you need to pay college fees, you will have a much bigger pension fund and could take a pension contribution holiday at that stage.
7) When planning your finances, look at all your assets - for example, do you have shares in your employer or do you have an investment property which you could sell if you need to to fund college fees?
8) You should also look at potential inheritances which you might get.
9) It's probably not a good idea to buy an investment property now so that your kids can use it when they are in college in 10 years' time.

 

[Brendan Burgess]

The big mistake a lot of people make is to put the child benefit and other money into a deposit account on the basis that they are "risk averse". The risk might be quite small over a year or two, but the longer the period the greater the risk that your savings will lose a lot of their real value due to inflation.

In particular, it's crazy to have money on deposit at 0% while paying 3% interest on a mortgage.

If you have €10,000 today in a deposit account, it will be worth €10,000 after 10 years, if it earns no interest.
If you pay that off your mortgage today, you will save €3,400 compound interest on it for 10 years.

In other words, your mortgage will be €13,400 lower than it would otherwise have been.

(You could invest the €10,000 in a fund, and this would be better than leaving it in a deposit account, but you might not get a return of 3% tax-free on it. The return could be higher or lower than 3%, and it will be subject to charges and taxes. So paying off your mortgage is better than investing in a fund. )

If your mortgage is lower, then your repayments will be lower so you will have more money with which to pay college fees.

Paying the money off your mortgage has the added advantage that it will reduce your Loan to Value ratio which means you could get a lower interest rate on your entire mortgage. Or if you trade up in the meantime, having a lower mortgage will help you trade up. You might trade up just before you need money for college, and could at that stage take out a bigger mortgage than you need so that you can use the extra cash for fees.

 

[Brendan Burgess]

If you do decide that you want a separate fund instead of paying down the mortgage, then you should invest your savings in an equity based fund and not in a "safe" deposit account.

Over a period of 10 years or more, it is much more likely to rise in value and keep pace with inflation than a deposit account.

 

[Brendan Burgess]

Some people have suggested buying an investment property now which their children could use while in college in ten years.

This might work out, but a lot could go wrong with it...

• You buy in Dublin but your children want to attend college somewhere else.
• You might not be able to get the tenants out when you need the house back either due to difficult tenants or due to new legislation saying that it is no longer a valid reason to terminate a tenancy so that your children can use it.
• In ten years, there may be great on-campus student accommodation and your kids might prefer that to living miles away.

It's probably not a bad idea to buy a property for your kids to occupy while they are in college. But wait until they have decided which college they want to go to.

 

[Brendan Burgess]

Review all such long-term planning from time to time.

In particular, review this plan annually from about 5 years before you need college fees.

If, at that stage, it seems unlikely that you will be able to afford to pay the fees from income, then it might be right to stop overpaying the mortgage or contributing to a pension and start building up a fund.

Brendan

 

[Brendan Burgess]

The biggest criticism of the paying down your mortgage is that you may not be able to access the cash when you need it to pay college fees.

This is certainly true if you are talking about paying €1,000 off your mortgage today and you need the funds next year.

But with 10 or more years to go it's not correct for a few reasons.

1) By paying down your mortgage over the next 10 to 15 years, you will have much lower mortgage payments when you need to pay college fees.
2) It's quite possible that you may trade up in the next few years - at that stage you can take out a bigger mortgage than you need thus "releasing" the money you have overpaid.
3) There could be innovation in mortgages in the meantime. For example, permanent tsb treats overpayments as a credit to the account - i.e. the opposite of arrears. So if you have a permanent tsb mortgage, you could take a complete mortgage break while using up your overpayments.
4) You should review the strategy with 5 years to go. At that stage you can stop your overpayments and build up a college fund.

But the more general point is that you should not set any plan in concrete over a very long-term. Do what is best today to maximise your long-term wealth. And the best way to do that is to pay down your mortgage.

 

[NoRegretsCoyote]

Some people have suggested buying an investment property now which their children could use while in college in ten years.

To me this only makes sense if at least one, and probably two, children will be in a particular city for undergraduate years. You won't know this until very close to the time, or even after they've started.


Otherwise if you have €250k in the bank it makes sense for your kids to live in a €250k apartment rather than you spend €50k on rent for two kids for 3 or 4 years and have €200k in the end. But don't forget stamp duty and fees on purchase and sale, maintenance, risk of capital loss, etc.