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When should you start to save for your child’s college costs? Around the time they’re born

‘There is definitely more pressure on parents to have that lump sum when the time is right’

College can be an expensive time for parents, so early preparation and saving can pay dividends. Photograph: PA

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Fiona Reddan
Tue Oct 18 2022 - 05:00

With autumn once again in the air, third-level colleges across the State are preparing for a return to the lecture theatre.

For parents, it’s an expensive time, so early preparation can pay dividends.

First thing to remember always is that you need to ensure your own future financial needs are being met before you think about that of your offspring.

“There is definitely more pressure on parents to have that lump sum when the time is right,” says Grace Webster, a senior wealth management executive with Goodbody Stockbrokers. And while you don’t know just how much you might need, an advantage of saving for education is that the timeline is clear.

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“Of all the things you’re saving for throughout your life, the timeline is set out clearly for an educational plan. Primary schools are going to start at five/six, third level at 18/19, etc. You know each stage from the time they’re born,” says Webster.

Of course, the earlier you can start, the better.

“The starting point really, if parents can afford it, is around the time the children are born,” says Webster.

And starting with the children’s allowance can be a good idea. “Child benefit payments align perfectly with long-term education saving — they are untaxed, monthly and run for 18 years, so they can be particularly beneficial to fund third-level costs,” says Webster.

The current child benefit payment for one child is €140 a month. Over 18 years, this comes to €30,240 per child.

Rising costs

But is this €30,000 enough for college? Well, one challenge in saving for college is that you just don’t know how much it will cost.

“Knowing at the outset is very difficult,” says Webster, noting that the costs of coming to college in Dublin would have been very different just a few years ago.

“When you’re talking about a time horizon of 18 years, it’s very hard to know what that end expense will be,” she says.

Moreover, providing for more than just the four years of an undergrad degree is also now more common, with more students opting to continue studying for a masters straight away.

[ Six ways younger people face an uncertain financial future ]

“Years ago, people would have done third level, worked a bit and then gone back for a masters, and maybe half-funded that themselves,” says Webster. Now parents can be expected to pay up.

And it’s certainly not cheap to head to college in a major town or city. A TU Dublin cost-of-living survey for this year gave an annual cost of €13,305 for a student living away from home in the capital, or €6,159 for a student living at home.

Over four years, this would come to more than €50,000 per child, and considerably more if they opt to stay on in college and do a master’s degree.

But it’s not just third level for which parents are footing the bill. There has also been an uptick in the number of students enrolling in private secondary schools, up by 6 per cent from 2016 to 26,682 in 2021/22, according to figures from the Department of Education. This is the highest level of enrolments in the private education sector in the history of the State.

“And that is before you add the costs of grinds, extracurricular activities and Irish college,” says Webster.

Take some risks

Some families might opt to keep savings for future college budgeting on deposit or opt for State Savings, which offer some of the better rates available. However, Webster says, it’s “very hard to recommend” deposit accounts given the potential long time horizon and the impact of inflation at present — although this might start to change in the current interest rate environment.

“The time horizon being so long gives you more opportunities to increase the risk slightly,” says Webster, adding that it gives you time to ride out any corrections in the market. “It’s about time in the market as opposed to timing the market,” she says, citing a well-known investment saying.

Consider €140 saved every month for 18 years at an interest rate of 1 per cent. At the end of the term, you will have saved almost €33,000. If you invest it however, and achieve an average annual return of 5 per cent, you will have a nest egg of more than €47,000.

Webster suggests an active managed diversified fund to help achieve that goal, but another option is a passive index tracking fund, which can have lower fees.

[ Could interest rate hikes cause a property price crash in Ireland? ]

Buy an investment property

One way of coping with rising rents and a lack of student accommodation is to buy a property that will see your children through college.

It’s a route taken by thousands of people in years gone by looking to see their families safely through their college years, with rent achieved from letting out rooms to friends of their children — not to mind ever-rising property prices — helping the investment wash its face.

These days, prices may mean that in cities like Dublin, it’s not as feasible as it once was.

“We used to see more of it but this year has been very different,” says Brian Dempsey, who runs DNG’s Stillorgan office, noting that typically he’d receive a number of calls along the lines of: “My daughter is starting in UCD, do you have anything for about €400,000 in the area?”

This year, however, those calls haven’t come, perhaps down to several years of sharp house price growth.

Buying a property while your children are still young can also bring with it some risks. After all, there’s no guarantee that just because you expect your children to move from Roscommon to Dublin for third level, as an example, that this will actually happen.

“You’re taking a chance that by the time they get to 18, they will actually end up in Dublin,” says Webster. So the decision really should be considered as more of a long-term investment.

Where parents are in the market for a property, Dempsey urges them to do their due diligence before buying.

Rent control rules limit increases to about 2 per cent a year, but if the property they are buying has been let at below market rates for some time, it means that a rent increase is limited — even if the current rent still remains far below what the market would accept.

“Legacy rents, or ‘good Samaritan rents’, are hurting investors,” says Dempsey, adding that if parents just want the property for their children, this isn’t an issue. But if they want to rent out rooms to other students, it could be.

[ Thinking of renovating or extending? Here’s your to-do list ]

Getting help

Another way of boosting your education saving fund is by getting help from grandparents through the small gift exemption scheme. This allows each grandparent to contribute €3,000 each year per child (so €6,000 for a couple) tax free.

And if you end up with a surplus at the end of it all? “Happy days,” says Webster, noting that this could be used instead towards a deposit for a house.

The cost of education

Private (day) school fees 2022/2023
  • Alexandra College: €7,992
  • St Andrew’s College: €7,700
  • Holy Child Killiney: €6,400
  • Bandon Grammar, Cork: €4,016
  • Nord Anglia: €18,029-€27,771
Annual college fees*
  • Undergraduate contribution fee: €3,000
  • MSc Applied Psychology, Trinity College Dublin: €9,370
  • MSc Finance (Corporate Finance), University College Cork: €10,630
  • MSc Software Engineering, University of Limerick: €6,500
  • MSc International Business, Smurfit School, University College Dublin: €15,000

*based on European Union applicants

College accommodation

Rent (campus accommodation)
  • UL, from €5,004.20
  • UCD, from €6,389.64
  • Waterford Institute of Technology, from €4,685
Buy
  • UCD: Two-bed semi-detached, Clonskeagh, South Dublin, €445,000, dng.ie
  • UL: Five-bed semi-detached, Castletroy, Limerick, €195,000, daft.ie
  • Dublin City University: Two-bed apartment, Grace Park Manor, Dublin 9, €345,000, daft.ie