by Niel Fourie, Public Policy Actuary, Actuarial Society of South Africa
The short answer to the question in the title of this article is: not if you have other short-term debt.
Most schools have informed parents of the new school fees for 2015, which means that you have only a few weeks left in which to pick the payment option most favourable for your financial circumstances.
Schools generally offer a discounted rate for school fees paid annually in advance. Some offer a discounted rate for quarterly payments, while monthly payments are not discounted.
Schools with the biggest need for capital tend to offer the highest discounts for school fees paid annually in advance. But often these schools will also require you to pay the lump sum as early as possible, with some requiring that this amount reflects in their bank account before this year is over.
A survey of the 2015 school fees across a number of schools, both public and private, has shown rebates on annual payments of schools fees as low as 1.6% and as high as 10%. The most common discount rate appears to be 5%.
Is the rebate high enough?
The question to be answered by those parents who have the means to pay school fees at the beginning of the year, is whether the rebate is high enough to warrant a lump-sum payment, or whether it would be better to either invest the money or keep the money in the mortgage bond access account and pay the fees either quarterly or monthly.
For many parents, their outstanding debt will be the deciding factor. Having crunched the numbers – a variety of interest rates against school fee rebates – the conclusion reached is that your short-term debt (like credit card debt and retail cards) will cost more than any of the rebates offered by schools.
For example, say the school fees for one child amount to R37 700 in 2015. You were also lucky enough to receive an annual bonus of R40 000 (after tax). If you pay the school fees annually in advance you benefit from a rebate of 5% (R1 885) and you would pay only R35 815. But say you’re also servicing credit card debt of R40 000 at an annual interest rate of 17%. In this case, you would be better off repaying your debt first and paying the school fees on a monthly basis.
Since you’re probably used to paying monthly school fees and servicing debt, it would be financially wise to save the monthly credit card repayments that would have fallen away when you repaid that debt in your access bond. This should then provide you with a lump sum for the 2016 school fees.
That means if you apply strict financial discipline over the next 12 months, you could benefit from a massive head start in 2016 by having no short-term debt and a lump sum for school fees.
However, if you are debt free and you are about to receive an annual bonus (after tax) of R40 000, you would be wise to pay the school fees in advance and benefit from the rebate. It’s never a good idea to invest money earmarked for short-term needs like school fees, in equity-linked investments, since these investments are subject to market volatility over the short to medium term.
If your school offers a generous rebate of 10% on an annual advance payment of fees, this exceeds the returns offered by most low-risk investments. A Cape Town based private secondary school has set its annual school fees for Grades 10 to 12 in 2015 at R87 700. If you pay this fee before 31 December this year, you qualify for a 10% rebate or R8 770.
This is most likely also more than the interest rate payable on your access bond account and if you have the money you would be wise to pay the fee upfront.
Another Cape Town based private secondary school, however, charges an annual fee for Grades 8 to 11 of R97 902, but offers a rebate of only 1.6%. In this case, you would definitely be better off parking this money in your access bond account.
Tips to help you pay next year’s school fees in advance
If you are not in a position to pay school fees upfront for 2015, here are some tips to help you achieve this for 2016:
- Work out how much you need to save every month to accumulate the lump sum fee for 2016 and then work towards saving this amount either in a money-market fund or your bond account starting in January. You will then be in a position to pay school fees upfront for 2016. You then repeat this process and save for the next year. Not only do you benefit from the interest rate earned, but you also benefit from the rebate offered.
- Resist the temptation to spend your 13th salary payment and use this money as the basis for saving towards school fees for 2016. This may mean cutting down on Christmas presents or other holiday spending this year, but remember that a good education is the best gift you can give your children.
- If you are paid an annual performance bonus, park this money in your access bond and use it to pay the school fees annually in advance, especially if your children attend a private school that offers generous rebates of 10%.
- Sell things you no longer need during the year and pay the money into an separate savings or money-market account ringfenced for school fees. You will feel better once you have decluttered your house and you are putting the money to work for a good cause.