How to manage the soaring costs of private school fees
Most parents send their children to private school because they believe it will give them the best possible start in life — to be happy, develop their talents and social skills, and get the best possible exam results.
When the A-level results arrive this month, many parents who put their kids on that journey 14 years ago will find out whether the investment has paid off — at least in terms of exam results.
But what about those who stand at the beginning of the road, considering the costs and sacrifices of private education? You need to know what you’re letting yourself in for before handing over the first school scholarship check.
How much do you need?
Using historical data from the Independent Schools Council (ISC), we’ve calculated the cost of raising one child – let’s call her Lucy – and eagerly await this year’s A-Level results. Lucy started private education as a day student at the front desk and stayed until the end of Year 13. The school charged average fees.
By our calculations Lucy’s 14 years of education cost her parents about £179,000. If her cousin Edward had boarded from the age of seven, his parents would have paid just over £365,000.
Inflation has undoubtedly contributed to the increase in rates over the past 14 years. But our research also shows that school fees have risen more than 1.6 times consumer price inflation over this period. If Lucy’s parents had looked at the fees in 2008 and made sure they rose in line with CPI inflation, they would have undercut nearly £25,000. The parents of lodgers would have been nearly £48,000 short.
What can you expect when your child travels this year? Based on this year’s costs and without taking into account inflation and price increases, private education would cost on average around £218,000 for a day student and £427,000 for a boarder.
Keep in mind rising prices and the numbers skyrocket dramatically, as our table shows. For example, if fees increase by 5 percent per annum, the cost increases to £323,613 and £654,919 respectively. Tuition is not the only expense. I tell families to bring at least another 10 percent to cover additional costs, such as uniform, sports equipment, music lessons, and school trips.
How to reduce costs?
There are a few ways to reduce costs. Find out if the kids are eligible for scholarships or grants. About one in three pupils receive help with paying, often from the school itself. Scholarships are often means-tested and can be particularly generous. For almost half of all students with means-tested grants, more than half of their tuition fees are reimbursed and about one in seven pay nothing.
In addition, most independent high schools offer scholarships to students who are exceptional, whether academically or in the fields of music, sports, drama, or the arts. These benefits — which are less likely to be based on income testing — typically mean a reduction in benefits of between 5 and 10 percent.
Research possible sibling discounts if you are considering enrolling a second child in the same school.
If you pay a lump sum upfront to cover all or part of your child’s education, the school may offer a discount or withhold surcharges. But beware: The Financial Services Compensation Plan does not cover prepaid school fees. Your money could be at risk if the school runs into financial difficulties. And before you commit, ask what would happen if your child was unhappy and wanted to leave after a few weeks. I’ve known this happens. How much would you get back?
Private education is affordable for many families only with the help of grandparents. I always remind clients that whatever they offer a grandchild, they may feel obligated to provide everything. And it may be several years before they know how many grandchildren they will be blessed with. This can be a very expensive act of generosity.
You may want to set aside the money up front. Grandparents may prefer this approach as it can help with estate tax planning (IHT).
If you donated a lump sum within three years of your death and your net worth exceeds the IHT fees, HM Revenue & Customs can reclaim 40 percent of the gift in IHT. Dies between three and seven years after the gift and the rate charged will decrease downwards – down 8 percent per year. If you donate a large amount early, the seven-year IHT clock may be ticking.
Smart investing of this money can offset some of the pain of inflation. Children cannot own shares except through a Junior Isa, but they do have the same tax deductions as an adult, including a personal deduction of £12,570 and a capital gains tax of £12,300. Giving the money to the child’s parents to take care of can cause them tax problems as all income and profits are offset against their own tax deductions.
Perhaps the easiest answer is to set up a “bare trust”. Here, the grandparent’s gift is registered through an account set up by the parents in their name, but identified by the grandchild’s initials – essentially a “nominee account”. Any income or profits generated will be treated as the grandchild for tax purposes.
One potential downside is that the grandchild takes control of the money when they turn 18. The alternative is a discretionary trust. Here, the administrators you designate remain in control as the grandchild matures. There are significant legal and tax implications for discretionary trusts.
Whichever model you choose, once you make the gift, you can’t ask for the money back – even if you get into a fight with your grandchild or your own financial circumstances change.
If you don’t state everything in advance, but pay regular monthly or installment fees, consider whether it’s from “surplus.” Such gifts are exempt from IHT. Set up a regular standing order and keep a record of income and donations to prove to HM Revenue & Customs that this is really a surplus. Your standard of living must be maintained and you must not dive into your savings to pay fees.
Let’s hope this year’s A-level results bring a just reward to everyone who passed the exams — and to the parents and grandparents who have supported them thus far, both financially and emotionally.
Shirley Coe is a senior private banker at Weatherbys Private Bank