Save now for future education
Babies don't come cheap, least of all if baby's future holds a tertiary education. Parents and prospective students hoping to avoid a big bill might want to do their homework.
Among the many parenting worries and woes, saving for bub's university education usually ranks low on the list, even if it is never far from mind.
Most families have a hard time meeting the mortgage payments, let alone making monthly instalments on an education savings plan for a still-babbling baby, whose scholastic calling is as uncertain as the child's first steps.
Still, it is a financial reality that parents cannot ignore if they hope to see their grown child off to college.
If there is any lesson to be learned from the sorry situation of today's students - whose collective debt now towers above $10 billion and is expected to double in the next decade - it is that saving today for tomorrow is not a half-bad idea.
Tertiary students today are leaving school with an average of $28,000 in the hole, and the debt burden is growing at an exponential rate.
Based on its tri-annual survey, the New Zealand Union of Students' Association (NZUSA) found that the amount of money students were borrowing to get through school increased a whopping 54 per cent between 2004 and 2007.
Pending the association's 2010 survey, the debt swell since 2007 remains unknown, but indications are that the situation has not improved.
With interest-free student loans, the cost of borrowing isn't the issue.
Student lobbyists say restrictions on living allowances, fee hikes and cost-of-living increases have all conspired to make life tougher financially for students and those parents who decide to help them.
Amanda Montgomerie, of Christchurch can attest to it. The 23-year-old will graduate from the University of Auckland in June with a master's degree in arts administration owing $55,000.
While Montgomerie believes she could have reduced her costs by studying at her home university and living with her mother, she didn't want finances to dictate her career ambitions.
"I thought why sacrifice something so important to me because of costs?"
That said, her decision to press on with a master's degree in arts was influenced by a recognition that paying off her student loans would likely be faster with a postgraduate degree.
"I'm very realistic with the current climate. I'm going into a competitive industry, which is why I'm going into management, because it's more about the business side of the art world."
While discouraged by the recession and rising unemployment, currently at its highest level in 10 years, Montgomerie says she isn't losing sleep over student loans.
She says debt has become an accepted part of student life for her age group.
"I know it that it will take a long time to pay off, but my friends and I are of the opinion we're going to be the renting generation anyway, because we all carry so much debt."
Amanda's mother, Viv, wishes it were otherwise.
While university was always a goal for her children, she says the financing of it was sidelined by small incomes and high mortgage payments.
She finds herself now advising younger parents to think ahead and to be disciplined about saving, however difficult.
"I am always saying to parents now: 'Put away for their secondary education'."
Education economist Paul Hansen says parents such as Montgomerie can hardly be blamed for not having the foresight to plan ahead. When people her age were starting families, user fees at university didn't exist. Some were even paid to go to university. For that reason, he believes education savings has not really registered in New Zealand to the extent that it has in other countries.
But in the current environment it probably should, he says.
The abolishment of university fees, while not impossible, is unlikely. Hansen suggests parents with tertiary ambitions for their children would be smart to start saving sooner than later.
"The way the world looks now and the way things look in New Zealand, I'd say it was prudent," says Hansen, a lecturer at the University of Otago.
So just how much should a parent or prospective student be putting away in savings, assuming they can?
The Australian Scholarship Group calculates that a child born in 2007 would require more than $100,000 for a four-year degree by the time they reach university age.
Similar forecasts for New Zealand are difficult to find, but estimates prepared by New Zealand Financial Planning put an undergraduate degree in the same range, and that's just for tuition.
Hansen says the biggest sacrifice students make in going back to school isn't the cost of their education but the money they give up by taking themselves out of the workforce.
Yet the long-term economics, as measured by earning power, work decidedly in favour of those who further their skills and education beyond high school, he adds.
Degree holders and those with higher qualifications make hourly earnings 64 per cent higher than those with no qualifications, according to findings contained in New Zealand's Income Survey for 2006.
Financial adviser Sheryl Sutherland says while there is little dispute that advanced education pays off in most instances, there is no parental guarantee that one's child will choose to go that route.
Sutherland advises parents who want to save for tertiary costs down the road to do it through an account in their own name rather than the child's.
"Trying to work out what your child is going to do in 10 or 15 years, you've got to have a crystal ball, so you want to have as much flexibility as possible," she says.
For the same reason, Sutherland isn't a fan of retail structured products specialising in education savings plans. Often such plans are conditionally tied to the recipient going to university, and if they don't, some of the profit made on the investment is forfeit.
The upside of such products is that they might have the intended effect of incentivising a child to pursue a post- secondary education.
Six years ago, Robert O'Connor set up such a fund for his then one-year-old daughter with that goal in mind.
"Peer pressure is such a strong thing and what I'm trying to do with my children is put them in an environment as much as possible where people are carrying on with their education, and this just seems to be part of that."
He decided not to do the same for his youngest daughter, because he says he is more realistic about the parental proclivity to effect outcome. Instead, he is looking into alternate investment vehicles that are less restrictive.
For parents in a position to apportion income into education accounts, Sutherland suggests the stock market is the best the way to go.
"If you've got a 10-year timeframe, the risk factor in equities reduces considerably," she says.
"The only downside with that is when you're approaching the time when people want to draw down on the fund, but a good financial planner will be on top of that and will transfer money out of equities on an averaging basis or at an appropriate time. I think that works out far better for parents."
But is money in the market or in a managed fund really the best way to go?
Some might argue that a more expedient way to finance a university education is to throw every disposable dollar you have at the mortgage and other debts, to minimise interests payments and free up cash.
Sutherland says it is a viable option, but one that is contingent on a high degree of discipline and commitment from the income makers.
She says individuals need to assess their whole financial situation to determine the best course of action.
Setting up an education savings plan may be all well and good, but in the absence of other financial securities, such as adequate insurances, it could be all for nought.
"I do see a lot of people who want to put money aside for their children's education as a separate issue, but my advice would be to pay down debt and do some risk management first.
"You are better to put money into that and protect your family that way, than worry about the education thing. That's a step down the track, isn't it?"
The cap-and-gown ceremony may be only a daydream for Montgomerie's youngest daughter, but by her own choosing, she is plotting a debt-free path to university. "She is aiming to pay off her debt while she is at home, and does not want to be crippled by that."
Legions of future students are bound to find themselves in a similar situation, given the scarcity of parents in a position to finance their child's future education.
Hansen suggests that rate of return linked to the various degree programmes could become an increasingly important criteria for students weighing up what career path to choose.
The harsh reality is that some degrees pay better than others, at least in terms of their debt-slaying potential.
Lost in the debate over the escalating costs of tertiary education is the more positive point that earning power has dramatically improved since the fee-free days of university, says Hansen.
"So you come out of university and you've run up this big debt, but if you're good at what you do - take an economist, for example - you could walk into a job paying $40,000 to $60,000 a year, and in another two to three years, you'll have another $20,000 on top of that.
"So students these days are worse off in terms of debt, but the ones who have a good degree have a much higher earning potential."
Debt considerations aside, Hansen says students looking for long-term career satisfaction as well as personal happiness need to weigh up various factors.
"Is it a good degree? Is it from a good university? Is it a worthwhile subject? Did you enjoy it? If you've got a huge debt and it is a crap degree from an awful university and you had a horrible time, they've really bought it. It's all common sense."