The real cost of private education
Forget the headline rate of inflation - if your children are at private school it is likely to be a lot higher. According to figures from the Independent Schools Council, school fees have risen by 40% over the past five years, and 6.2% in 2008 alone.
Day schools cost an average of £9,069 a year, while boarding school would set a family back an astonishing £22,059.
Rachel Watkins, chairman of the Independent Association of Prep Schools, says fees have risen dramatically: "Fees went up quite rapidly over the past 10 years, as schools updated facilities and ensured they recruited the best staff."
Fees and increases also vary between schools.
When faced with soaring costs, the canny consumer can usually vote with their feet, but this is easier said than done if your children settle at the school.
This would explain why Engage Mutual Assurance figures show that only 3% of parents plan to switch schools to cut costs as a result of the credit crunch, compared with almost 40% who will cut down on holidays.
Even if you decide to leave, the small print in many school contracts stipulate that parents must give one or even two terms’ notice. Most schools aim to give a term’s notice of fee increases so parents won’t be caught out, but others let parents know as late as the last day of term.
If you have a problem with increased fees, it’s worth approaching the school to find out what help it offers parents. Some 31% of pupils at independent schools receive financial help.
Watkins says: "If parents get into difficulties they should come to the school as early as possible, so they may be able to work something out such as deferring payments, paying monthly instead of per term, or holding fees at last year’s prices."
However, she points out: "If the child is very young and private school is stretching their finances too far, it may be sensible not to continue."
Most schools offer scholarships, usually for gifted children, and these can pay a substantial portion of the annual fees. Many also have bursaries for parents in particular situations. Speak to your school to find out what it’s offering.
Watkins says some schools are reacting to the current economic climate by offering more bursaries, while others are offering fewer in order to keep fees as low as possible for everyone.
Cap your liabilities
If you have yet to run into difficulties, you can cap your liabilities. Some schools have schemes where you pay upfront for at least three years and receive a discount. However, this relies on parents having a big lump sum in the early days, which isn’t always realistic.
Many parents also tap into the equity in their home to free up money for private education.
It could cause problems, however, if parents eat into too much equity at a time of falling house prices, as this could them into negative equity. It’s also important to consider the fees attached to remortgaging - you could end up with a worse deal.
Some parents are using loans to fund school fees. This may bridge a gap, but it’s worth considering how you will afford the university years if school fees have already left you in a financial hole. Parents may also want to ask their family for help. For example, grandparents may be able to contribute to school fees.
In an ideal world, parents will have a chance to plan before sending their children to school. Will Cairns, a 38-year-old business owner from Oxfordshire, sends his two daughters to St Hughes prep school, at a cost of just under £40,000 and puts money aside two years in advance.
"At the moment, I’m putting aside money for later years, so whatever happens in the economy, we will have available funds," he says.
Without the right preparation, parents may well struggle - particularly where the school is unsympathetic.
Changing mortgages without moving home. Property owners chiefly remortgage to get a better deal but some do so to release equity in their homes or to finance home improvements, the costs of which are added to the new mortgage. Even though you’re not moving house, you still need to engage solicitors, conveyancing and the new lender will require the property to be surveyed and valued.
The circumstances in which a property is worth less than the outstanding mortgage debt secured on it. Although it traps householders in their properties, the Council of Mortgage Lenders (CML) says there is no causal link between negative equity and mortgage repayment problems. At the depth of the last housing market recession in 1993, the CML estimated 1.5 million UK households had negative equity but most homeowners sat tight, continued to pay their mortgages and eventually recovered their equity position.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
Generally thought of as being interchangeable with insurance but isn’t. Assurance is cover for events that WILL happen but at an unspecified point in the future (such as retirement and death) and insurance covers events that MAY happen (such as fire, theft and accidents). Therefore you buy life assurance (you will die, but don’t know when) and car insurance (you may have an accident). Assurance policies are for a fixed term, with a fixed payout, and unlike life insurance have an investment aspect: as a life assurance policy increases in value, the bonuses attached to it build up. If you die during the fixed term, the policy pays out the sum assured. However, if you survive to the end of the policy, you then get the annual bonuses plus a terminal bonus.