Cheryl Howard, Managing Director of Maitland Family Office in South Africa, discusses some of the implications for South African families planning overseas studies for their children. This article was first published in Personal Finance.
Millennials are by instinct geographically mobile, and many young South Africans want to study overseas. Indeed, among our client base it is common for families with school-leaving children or graduates with a first degree to be attracted by the thought of attending a foreign university, at either an undergraduate or a postgraduate level.
Popular countries for overseas study are the UK, the US and Australia, with the Netherlands growing in popularity.
Competition is fierce to be accepted into a foreign university. Such is the demand that entire cottage industries are springing up in South Africa to tutor students to make the grade, such as training for the SAT exam, which is the US university admission test.
For families who are set on helping their children to study overseas, there are many considerations to take into account. Aside from the softer issues such as different time zones, homesickness and empty-nest syndrome for the parents back home, there is the very real “hard” issue of financing an offshore education.
It certainly comes at a cost, with tuition at a UK university at about £14000 a year. At the current exchange rate that means you will need a pre-tax sum of about R600000 for a single year’s tuition. You can easily double the figure when including accommodation and subsistence – let alone travel to and from South Africa and medical cover – and so you are probably looking at about R2 million to fund an “offshore” student for a year. Help!
Here are some broad points you might want to consider:
Start planning early, ideally while your child is in primary school, and get a long-term education-funding plan into place, within the broader family wealth plan. This kind of investment planning, taking into account tax, exchange control, currency trends and the need to diversify your portfolio, needs expert advice.
One of the questions we are asked is whether to finance an offshore expense, such as education, from local or offshore savings. It is impossible to answer this question in isolation, and again the long-term family wealth plan needs to be taken into account.
What many people do not know is that a special South African Reserve Bank application can be made to export funds for property purchase, as well as to make payment of university fees. This is in addition to the current R11m a year that you are allowed to take out of the country (R1m for the so-called discretionary allowance and R10m for the foreign investment allowance). By applying to externalise funds specifically for these purposes, you are still able to avail yourself of the discretionary and foreign investment allowances, and therefore the costs associated with foreign education need not affect your ability or plans to externalise funds for investment purposes.
Some families opt to apply for a bank loan to finance overseas education. A loan from a high-street bank might be expensive and hard to come by without a track record, and so you could check with your local bank to see what structured finance options they can offer to secure a foreign loan.
A trend we note is that families are opting to purchase properties overseas, so that their children who are studying can live in owned accommodation and parents can visit. This at least reduces the cost of rented student accommodation and can serve as a long-term investment. Sometimes, a second South African home – a holiday home for example at the coast – will be sold in order to buy a small pad overseas. Alternatively, as with financing the education costs, you could check with your bank to see how it might be able to facilitate a loan for the purchase of such property via its offshore branches.
Finally, there are a few silver linings in what may appear like a dark cloud of costly overseas education:
- Many universities in the US and UK, in particular, have academic or sports bursaries and scholarships that are directed towards students from Africa and are open to all those from all cultural backgrounds.
- If you are looking at the UK and your child happens to have a UK passport, the average annual cost of tuition drops from about £14000 to £9500.