Paying for class

Andrew Verity on funding the soaring costs of education

Education has been one of the most contentious topics of this election, with the Conservatives promising to encourage further growth in the development of privately funded schools, a policy bitterly opposed by both Labour and the Liberal Democrats.

Despite the Tories' defeat on Thursday, the desire of many parents for their children to get the very best education means that private schooling will survive and may even prosper despite Labour's opposition.

Ironically, parents of children at private schools have one thing in common with their state school counterparts: they rarely plan for school fees. Statistics from the School Fees Trust show only 14 per cent of the former make any kind of advance provision for fees. The other 86 per cent pay from their income, not savings.

That can be a crippling expense. The average school fee for private day schools is around pounds 2,000 a term - or more than pounds 6,000 a year per child. Even for a four-year-old, fees are at least pounds 300 a term. To fund a full private education from five to 18, some estimates are well over pounds 100,000.

Parents willing to bear that cost also face the daunting spectre of fees escalating not just with inflation but also with their child's age. To be safe, school fee experts usually assume a rise of at least 5.5 per cent a year.

In many cases parents find themselves spending more on school fees than on their mortgage. So why do so few save for education? According to School Fees Trust managing director Angus Cater, bad salesmen are at least part of the reason.

"The biggest problem is that parents get frightened to death by insurance salesmen telling them it will cost pounds 130,000 and they must pay pounds 240 a month as soon as their child is born. School fee planning is appallingly badly sold."

Because of the lack of planning for fees, insurance companies tend to aim their fee-planning services at parents who find they cannot keep up payments. The School Fees Partnership, for example, markets advice to parents and schools on how to tap into the equity in their homes. Here, parents can arrange "draw-down facilities" that capitalise the remaining equity in their house by re-mortgaging at discounted rates with their original lender.

The School Fees Insurance Agency, a specialist broker, offers loans based on an endowment savings vehicle - allowing parents to draw as fees fall due. But parents who feel able to save before their child begins school can benefit from an increasingly competitive market in tax-exempt savings vehicles.

Here, it is important to steer clear of most so-called "educational trusts". Two years ago, the Inland Revenue objected to the use of tax exemptions, meant for charitable trusts, to fund private education. Several investment companies, such as Save & Prosper, were forced to suspend sales of this type of plan.

More in favour among school fee planning specialists are personal equity plans (or PEPs). These offer the chance, from a minimum of pounds 50 a month or a pounds 1,000 lump sum, to gain access to tax-exempt growth in the stock market.

However, most PEPs aimed at school fee planning are directed at savers prepared to tie up their money for the medium to long term. Cash them in or draw funds within the first two or three years and your investment may give a poor return.

Parents must also decide how many risks they are prepared to take with the investments within their PEP. There is one established method of minimising risk but getting better-than-average returns on a school-fee investment.

Within a PEP, school fees specialists often recommend investing in a split-capital investment trust. These have the advantage that they will wind up at a fixed date - just right for school fees which will become payable at a predictable time.

Investors can buy zero-dividend preference shares in the trust. While you will not benefit from dividends paid on the shares which the trust buys, the trade-off is that the trust pledges to give a return of, say, 7.5 per cent a year when the trust winds up - much higher than saving with a building society. It is a safer bet than other equity investments because you get priority if the trust ends up growing by less than expected.

The School Fees Insurance Agency offers PEPs specially designed for fee- planning, which include a payment diary system to make sure the right fees are paid at the right time. Built-in life assurance cover and cover for disabling illness can help make sure that your child never has to attend that nasty local state school, unless it means going to the same one as the kids of Labour Cabinet members.

School Fees Insurance Agency 01628 502020; School Fees Partnership 0171 240 5656; School Fees Trust Scheme 0171 351 5335