YOUR MONEY: New kid on the block for fees

SOME parents save for decades to pay public school fees, either by investing a lump sum to generate future income for fees, or through regular savings schemes, but more than three out of four never get round to planning it and have to pay out of current income, writes Clifford German.

With so many other competing claims on income, including mortgage interest, life insurance, pension contributions and private health insurance, many parents have cut back on holidays and gone into debt to pay school fees.

Fees have also outpaced inflation. Recessions lead to a drop in the numbers of parents who can afford to pay fees and the last recession hit the middle classes hard, but school fees have risen consistently faster than average incomes and inflation for the best part of 20 years now and show no signs of stopping.

Although fees are now rising more slowly than in the late 1980s, they are likely to go on growing by around 5 per cent a year.

Education reforms to improve the state schools may well be on the way, whatever the outcome of the next election, but few parents can afford to wait and see. For most parents of school-age children, rising fees will be a fact of life.

Hard-pressed parents can no longer simply generate cash by taking out another mortgage. With property prices static or falling, few want to increase the risk of ending up with negative equity, even if lenders are willing to take them on. Personal loans are generally too short and too dear to make ideal loan vehicles to pay school fees, which can continue for the best part of 20 years.

The Maidenhead-based School Fees Insurance Agency, a privately owned provider of school fee plans, allows parents to borrow up to pounds 20,000 from the Bank of Scotland, without security, at a variable rate of base rate plus 4.5 per cent, currently 11.25 per cent. Repayments are over 15 years.

The rate is slightly more than most banks charge gold card borrowers for agreed overdrafts, but well below personal loan rates. Funds can be drawn each term or annually as required, and interest is charged on the balances actually borrowed.