Beat School Fee Inflation by Investing

Private school fees in the UK rose by 3.5% last year, according to the latest figures from the Independent Schools Council (ISC) released in May. Boarding fees rose by 4.1%, while day fees increased by 3.5%. While the ISC reports that this is the lowest increase since 1994, fees hikes continue to outstrip earnings growth and inflation.

In fact, analysis by Netwealth's research team reveals that this is a long-term trend. While fees vary sharply across the regions and types of school, on average annual increases have been ahead of inflation for more than two decades.

Investing to pay for school fees can be a good way to stay ahead of fee inflation and ensure you can provide for your children’s future. Starting a portfolio as early as possible will give your money more time to grow, as well as protecting it from inflation.

25 years of inflation-busting increases

Examining 25 years of ISC data, Netwealth found that average school fees have risen by more than 5% each year since 1992 across the board - regardless of whether the schools were in London or the regions, or whether rates were for boarding or day pupils.

While boarding fees have risen by 5.5% each year on average since 1992 and day fees by 5.4% per annum, the biggest increases have been in London, where hikes were 5.7% a year. Rates have typically risen by 5.2% each year for the past 25 years.

The average fee is currently £10,753 a term for boarding and £4,702 a term for day pupils.

These figures do not take into account extra costs parents may incur, such as meals, text books, extra-curricular activities and school trips.

Starting an investment portfolio to pay for school fees can be an effective way to beat fee inflation.

School fees: the cost over a school career

Using average fee figures, we projected how much it could cost to send two children to private school over ten years when factoring in inflation.

In our example, Mr and Mrs Gray want to send their children, James and Emma, to private school from the age of eight. James is four and Emma is two. He starts junior school in 2021, while she enrols in 2023. The junior school costs £4,223 a term - £12,669 a year per child. The siblings will then each enrol, aged 12, at a private senior school, with fees of £15,006 a year per child. Our figures cover ten years of school fees for each child from the age of eight to 18, so 12 years of payments in total.

Before fee inflation, the total cost of each child’s education is £143,049 – £286,098 for both siblings. However, after factoring in an anticipated 5.4% fee increase each year, in real terms it will actually cost £507,729 – 77% more.

Investing to keep up with school fee inflation

Starting in May 2017, with combined ISA portfolios worth £150,000, the Grays opt to invest to pay for the school fees as they attempt to keep up with inflation. The couple then save the maximum of £20,000 each into their ISAs every year until 2023/2024. Initially, they invest in the Netwealth Risk Level 6 portfolio [76.3% equities, 20.2% fixed income and 3.5% cash] for the maximum potential risk/reward, switching to Risk Level 3 [66% fixed income, 29.6% equity and 4.4% cash] once school fee payments begin in August 2021. Termly payments are made directly from the portfolio.

The graph below projects how the portfolio could perform in various possible scenarios – the light blue section illustrates a strong investment performance, the dark blue an average performance, while the light red section illustrates a weaker performance.

Our projection shows that over the 12 years of their children’s school life, if the Grays did not invest their funds, their money would run out in 2030 - two years before their youngest child finishes secondary school.

Our projections suggest as well that if the Grays’ portfolio generated average returns – the dark blue section on the above chart - then both children’s school fees would be covered by the portfolio. If their portfolio delivered a strong return – the lighter blue section on the chart - the couple would also have £88,000 left over by 2033 after the fees had been paid, perhaps to go towards their own retirement or the children’s university fees. In the scenario of a weak portfolio performance – the light red section on the chart - the funds could run out in 2029, a term before the un-invested scenario.

The Grays’ example suggests that parents wishing to send their children to private school should plan ahead and start investing as early as possible to beat school fee inflation. However, it also shows that well-diversified investments held with a cost effective provider, like Netwealth, could help them provide for their children’s future.

Simulated future performance scenarios are designed to provide an illustration of the range of potential outcomes but cannot be relied upon as an indicator of future portfolio performance.  Outcomes may be worse than the range of scenarios provided.

The article is for information only and should not be considered as investment advice, or a recommendation of any particular strategy or investment product.

Capital when invested is at risk.