Building up that college nest egg

Whether or not third-level fees are reintroduced, parents are advised to start saving or investing early for the financing of their offspring's increasingly expensive further education, writes Caroline Madden

"Penny-wise but pound-foolish"; "short-sighted and short-termist"; "misguided". Minister for Education Batt O'Keeffe invoked the rage of Opposition parties and student representatives this week when he confirmed that the reintroduction of university fees is being considered.

The Minister's assurance that third-level fees, if brought back, would only apply to better-off families was greeted with scepticism. "It would be only a matter of time before threshold levels were dropped and the vast majority of families would again be facing fees," warned Labour Party education spokesman Ruairi Quinn.

"Given that fees for many courses would now be more than €6,000 per annum, their introduction would simply make it impossible for many families to send their children to third level," he added.

Even as it currently stands, the "free fee" higher education system stretches many parents' finances to the limit. Research carried out by Bank of Ireland Life indicates that a four-year degree now costs more than €38,000 - and that's assuming that the student sails through their exams and doesn't have to repeat a year.

Accommodation costs alone can amount to more than €13,000 over the four years. And although college fees were scrapped in the mid-1990s, they have been stealthily creeping back in in other forms.

"Look at the registration fee," says Shane Kelly, president of the Union of Students in Ireland (USI). "It started out at €75 and now it is [close to] €900, so it has seen quite a dramatic increase. The whole thing is predicated on serious under-investment by the Government in higher education."

If fees should make a reappearance, then the cost of attending college could soar to more than €60,000, or €15,000 a year. Meeting expenses of this magnitude out of current income is unlikely to be affordable even for those "better-off" families that O'Keeffe referred to; so how can prudent parents build up a sufficient nest egg to ensure that they will be able to put their child through college?

Unfortunately there is no magic solution, but by planning ahead and starting some form of regular savings plan early, it is possible to make adequate provision for university costs.

One of the simplest and most popular options is to divert child benefit payments (currently €166 a month for the first and second child in a family, and €203 for third and subsequent children) straight into a college fund. Bank of Ireland Life suggests going one step further. "Those who can afford to divert their creche fees, which average from €600 to €800 per month, into a regular savings plan after their children start primary school could benefit from a lump sum of €66,000 or €88,000 to put towards the expensive secondary and third-level education years," advises head of products Eoin Kennedy.

Once parents have made the all-important decision to begin saving regular amounts for their child's education, they must then weigh up the pros and cons of the various investment and savings products tailored for this market.

AIB's Parent Saver account is currently offering an eye-catching headline interest rate of 10.25 per cent annual equivalent rate (AER) on monthly savings of up to €200. It is suited to saving child benefit payments, and grandparents or godparents who wish to contribute towards a child's education can also open an account.

The downside is that at the end of each year of savings, AIB transfers the balance into a Parent Deposit account which only pays 3.25 per cent AER.

Nevertheless, it is one of the most attractive regular savings accounts available on the market at the moment, and has few restrictions. For example, it offers customers the flexibility of withdrawing their money from the account at any time without penalty.

Stock market-linked investment plans offer an alternative to savings accounts. The potential returns are greater, but the risks are also much higher, as evidenced by the fact that the extreme market volatility over the last year wiped out profits in many investment funds.

However, proponents of an equity-based strategy argue that stock markets outperform cash over the long term. "The important thing is not to make long-term decision based on short-term markets," advises Michael Gordon, executive manager of investments and funds at Hibernian.

Hibernian's Spectrum Saver Plus product allows investors to choose between a range of funds, from low- to high-risk, and the minimum investment is €150 a month. "We're increasingly seeing long-term clients funding for third-level education- where they have 15-year time horizons - take positions in funds that would have greater volatility with greater potential returns," he says. "Because they have time on their side, they can take more risk."

Despite the exhortations to think long-term, it's hard to ignore the columns of negative returns in the fund-performance section of the Hibernian Investment Managers' website, which make grim reading for those who have already invested funds with the company. As is the case with almost all managed investments, it would take a serious upswing in financial markets to eradicate the double-digit losses accumulated by many of their funds over the last year.

Bank of Ireland's Smartchoice Education fund is another regular savings plan linked to the stock market. As bait, it offers a 25 per cent "loyalty bonus" to customers who commit to saving regularly for a seven-year period. However, prospective investors should be aware that this bonus only applies to contributions made in the first year of the plan.

It is also worth noting that fees and management charges can make quite a dent in any profits, should they materialise. If you invest up to €12,000 a year, a "contribution fee" of 5 per cent is deducted, although it drops to 3 per cent if you invest more than €12,000 a year. On top of that, a management fee of 1.5 per cent of the value of your fund is deducted each year.

Another alternative for parents reluctant to take a gamble with their child's college fund, apart from bank deposit accounts, is An Post's Childcare Plus long-term savings account. One of the most attractive - and unique - features of this product is that the interest paid is tax-free.

Monthly child benefit allowances can be paid directly into the account, and the total sum saved each year will earn a guaranteed interest rate of 20 per cent (cumulative) tax-free if left on deposit for five years. Withdrawals can normally be made as long as you provide An Post with seven working days' notice.

Whether or not university fees are brought back, the key to coping with college costs is the same - plan as far in advance as possible.