Saving the Way to College sans Education Plans

Saving the Way to College

by:  Kendrick Chua, the Wealth Warrior

First appeared in May-June 2009 of Money Sense. Was also my first paid article

Norma (not her real name), who is connected to one of the biggest educational plan providers before, can’t help but cringed when I asked her how people are reacting now towards educational plans. Her facial expression mimics the sentiments of her clients and their more subtle way of rejecting her.

Twenty years back, it was unthinkable that education plans will now be received with hostility. When educational plans were first launched, they were a much sought-after investment instrument by the public.  After all, education is one of the major financial priorities of Filipino parents and the burden of a forthcoming college education cost is no laughing matter.

The educational plan was crafted precisely to address this concern of parents.  The educational plan was a commitment by pre-need companies to pay for their child’s tuition fees sixteen or seventeen years later in exchange for a minimum investment on the parents’ part. With an offer like that, who can refuse? The Filipino parent’s dream of being able to send their child to the best colleges and universities will now become a reality. It became a huge success that other pre-need companies followed suit thereby flooding the market with hundreds of thousands of education plans.

“I will often receive phone calls or beeper messages from people I never knew telling me they would like to buy an education plan. That was how lucrative selling education plans were.” The euphoria was pandemic and the sales agents were having a heyday and Norma, was able to build a house from the commissions she earned within several years.

Just when the exuberance seemed never to end, pre-need companies were suddenly confronted with soaring tuition costs when deregulation started in 1992. The return on their investment just cannot keep up with the increase and this snowballed into the collapse of several pre-need companies in the mid-2000 defaulting on their commitments to the plan holders.

Early this year, because of the collapse of the Legacy Group and later the sale of Pacific Plans to Noel Onate, the public’s eyes once again fell on these pre-need companies and a Senate investigation even ensued. What added oil to the fire, was the admission from the Federation of Pre-need Plan Companies that their industry is suffering a dwindling trust fund as an effect of the global financial crisis. If not addressed soon, more pre-need companies may collapse and along with it, the dreams of thousands of Filipinos.

Crunching down the numbers

In the minds of everyone, education costs today are outrageous to say the least. Just ask any parents with kids currently in the tertiary level and you’d get the same response-a wide-eyed, open-mouthed sigh.

Sixteen years later, the figures are not going to look any less. According to the Commission on Higher Education (CHED), the average increase for college tuition fees is 12.25 percent per annum. That means, should you wish to send your child to either the top-tiered colleges like Ateneo, La Salle or the University of the Philippines, be ready to churn out at least half a million pesos, multiply that by four years, and that would translate to just about two million pesos!

What are the other ways to invest?

With the public trust on pre-need plans dwindling, it is natural for Filipino parents to look for other alternatives. After all, the need to send one’s child to college is still there, with or without the pre-need companies. Quality education after all, is still perceived as the ticket to success by Filipinos.

Since prudent financial planning starts with a projection for the future cost of college, the problem comes in when investors put too much emphasis on the projection. Clients should be made aware that projections are just that-projections. “From point A to point B, nobody knows what will really happen and if those figures will still hold true,” says Alijeffty Gonzales, a Registered Financial Planner and a consultant for business development for Insular Life and Assurance Company.

While the figures are there to serve as guide, it is by no means the end. If these multi-billion companies can hire the best actuarials in the land and still fail because of conservative estimates, how much protection does the ordinary Juan who invest on his own, has?

What can the ordinary person do then?

“You can either invest on your own or purchase a plan.” While either or both of the options are practical, there is one thing we should clearly remember, “Over invest towards the goal,” he recommends “Gone are the days when you have one product to match one objective. Now you need three or four to match one particular need.” In this case, it is better to have a surplus than to have a deficit.

Investing on your own

Say, if you’re going to work towards having Ps. 2M after 16 years without the use of interest rates and yields, you need to at least save at the very least, Ps.130 thousand every year to achieve the Ps. 2M mark sixteen years later. Even with the use of four percent interest rate, you need to still need to save Ps. 90,000.00 every year. Clearly, it is not an easy figure to save for salaried employees but surely, there is a better way.

Gonzales cited that the recently issued corporate bonds offer very attractive coupon rates with some reaching as high as nine percent interest per annum. The only problem with the bonds he added is that they mature after five years. “There would be no matching after then.” At the given rate, an initial investment of five hundred thousand pesos would be Ps. 1.9M sixteen years after-maybe enough to fund for the college education of your child. The challenge after the maturity is to look for an investment that offers the same yield.

Stocks are also another investment instrument one can consider but it entails a greater risk management. Since the start of the Bull Run in 2003 all the way up to the 2007, stocks have been averaging a whopping 22 percent per annum. The same Ps. 500 thousand now has grown to more than Ps. 1.6M in just five years! Sounds great but let’s go back further and imagine if you have invested in 1997 with the same objective, the same Ps. 500 thousand 12 years later is just valued at Ps. 260 thousand.  That means your investment in those 12 years didn’t earn anything and has to earn more than a hundred percent just to recoup the losses and earn a little profit. Stocks may well be the best instrument to leverage against education increase but mismanagement of funds can really burn your hard-earned savings.

If you don’t have the resources to invest in either of the two, mutual funds may be another option, Hector C. De Leon, RFP and First Vice President of First Metro and Asset Management., points out. “A strategy you can employ is to use the gains from a conservative fund and reinvest that into a more aggressive one.”

Purchasing a plan

Since most Filipinos are risk averse, lacks the time and expertise to invest on their own, and tends to pass the risk to another company by purchasing a plan. Another optional strategy is to invest in a life insurance policy.

Renelyn Arellano, a law student recently got a variable life insurance policy for her one-year old daughter. “When I was offered this product by my financial adviser, I immediately liked it and it was better than the education plan that was earlier offered to me. The returns may not be guaranteed but it certainly has the potential to match the tuition fee increase.” That is because the policy is linked to the performance of either the bond or the equity market. While she is clearly aware of the risks associated with it, Arellano is nonetheless, willing to take the chance.

By leveraging on these asset classes, an annual investment of Ps. 65 thousand for the next 16 years at a rate of eight percent can help the funds grow to more than Ps. 2M.

An endowment plan is also a good alternative for those who wouldn’t want to risk heavily. But given the benefit it guarantees, it naturally comes at a higher premium.  A 10-year endowment plan cost more than Ps. 1.7M but it guarantees a fund of Ps. 2.1M in total living benefits that can be use as the education fund when the child starts college six or seven years later.

Whether it is investing on your own or buying a plan, it is important to stay focused on the goal. Gonzales recommends a regular rebalancing of portfolio to see whether the investments are doing well or not. That is why there is a need to come up with a basket of three or more investments so that there is a buffer or contingency in case one or two of your instruments are not performing well. Financial advisers have always harped on the benefits of a diversified portfolio. Constantly updating yourself on the current tuition fees can also help.

Filipino parents’ are notable for sacrificing and saving just to send their children to school and often, at the expense of their own future. It is undeniably a very noble act.  But they are not alone anymore, partnering with financial institutions and financial advisers can make their objective clearer and more achievable. Leveraging their hard-earned savings on the right investments can help them realize the ultimate dream of every Filipino parent. ***

Tags: education plans, life insurance, Mutual Funds, stocks

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