How to Plan for a Child's Education Costs in Stages

Meera is planning for a decision that has not been made

Meera has two children a few years from choices that will cost a great deal, and she is trying to prepare for costs she cannot yet name. She does not know what either of them will study, or where, or whether one of them will want to go abroad. She does know that whatever it is will arrive on a schedule she does not control, and that her own parents need her at the same time.

The advice she has been given is to pick a number and start saving. That is not wrong, exactly, but it skips the two things that make an education goal different from the others she is managing, and both of them change what she should actually do.

It arrives in instalments, and that changes the total

The first difference is structural. An education is a stream of payments over several years, not a lump sum on a date.

This matters more than it sounds, because the standard approach — take today's total cost, inflate it to the year the course begins, save towards that — is wrong in a specific direction. It treats money needed in the final year as though it were needed in the first, and money needed in the first as though the intervening years of price rises had not happened to it. The two errors do not cancel.

The correct method is to lay the costs out as a schedule. Tuition for each year, living costs for each year, and the one-off items — a deposit, equipment, travel — against the dates they fall due. Then inflate each of those to its own date, using the approach in estimating the future cost of a goal.

The schedule is not just a more accurate total. It is the more useful artefact, because it tells Meera which money is needed soon and which is needed years later, and that is precisely what her portfolio needs to know.

The second difference: she is planning several futures

The other complication is that Meera is not planning one goal. She is planning a distribution of possible goals, and she will not know which one is real until quite late.

The temptation is to plan for the most expensive case, on the grounds that it is safest. That runs into the problem covered in choosing an inflation assumption: an assumption is only prudent if the plan built on it gets funded. A contribution sized for the most expensive outcome, which Meera cannot sustain alongside her parents' medical costs, is not caution. It is a plan she will abandon.

The workable approach is to cost two or three plausible paths — a course locally, a more expensive one, and the overseas version treated separately because it brings currency risk and a different cost structure — and then to fund the central case while knowing exactly what the gap to the expensive one is and what would close it. That way the expensive case has an answer prepared rather than being a catastrophe if it arrives.

Deciding what the family is actually committing

This is the part of education planning that gets avoided, and it is the part that protects everything else Meera is responsible for.

What the family is providing and what it is not has to be decided, and preferably said out loud. That means the assets genuinely assigned to education, as distinct from assets she has vaguely thought of as available; the monthly contribution she can sustain through a bad year rather than a good one; and — the hard one — the limit past which the money does not come from her retirement.

Retirement is the goal with no alternative funding, and education is a goal with several. There are loans, there are less expensive institutions, there is the child's own earning, there is a year's delay. There is nothing equivalent for the last decade of Meera's life, and a parent who funds a degree by hollowing out their retirement has not solved a problem; they have moved it to a point where their children will have to solve it for them, which is where it started.

Scholarships belong in this conversation as upside and never as a plan. A place that depends on one being awarded is a place that may not exist.

Making the money safe payment by payment

The schedule now earns its keep, because it tells Meera how to hold the money.

The first year's fees are, at some point, eighteen months away. Money that will be spent in eighteen months should not be somewhere that might need three years to recover, because there is no mechanism by which she can wait. The final year's fees, though, are six or seven years further out and can still be growing — moving everything to safety when the first payment approaches would sacrifice years of return on money that is not needed yet.

So the de-risking happens payment by payment rather than all at once, which is the glide path idea applied to a staged goal. Each tranche moves to stability on its own timetable, a couple of years before it is spent, and the rest carries on.

Two things should not trigger a change to this. One is a market forecast; the schedule is driven by dates, not by views. The other is a good year, which makes de-risking feel like a waste and is exactly when it is cheapest.

Reviewing without churning

The estimate is worth revisiting once a year, and there are two different kinds of new information to look for.

The first is price. Fee schedules get published, and each year's actual figures replace a year of assumption. This is the review that matters and it usually moves the target somewhat.

The second is direction. As her children get closer to deciding, the range of plausible courses narrows, and the plan can become more specific. A child who has clearly settled on something domestic removes the overseas branch and the currency exposure with it.

What should not happen at these reviews is a change of portfolio in response to how the last year went. The allocation is set by when the money is needed, and that is a year closer regardless of what markets did. Confusing the annual price review with an annual investment review is how a carefully staged plan turns into performance-chasing with a schedule attached.

What to take away

Lay the education out as dated payments and inflate each to its own date, because a single total is both wrong and less useful than the schedule that produces it. Cost more than one path and fund the central one, with the gap to the expensive one known in advance.

Decide what the family commits and where the line is, and put retirement on the protected side of it. Move each payment to safety a couple of years before it is due, on the calendar rather than on a view. Then review the prices annually and let the plan get more specific as the children's decisions get more specific — which is the one form of new information that genuinely improves it.