Some of the options available for investors, the various factors that come into play when selecting an education plan, and asset allocation strategies that fund managers employ when investing the funds in education investment plans.
Education is a key aspect in any economy. Over the last 10 years, Kenya’s budgetary allocation towards education expenditure as a percentage of GDP has been averaging over 5.3%.
According to the FY’2019/20 budget, the education sector received a significant share of government spending at Sh94.8b, out of the total budget of Sh2.8tn, (equivalent to 17.7%). This, according to the 2020 Budget Policy Statement, is expected to increase to Sh497.8b in FY’2020/21, Sh528.4b in FY’2021/22 and to Sh544.2b in FY’2022/23.
Education enables citizens to get better jobs in the market and empower those who do not get employed to start their own businesses. The skills equipped by secondary and university education especially are enough to make one self-sufficient.
Employment on the other hand empowers Kenyans to improve their standards of living and collectively that of the nation.
There is no limit to the potential that education holds hence why the government continually spends on the sector. This has increased access to quality basic education and improved the outcomes of our public schools as seen in high literacy levels ranking among peer nations.
In particular, Kenya has the highest rate of primary-to-secondary school transition, which is currently close to 100%. Education however has a huge cost implication that needs addressing. With primary education being mostly free, it is post-primary education that many guardians need to save for to enable their children gain quality education hence the need for education investment plans.
Enrolment and literacy statistics
Literacy level refers to the total number of people in a country or region who are able to read and write. Kenya has had a high literacy level from the beginning of century to date currently estimated at 82%. This may be attributed to the introduction of free primary education and the importance that her citizens place on education.
Kenya has a literacy level of 81.5%, which is higher than the other select African countries except for Zambia, which has about 86.8%. The world average is 86.3% while the Sub Saharan average is 65.6%.
The biggest constraint to quality education, however, has been the cost implication on guardians. The introduction of free compulsory primary school education during the previous regime has offered some reprieve, albeit minor. They still had to contend with costs such as purchase of books and reading material, exam fees, boarding fees and others. On top of it, this waiver of tuition fees drove an influx of students to public schools, causing an issue of overcrowding and in effect deterioration of quality of education. Most guardians opted to go the private school route, despite being costly, to ensure their children get the best education.
Recently, there has been a stagnation and further decline in the number of students joining universities from secondary schools. This has put pressure on public universities’ cash flows causing various public universities to start focusing more on parallel programs in order to avoid revenue shortfalls. This raises fear that the cost of university education may become significantly higher in the next five to ten years. On top of that, the alternative, parallel programs, is more expensive than government-sponsored courses.
Companies in the financial services sector have taken the opportunity to address these issues by tailoring products (Education Investment Plans), aimed at helping parents save and invest with the goal of securing their children’s education.
Education investment plans
Education Investment Plans are medium to long-term mutual funds promoted by a financial institution, usually an insurance company or an asset manager. In terms of structures, Education Investment Plans are easily distinguishable in that they often have a lock-in period of investment whereby the guardian is required to make periodic contributions, usually monthly. These funds then gain interest and help the contributor attain their financial goals. The beneficiary of the funds could be a dependent or one may save for their own education.
Education investment plans have a relatively longer lock-in period, which help to promote investor discipline. Ideally, an investment plan that caters for a long-time goal should have low liquidity. In Kenya, most market players have set the minimum tenor at five years. This serves the logic that most parents and guardians save for secondary and university education and they often start saving early. The plans require a minimum monthly investment amount ranging from Sh1, 500 to Sh7, 000. However, the payments are flexible in that one may pay monthly, quarterly, semiannually or annually.
Below is a list of some of the existing education plans in Kenya:
From the above table, we can deduce that all insurance companies provide life insurance together with their education policies. The sum assured in this case refers to the amount that is paid out to a client’s next of kin should they die. This amount varies with the monthly contribution amount and the tenor of investment. They also incorporate life insurance premiums into the monthly payments in order to avoid clients making two separate payments. Insurance companies, it can also be concluded, offer less returns than education products by investment managers. This is mainly because education policies in insurance companies are taken as more of a savings plan rather than an investment plan and lastly, that the minimum investment amounts vary from Sh1, 500 to Sh5, 000.
Education policies offer flexibility in that a client may choose to contribute monthly, quarterly, semiannually or annually. If a client is able to, it is advisable to pay annually in arrears, as the interest accrued for the year will be higher.
Kenya also has a tax incentive for Education Plans but with the condition that one must save for a minimum of 10-years. The tax incentive allows for tax-deductible contributions of up to Sh 5, 000 per month.
Recently, we have seen the monopoly set by insurance firms challenged with new entrants into the market. In 2019, Nabo Capital launched Wanafunzi Investment Unit Trust Fund, which allowed students to save for their own education. Unlike the other education policies that are offered by insurance companies, Nabo Capital is an investment firm. Cytonn also provides its own education plan, Cytonn Sharp Education Investment Plan that offers a return of 15% per annum with a lock-in period of 3 years, but the product is a privately placed product.
What to consider before joining an education investment plan
According to research done by Cytonn on priorities accorded to various household expenditures, food is the first ranked priority at 81.9%, followed by rent with 67.3%, then school fees with 29.6%, transport at 27.1% and the least prioritized is entertainment with 3.9%. School fees herein represent expenditure on education; add to it the costs of student accommodation and reading materials and the total expenditure rises even further. Bearing in mind these costs, a guardian has to choose an education plan that can provide safety, preservation and growth. The following are key factors to consider:
Your financial profile: This refers to the different and unique characteristics each investor has. Age is an important factor to consider before making any investment decisions as it affects both the time horizon of an investment that an investor is willing to take and their risk appetite. A young couple with a young child can choose to invest in a longer education plan, while an older couple with more mature children does not have the need for saving for such a long time. A longer tenor also affords the younger couple the opportunity to have a more aggressive portfolio as they have more time to recover any lost potential returns. It is also key for guardians to profile themselves based on the financial goals they hope to achieve with the investment plan. If they want to invest for a short period they should consider other investment vehicles whereas if they would like a longer-term investment then education investment plans are the best options for them.
Issuer: It is especially crucial when seeking a financial partner to do a background check with a keen focus on returns offered. Education plans are often long-term investments that are hard to get out of. One should think about whether to buy insurance based product or an investment manager based product.
Inflation: The value of money now is higher than a similar amount in the future due to the effect of inflation; to ensure that you preserve the strength of your education savings, it is important that you save in a plan that offers above-inflation interest rates. Inflation refers to the continuous rise in prices of commodities and services. This means that if you were saving towards university fees, say Sh1m, then the fees in 10 years would be higher for the same service. It is recommendable to have a financial goal higher than the current market conditions. Guardians should also save their money with an issuer who offers interest rates significantly higher than inflation rates to cushion inflationary effects.
What to do with funds when the kid is in school: When the term of the education plan comes to an end and the dependent is going to his or her desired college, it is highly probable that the matured funds will be more than enough to cater for the college fees. The guardian can either choose to pay the school a lump sum or alternatively pay the fees for the current year or invest the rest in a liquid investment product,
Additional Benefits: Most education plans are provided by insurance companies. The insurance companies offer their education policies clients with the additional benefits of life cover, which is sometimes subject to payment of an additional premium. Life insurance serves to provide financial protection to the loved ones left behind and it is important to consider before saving in a plan. The guardian may also choose to have the education plan and the life cover separately with different firms.
Early withdrawal: One key area that an education policy client should be able to appreciate is the fact that as a medium-long term investment, it is difficult to have early access to all of your funds anytime as one may wish. In education policies offered by insurance companies, there is a term known as surrender value. This is the amount that one stands to be paid should they wish to withdraw early on in their policy before maturity and this value is usually significantly less than the aggregate contributions. However, there is an option called ‘Paid up’ which allows the client to no longer contribute monthly payments without penalties. To better understand, we shall take an example of plan offered by a market player, ABCD education policy: For this policy the minimum tenor is 5 years; however, for a client who has faithfully contributed every month (or quarterly, semiannually or annually) for 3 years they are offered the Paid Up option. Should they choose this option, for the remaining two years, their money will continue earning interest but they will not be required to contribute.