Invest to pay for college but avoid getting a loan — financial experts

With the cost of education going up each year, experts are now advising parents to approach this future financial responsibility as an investment for their child's future. The premise, of course, is that time is on your side. "The best way to prepare for your children's education is to save for it way in advance," Alvin Tabañag, a registered financial planner and founder of Pinoy Smart Savers Learning Center, said in an e-mail to GMA News Online.  Financial advice website financialplan.about.com echoes this view: "Start now! The sooner you start investing for your child's education, the better," it says. "The most efficient way of providing for your children’s future education needs is to start early in saving and understanding how to properly invest the money you saved," Ben Panares, president of Citibank NA affiliate Citicorp Financial Services & Insurance Brokerage Phils., told GMA News Online in an e-mail interview. Save ahead, not pay as you go Parents should avoid the "pay as you go" strategy in settling their children's education, said Tabañag. "The problem with using this as the sole strategy for funding college is that there is no guarantee you will still be earning well in the future," said Tabañag, author of "12 Steps to Build Wealth on Any Income". To get a glimpse of how much it takes to pay for a college education, click here. Experts advise parents to consider placing their money into various investments as a way to head off inflation, a method called "mixed funding." "It’s important to consider the annual increase in education expense in our financial planning. And thus, parents should look for and consider investment outlets where the returns of the investments would closely match the increases in education expenses," Panares said. Mascy Cabuhat-Pineda, mother of Lucas, 7, considers saving for a college education one of the "biggest financial challenges" facing parents who understand the real value of a diploma, which to others may simply be a piece of paper. Cabuhat-Pineda and her husband Jeffrey are now looking at investment options to start saving for their child's college education. "Saving money in the bank might not be sufficient enough to meet the... (inflated) tuition fees 16 years from now," she said. Parents may consider putting their money in long-term time deposits, Treasury bills and bonds, mutual funds and unit investment trust funds, Tabañag noted. To be able to make their choice, parents must first identify their needs, their financial capability, as well as understand the investment product before actually letting go of their money, Panares said. The idea is to invest with an eye on maximizing returns, according to the Citigroup executive. "Critical here is that parents must always keep in mind that if the opportunity provides a return that is high, then this would entail the parents to take on high risk as well," he said. Call in the professionals Tabañag advises parents, especially those who do not have the luxury of time to look after their investments, to let professionals do the work. "Save and invest on your own only if you have the time, patience, knowledge and skills to seek out the right investments and make wise money decisions," he said. "Don't risk your money if you have doubts about your abilities. Better let the professionals do it for you." "In order to still create value returns to the money saved, getting into managed funds by reputable fund managers can be considered," said Panares. "The fund managers’ job would be to invest the money, manage risk lower, yet still provide some returns on the investment." Noeh Fernandez, Jr., father of Noe Jr., 11, and Kshanize, 7, is one parent who went for mixed financing by investing in equity bonds and mutual funds as well as educational plans for his kids' college education. "I'm fully aware that I have to fight off inflation," said Fernandez, and warns that every move involves a certain amount of risk. Fernandez was one of the customers of shuttered pre-need company Prudentiallife Plans Inc. "This is why I have two educational plans plus other investments. I became fully aware of the risks because I consulted financial planners and got financially literate. When I invested my savings, I spread it to different products," Fernandez said. Pre-need plans are still viable Still, he sees an educational plan as a viable way to paying for a college education. "Nothing in this world is risk-free," noted Fernandez, who claims to be a product of educational plans. His mother sent him and his sister to college using educational plans. Despite the problems besetting the pre-need industry, educational plans are still viable. "There is this common misconception that educational plans are only sold by pre-need companies. Life insurance companies are also very reliable sources of educational plans and they have been selling this for a long time," said Tabañag. To avoid scams, doing a background check on pre-need and insurance companies before approaching them is in order. The status of a company, its license and ranking based on various metrics can be found on the Insurance Commission's website. "An SEC [Securities and Exchange Commission] registration is not an authority to educational plans," said Tabañag. Citigroup's Panares said banks also "provide ample information to discern, through different accessible media in order for clients to make the best informed decision." When securing an education plan, parents are advised to consider four things: benefits, maturity (when the plan holder starts to yield benefits), payment terms, and add-on benefits. "Buy only a plan that you can afford, not what the agent tells you. There's no point in buying a plan that will cause you to constantly lose sleep worrying about where to get the money to pay for the premiums," Tabañag said. Loan as a last resort While college loans may be available to finance higher education, financial planners said this should be the last recourse. "It cannot be part of a long-range plan," Tabañag said. However, if taking out a loan is unavoidable, parents should "take time to canvass the rates offered by different financial institutions so they can get the best deal. A small difference in interest rates may... translate to thousands in peso terms," said the financial adviser. "Get the lending companies to tell you exactly how much you are going to pay per month when you borrow a certain amount and pay it off within a particular number of years," he added. — BM/VS, GMA News