How are desperate families coping with soaring private education costs in the UK? Entrepreneur Joe Hill believes he has a potential solution with a new type of tuition loan secured against the parents’ home.
Hill, CEO and Founder of Secta Finance, claims that a lack of innovation in the UK’s financial services market has left private education beyond the reach of many families – and has forced even many who can afford tuition to organize their finances inconvenient and inefficiently.
Secta Finance’s answer is the Flexiplan, which allows homeowners to borrow against the value of their properties in order to finance the costs of private education. Importantly, borrowers only withdraw funds when they need it – to pay for each year’s tuition when they fall due, perhaps – and only pay interest on what they actually took. Loans are repaid over extended terms of 10 or even 20 years.
“It’s incredibly difficult for many families to fund private education, so I was really surprised that we haven’t seen better funding solutions emerge,” Hill said. “If we can find these solutions, we will make it easier for those who already pay tuition fees and increase the number of families for whom private education might be an affordable option.
Secta reports research suggesting the cost of private education in the UK has risen by more than 400% over the past two decades, increasing pressure on parents of the 7% of UK schoolchildren who do not attend public schools . Average annual tuition fees exceed £ 15,000 for day schools and £ 30,000 for boarding schools. Factoring in the additional costs, private education can cost an average of £ 325,600 per child for day school and £ 469,700 for boarders starting school in 2019.
Most families finance tuition fees from their income or use loan products such as credit cards and personal loans to cover any shortfall. But such borrowing is expensive compared to secured debt, Hill points out, and the path to self-financing is often problematic for people whose circumstances change or for those whose incomes are unpredictable.
“In the worst case scenario, you have to take your child out of school for financial reasons,” says Hill. “But my own experience has been that there have been years where tuition fees have not been a problem to pay and years where they have been much more difficult.” People need more flexibility, he argues.
Under Secta Finance’s Flexiplan, borrowers can take out loans worth up to 75% of the value of their home. When they have existing mortgages, this ratio is reduced by the amount still secured by this first charge product. Someone in a house valued at £ 600,000 with outstanding mortgage debt of £ 300,000, for example, could apply for a loan worth up to £ 150,000.
After accepting the facility, provided by a panel of lenders appointed by Secta, the borrower does not have to withdraw any money at all until he needs it to pay the fees – and can then make payments. withdrawals over time if necessary. Secta charges an arrangement fee of £ 795, but borrowers only pay interest on funds advanced. Hill believes he can keep the debt rate below 4%.
It’s more expensive than the cheapest residential mortgages – lenders charge a premium for second load loans where a first load lender is higher in the repayment order. This means that for some parents, a remortgage may be a cheaper option. Secta also offers an advanced product, offering a lump sum to borrowers unable to remortgage rather than a direct debit facility. The potential benefit of these approaches, says Hill, is that some schools offer discounts when parents prepay large amounts of their tuition. The discount may be worth more than the interest savings offered by the direct debit approach.
These nuances point to another issue that worries Hill about the tuition funding market. “One of the problems in this market is that parents often don’t understand the different options available to them,” he warns, with Secta also offering financial advice to parents who are unsure of their best options. “People need more opportunities to discuss what is possible. “
In addition to lowering the initial cost of tuition for families struggling to finance themselves, Hill believes Secta Finance’s innovative approach could help families rethink the way they plan their finances. “Many families make sacrifices to pay for school fees and then see their disposable income rebound after their children’s education is over,” he says. “They might in fact prefer to have more disposable income when they are still financially responsible for their children, reimbursing the cost of the fees later when their expenses are lower.”
Hill believes that Secta Finance’s innovation will evolve over time – and that schools may want to engage, too. “We are creating opportunities for parents, for schools and for children,” he says. “Our strategic goal is to extend the possibilities of private education to many more families and to enable a lasting relationship for parents and schools through the products we offer. “