How are severely disadvantaged families dealing with the rising cost of private education in the UK? Entrepreneur Joe Hill believes he has a possible solution with a novel school fee loan that is secured against the parents’ home.
Hill, the CEO and founder of Secta Finance, says a lack of innovation in the UK financial services market has made private education inaccessible for many families – and even forced many of those who can afford school fees to find their finances uncomfortable and inefficient to order.
Secta Finance’s answer is the Flexiplan, which enables homeowners to borrow against the value of their real estate to fund private education costs. It is crucial that borrowers only withdraw money when they need the money – for example, to pay annual school fees when they fall due – and only pay interest on what they have actually taken. The loans are paid off over extended terms of 10 or even 20 years.
“It is incredibly difficult for many families to finance private education, so I was really surprised that better funding solutions have not emerged,” says Hill. “By finding these solutions, we will make things easier for those who already pay fees and increase the number of families for whom private education could be an affordable option.”
Secta points to research suggesting that the cost of private education in the UK has increased by more than 400% over the past two decades, adding to the pressure on parents of the 7% of UK school children who do not have state schools visit. Average annual school fees are over £ 15,000 for day schools and over £ 30,000 for boarding schools. Taking the additional costs into account, private education can cost an average of £ 325,600 per child for all-day school and £ 469,700 for boarders starting their schooling in 2019.
Most families finance school fees from their income or use credit products such as credit cards and personal loans to make up for any shortfalls. But such loans are expensive compared to secured debt, Hill points out, and self-financing is often problematic for people whose circumstances change or for people with unpredictable incomes.
“The worst possible scenario is that you have to take your child out of school for financial reasons,” says Hill. “But my own experience is that there were years when school fees weren’t a problem and years when it was much more difficult.” People need more flexibility, he argues.
Joe Hill from Secta Finance
With the Flexiplan from Secta Finance, borrowers can arrange loans worth up to 75% of the home value. In the case of existing mortgages, this quota is reduced by the amount still secured against this first-charge product. For example, someone in a £ 600,000 home with a mortgage debt of £ 300,000 could apply for a loan of up to £ 150,000.
With the approval of the facility provided by a Secta-appointed lending body, the borrower does not need to withdraw funds until they need it to pay fees – and can then withdraw as needed over time. Secta charges a processing fee of £ 795 but borrowers only pay interest on funds advanced. Hill believes he can keep the interest rate on the debt below 4%.
This is more expensive than the cheapest residential real estate mortgages – lenders charge a premium on second-charge loans where a first-charge lender is higher in the repayment peck. That means that for some parents, rescheduling may be a cheaper option. Secta also offers an advanced product that instead of a drawdown facility provides a lump sum for borrowers who are unable to reschedule. The potential benefit of these approaches, Hill says, is that some schools offer discounts if parents pay a significant portion of their fees up front. The discount can be worth more than the interest savings that the drawdown approach offers.
These nuances point to another problem Hill preoccupied with the financial market for school fees. “One problem with this market is that parents often don’t understand the different options available to them,” he warns, and Secta also offers financial advice to parents who are unsure of their options. “People need more opportunities to discuss what is possible.”
Hill believes that Secta Finance’s innovative approach can not only lower the upfront cost of school fees for families struggling to finance themselves, but it could also help families rethink their financial planning. “Many families make sacrifices to pay for school fees and then see their disposable income rise again when their children’s education is over,” he says. “They may even prefer to have more disposable income when they are still financially responsible for their children and pay back the fees later when their expenses are lower.”
Hill believes Secta Finance’s innovation will evolve over time – and schools will want to get involved too. “We create opportunities for parents, for schools and for children,” he says. “Our strategic goal is to expand the possibility of private education to many more families and to enable a sustainable relationship for parents and schools through the products we offer.”