Is a private education worth it?

The value of a private education is a question that has come into sharp focus since the imposition of VAT on school fees.

For some it’s a default — if you can afford to send your kids to an independent school then that’s just what you do — but for many it’s a real question of value as household budgets are under pressure and the cost of a private education becomes ever more of a stretch.

This post won’t quantify the value of a private education for you, but it will challenge you to think about whether it’s likely to be more valuable than a £560k nest egg when your child reaches 21.

Read on to learn more…

What does “worth it” even mean?

We each have our own idea of the drivers of value from an independent education:

• Class sizes and student ratios.

• Facilities and extracurricular opportunities.

• The character of your child's peer group.

• Pathways to top universities.

• Etc.

But, ultimately, all of these boil down to one thing: we hope that an independent education will lead to a better future for our children.

Our definitions of “better” will differ, but they’re likely to include:

Wealth

We’re likely to agree that, at minimum, it’s better not to struggle to make it to the end of the month. We may have more ‘noble’ aspirations for our kids, but it’s hard to self-actualise when it’s an emergency if you need to replace a tire on your car.

Opportunity

We’re also likely to agree that having a range of options in your future is better than the alternative. It’s better to have employers climbing over themselves to get you on board than having to find someone willing to give you a chance—not just for the economic opportunity, but so that your child can choose a career that they find fulfilling.

Character

As parents, we need to take responsibility for the character of our children, but we also can’t ignore the fact that the school environment does an awful lot of the ‘raising’ of our kids. They swim in a culture and peer group that we don’t directly control (which is why we recommend checking out our reviews to get a real flavour of the culture of each school).

A comparative baseline

Many of us would say that we’re confident that a private school education will indeed provide a better life for our kids, and you can’t put a price on that.

Actually, you can if you assess it through a cold, hard, business lens. It might feel ‘gross’ to assess an investment in our kids' futures in the same way as we would a business opportunity, but it makes for an interesting thought-experiment - so bear with it.

ROIC

In this thought experiment, we’re investing our capital (fees) in an asset (an independent school education) in the anticipation of a future return (a better life for our kids).

The question is: are we getting a positive Return On that Invested Capital (ROIC).

The future is hard to predict, so we make our best guesses and forecasts to estimate the Return, but the first stress-test of any decision will always be to compare it to a ‘hurdle rate’.

The hurdle rate is the default expectation of the return that capital would generate if you didn’t make this investment with it. The investment idea is killed if it seems like fantasy that it could beat the hurdle rate, saving you the effort of complex reasoning about the return and risk that it doesn’t pay off.

A base scenario for an independent education

In this scenario, let’s assume that instead of spending the money on school fees, it is invested in an investment fund that is held in trust until your child reaches 21.

We’re comparing the asset that is an independent school education against a significant nest egg at the age of 21. Which is more likely to achieve the goal of a “better” life (wealth, opportunity & character) for that child?

Assumptions

• We’ll ignore inflation, which affects both the cost and the return on the investment (although school fees have been rising faster than inflation, so this is conservative).

• We’ll ignore the costs of ancillaries (school trips, uniform, sports equipment, etc). These are significant (up to 10-20% of the fees), but we’ll assume that these would be invested in supplementary tutoring, after school clubs, etc to bring the state/independent school scenarios closer to parity.

• School fees are invested in a low-cost diversified ETF that yields an average 6.5% annual return (conservative on a long enough horizon).

• We’ll use representative annual day school fees (inc VAT) from reception to year 13, invested at the beginning of each school year and compounding annually from there.

  • Reception – Year 6: £18,000

  • Year 7 – Year 11: £23,000

  • Year 12 – Year 13: £24,000

ROIC for this scenario

This is a total capital outlay of £289k but, thanks to the magic of compound interest, the nest egg at the age of 21 is worth over £560k. This is very likely to be conservative, but it’s a good benchmark.

This could translate into a mortgage-free house or flat, financial security to buy your child (now a young adult) time to train and invest in their passion, or seed capital for the next unicorn; or it could be burnt up in a few wonderful years of debauchery!

You know your child best…

£560K vs. a private education

This is a highly simplified scenario, but it prompts the question: what is more likely to provide the opportunity for a “better life” for your child at the age of 21, a private education or £560k in the bank?

The answer is personal and situation-dependent:

• Is your child likely to make the most of the academic opportunities offered by a private education?

• Is your child likely to leverage the relationships they form?

• How good are your local state/grammar school options?

• Would your child benefit more from a curated peer group, or from the resilience gained by navigating a more diverse social environment?

• To what extent do you think the value of a private education is in the quantifiable grades and certifications vs. the social capital of having attended a prestigious school?

• Is added value in SEND provision a consideration?

• What would your child do with £560k at the age of 21?!

If your child is likely to excel academically, pipeline into a top university and secure a highly paid dream job, then maybe £560k seems trivial.

If your child is likely to shun university and turn that £560k into seed capital for the next unicorn business, then maybe a private education feels like a waste.

Hopefully this is food-for-thought that encourages you to think about the incremental value of a private education and make more of a calculated, rather than ‘default’, decision.

For what it’s worth…

…the writer of this post has two kids in private education.

One is too young to know whether they’ll get more value from a private education or a nest egg.

The other is on the verge of transition into senior school, and this is a much harder call. He is very entrepreneurial and, at this stage, seems much more likely to be the kind of young adult that will found a business and create his own career opportunities.

It’s a hard call for us all, but if this post achieves just one thing we hope it encourages us all to really think about the value of the product we’re buying and to allocate our capital (financial, time, parenting capital) wisely.

Let us know what you think in the comments below.