When navigating the school application process in Hong Kong, one word parents hear over and over again is “debenture” – and it’s almost always followed by a usually mind-blowing figure. This week, Ruth Benny, Head Girl of Top Schools and Sassy Mama’s very own education expert, tells us what we need to know about the debenture system and how it works.
*SO, JUST WHAT IS A DEBENTURE?
A debenture is the traditional name given to a loan agreement where the borrower is an institutional borrower. For our purposes, the institution is a school. The money raised by the debentures becomes a part of the school’s capital structure, and the school may use the funds raised through debentures in any way it chooses.
The debenture, but not the interest earned on it, is usually reimbursed after the child leaves the school. However, some schools do not reimburse at all and some debentures even depreciate.
For Hong Kong schools, debentures are sometimes also called:
• Capital Notes
• Nomination Rights
• Foundation Certificate
• Capital Contribution
…there are a few other terms as well, but they are essentially still debentures.
While not all schools have debentures, some schools offer a variety of debentures – and the international schools have the priciest ones.
*HOW DO SCHOOLS USE DEBENTURES?
Many schools (even some pre-schools!) in Hong Kong require that the parents of new students pay a debenture on admission. Parents can sometimes buy a debenture before beginning the admissions process and earn some priority in the selection system.
Some schools that offer debentures also offer parents an alternative method of funding the school – a capital levy. This is different from a debenture in that it is paid yearly and not in one lump sum. It may amount to the same or more than the debenture over the course of the child’s schooling and is not refundable.
Most schools state that the fees are generally set at a level which covers most if not all of the school’s running costs, but not its capital costs. So, debentures are how parents of students contribute to the long-term funding of the School.
*HOW MUCH DOES A DEBENTURE COST?
They range from HK$25,000 for ESF to HK$10million for the top international schools for each child. Some schools reduce the price for the second and third child entering the same school.
Some schools will offer discounts or relief on the debenture if the financial situation of the family warrants it. In this case, the debenture may be as low as $10,000 or waived entirely.
You may also be able to buy a debenture on the ‘second-hand market’. This means that the school has ‘sold out’ and existing holders can transfer them to others. The price of this transfer may be set by market demands or the school may cap it. The school may also take a cut of the sale price.
*WHAT KIND OF DEBENTURE DO I NEED?
Common types include:
• Refundable/non-refundable or depreciating
An individual debenture applies to one child in a family and cannot normally be transferred. A corporate debenture is held by a corporation and can be used for a child of an employee. The corporation may transfer this debenture to another employee at any time, if the employee leaves their employ. Some schools will allow flexibility in allowing the child to stay at the school and some schools will insist that the child withdraws immediately if s/he is no longer associated with that corporate debenture.
For families relocating to Hong Kong, they may ask the HR in their home country whether the company holds any corporate debentures for schools in Hong Kong and start their search there.
Some schools will refund the full amount, without interest and less any penalties, to the parents once the child leaves the school, while at other schools they depreciate over a certain number of years – sometimes to zero. In at least one school, the debenture depreciates to zero in seven years. If a child is to continue on in the school, the parents must buy a new debenture or the child will not be allowed to stay in the school.
*AH – I’M CONFUSED! WHERE CAN I FIND OUT MORE?
It’s certainly a confusing system and it can be difficult to talk about debentures in a general way as the schools really do vary in what they call them, how they charge for them and how they use them. Be sure to speak with someone in the finance or admissions office of the schools you are considering to ensure that you fully understand their system and how it operates. And be sure to checkout the Top Schools website to learn more