Learning Curve: international schools need to rethink debenture policies

Peter and Miriam Cremers were required to subscribe to a refundable "personal nomination right" of HK$75,000 when their son Enzo was granted admission to the Chinese International School several years ago.

Besides paying the money, Enzo was selected on the basis of a half-day observation interview at the age of four.

"I don't have an objection in principle [on schools charging debentures]. I understand schools need to run and that costs money and investment. But in some schools there is a risk that a debenture gives you automatic access to a place and that is a problem," says Cremers.

Cremers raises a valid point, one that is becoming of increasing concern to parents who are reconciling themselves to meeting the exorbitant cost of educating their children.

Most international schools now require students to be covered by one of the several classes of debentures they issue, whose prices have risen significantly in recent years.

In the context of schools, debentures are a long-term debt instrument held by schools until maturity without any return on the capital invested. These instruments are also called capital notes, nomination rights and foundation certificates.

Parents of students can also contribute to the long-term funding of schools via an alternate method called a capital levy. This differs from a debenture in that it is paid yearly and may amount to the same or more than the debenture over the course of the child's schooling and is not refundable.

The primary benefit conferred by a debenture or the levy is the priority its holder gets in the allocation of a school place. Debentures bought by corporations have the highest value and priority because they are transferable to other employees.