Sunday, May 22, 2022

Understanding School Debentures in Hong Kong

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Definition of Debenture:
A loan agreement in which the borrower is an institution i.e. a school is known as a debenture. In such a case the parents who are considering admitting their child to the school have to make a lump sum payment on or before the admission. Various schools offer a wide variety of debentures but not every school has them. In Hong Kong debentures are also referred to as:

  • Capital Notes
  • Nomination Rights
  • Capital Contribution/ Levy

Use of Debentures by Schools:
Most of the schools in Hong Kong, including the pre-schools ask the parents to pay a debenture during the time of admission.

  • A debenture is a loan taken by the school thus the payment of fees by the parents of a child against his/ her admission in the school as a student is the way of contributing to the long term funding of the school.
  • The fee mainly covers the school’s running cost and not the capital costs.
  • To gain priority in the selection process of their child parents sometimes buy a debenture before the admission process begins.

Selecting the Right Debenture:
There are two different types of debentures that you can choose from.

  • Individual/ Corporate- This debenture is applicable to just one child in a family. It is non-transferrable.

A debenture that is held by a corporation and can be used for the child of its employee is known as a corporate debenture.

  • A corporate debenture is transferable and can be transferred from one employee to the other at any time if the former employee leaves the employer.
  • In such a case the school may ask the child to stay with them or withdraw the admission as he/ she is no longer associated with the corporation.
  • A child covered under corporate debenture receives priority during the admission process.
  • Refundable/ Non Refundable/ Depreciating- If the child leaves the school then some schools return the full amount of the debenture. They do not apply any interest or charge penalties. These are known as refundable debentures.
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Depreciating debentures are defined as the ones whose value depreciates over a certain number of years. If a child withdraws then, then the left over amount of the debenture after depreciation is returned.

Sometimes the value after depreciation reaches to zero. In a few schools, the debenture depreciates to zero in just seven or eight years.

Alternatives in case the debenture is unaffordable:

  • If you cannot afford a debenture then there are schools that offer parents the option of paying an annual levy in its stead.
  • This is paid on a yearly basis and is non-refundable. It may amount to the same or more that the debenture over the course of the child’s schooling.
  • There are many schools that do not require a debenture. If you are not looking to pay a debenture then you can always look them up.

Photo credit: Brad Flickinger / Flickr

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