There’s an old Chinese proverb which reads, ‘The best time to plant a tree was 20 years ago. The second best time is now.’
This quote from ancient China may not have had rising education costs in mind at the time but having sat with countless parents with young families we know that the sooner you start preparing for education costs, the better.
At 34 percent, Australia has one of the highest rates of private school attendance in the world (Australian Bureau of Statistics). Unsurprisingly, this demand has done little to reduce the costs.
Australian Scholarships Group’s (ASG) Planning for Education Index report estimates that a child born in 2016 may rack up almost $470,000 in education expenses if sent to a premier private school and $230,000 for a Catholic school education.
Alarmingly, education costs are growing at a rate of 5.5% per annum which highlights a key issue for parents: education expenses are growing faster than your savings accounts.
There are a number of options that parents can opt for to tackle the rising cost of a good education however it’s important to note that the suitability of each will depend on your personal situation. In all instances however, the consistent theme is that you get started as early as possible.
Using ASG’s figures, $470,000 education costs could be met by investing annual contributions of $17,500 (commencing at birth) and earning a net 6% return each year:
These annual payments shown above may appear high but the total contributions that you would make equal only $332,500. This equates to a $140,000 saving when compared with paying school fees as they fall due.
There’s a range of investment strategies that can be used as part of an education savings strategy, which are outlined below:
Education Savings Plan
Education Savings Plans are offered by a a handful of providers in Australia and work similarly to an investment bond, with a number of investment options and tax paid internally at a flat rate of 30%. The key difference comes when withdrawals are made – the tax paid on earnings is typically refunded when an educational expense is claimed.
Mortgage offset account
For simplicity it may be hard to beat a mortgage offset account. The ‘returns’ are equal to the interest rate that you’re paying on your mortgage and are therefore typically low, however you’re not required to pay any tax which can add to the appeal. The previous graph assumed a 6% after-tax return on your money which would be a reasonable long-term expectation for your mortgage. This strategy is also easy to establish and highly flexible should your plans change in the future.
If you’re an older parent (>50) you may consider using your superannuation as a vehicle to prepare for future education costs. This strategy may involve increasing your contributions to super via either salary sacrifice or after-tax contributions and then commencing a pension fund when you reach preservation age (the age when you can begin to access your super). The resultant pension payments may then be used to fund education expenses in a tax-effective manner.
If you have a particular school in mind it may pay to contact them to discuss your child’s eligibility for a scholarship. We suggest you learn how scholarships are distributed, whether your school offers both partial and full scholarships and what you can do upon application to increase the likelihood of success. You don’t get what you don’t ask for and this is especially true when it comes to scholarships.
If you’re unsure as to which approach to adopt or how much you will need to put aside, obtain some professional advice as part of your financial plan.