The idea of giving the kids a good start in life is virtually timeless, and for many Australian parents, this means education.
Compared with previous generations, we are seeing more people finish school and then continue on to university level studies and an increase in parents choosing private schooling for their children. Both of these choices come with a price tag.
A recent AMP.NATSEM Report, Cost of Kids, found parents sending their children to private schools spend an average of $216 per week on fees, compared with $12 a week for public schools and $81 for Catholic schools, and the cost of education has continued to outpace the broader cost of living.
So where should people start to make sure they can cover the cost of educating their kids, especially if private schooling is on the cards? The first step is to try to estimate future costs. Map out the relevant school years in terms of current costs, allow a decent margin for additional expenses outside the core enrolment costs, and then account for future price increases.
Next, decide how much of this cost you expect to fund from your cash flow at the time, and how much you need to accrue in savings. If you have more than one child, you need to plan for the overlap years where you will have to cover the significant expenditure of more than one lot of school fees.
Now it comes down to creating a plan for how you're going to save.
One way people save for the cost of education is the purpose-built scholarship plan or education fund. Typically these plans are taxed at a rate of 30 per cent, which for many higher-income earners would be lower than their personal tax rate, and may pass on additional tax benefits as educational expenses begin to be paid from the fund. These funds can offer a variety of investment choices, depending on the provider, and offer a simple, tax-efficient investment structure to achieve your education savings goal.
Saving through managed funds is also a popular choice. Earnings are taxed at the owner's marginal rates and capital gains are delayed until funds are withdrawn, when they receive a 50 per cent discount. For investors in a lower tax bracket, for example a non-working spouse, or where a significant portion of the return is from capital gains, this can be an overall advantage.
Mortgage offset accounts can provide secure, tax-free savings in an easily identifiable account. A similar thing can be achieved by sectioning off a split of the mortgage, and paying it down more rapidly, with the intention of redrawing funds when needed for education.
For people with a decent time frame and risk appetite, some gearing (borrowing to invest in things like shares or managed funds) can supplement or replace the previous strategies.
For some people, including older parents or perhaps grandparents who wish to support their grandchildren, superannuation can be a viable education savings vehicle, if the education expense is expected after preservation age is reached.
Don't forget to explore whether your school offers early payment discounts.
Providing an education for your kids can be an expensive exercise. It makes sense to plan ahead, do some sums and weigh up a variety of strategies to ensure your plans come to fruition.
Alex Berlee is an adviser with AMP Financial Planning. This article was originally published by the Sydney Morning Herald on 29 September 2015. This article represents the views of the author only and does not necessarily reflect the views of AMP.
Cost of education calculator
The cost of educating your children could be one of the bigger investments you’ll make in life. Get an estimate of what your children’s education may cost you.Calculate now