Saving for your children's education

The sooner you start saving, the better.
 
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01 .Your options

Child studying

The cost of putting your child through school has increased by 70% over the past 10 years, so the sooner you start saving, the better.

Our guide explains:

We also share some tips for grandparents who may be thinking of providing financial support to their grandchildren.

It’s projected that parents of children born this year will have to pay from $60,000 for a public school up to $400,000 for a private school education from preschool to final year.

Your options

By the time the latest addition to your family sits final school exams, their last year at a metropolitan private school could cost $50,000. And just when you’ve finished paying for high school, you may have to get out your wallet for the next stage of their education – university. 

The key factors to look at when selecting your savings strategy are performance, risk and tax rates. You’ll also need to decide whether you want to save for secondary or tertiary education.    

First of all look at your situation:

Next to the investments listed, a family trust may be an option if you have a large sum available. While you need specialist financial advice and there are administration costs, a family trust can help you to legitimately distribute investment income and take advantage of lower marginal tax rates for certain members of the family.

Some employers may also allow you to salary package school fees (fringe benefit tax may apply). This is where the employer pays the school fees upfront and then deducts regular amounts from your gross income to recover the cost - it’s effectively a fee-and interest-free loan that lowers your taxable income.

 
 

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Estimate how much you’ll need. For primary and secondary school the key difference in cost is whether your child will go to a government, an independent (for example catholic) or a private school.

For a child born in 2012, education expenses (school fees and extracurricular activities) from preschool until their final year could range up to about $60,000 for a public school, $200,000 for an independent school and $400,000 for a private school according to the Australian Scholarship Group.

Costs include next to school fees also extracurricular activities, uniforms, schoolbags, books and stationary, musical instrument, transport and technology costs such as for a computer and internet.

For tertiary education today, a three-year course to become an accountant will cost about $30,000 in total course fees. Add the costs of living for a student in shared accommodation, and this could blow out to about $120,000.

For a six-year medical course, course fees would be about $62,500 and if you include living costs it could be around $250,000.

For a student who starts university in 10 years, total costs are estimated to run up to about $175,000 to become an accountant and about $375,000 for a medical qualification, including accommodation and other expenses.

Budget for your savings

Saving for your child’s education is similar to any other long-term savings goal.  The best time to start saving is as soon as possible, preferably when your child is born or earlier. Make a budget and decide how much you can put aside each week and increase this each year to account for inflation.

There are a number of ways you can achieve your savings goal. It can be as simple as setting up a direct debit from your account and deducting a weekly amount into education savings. You could also make lump-sum contributions, such as your annual tax refund, or pay the 50% Child Care Rebate into your education savings account.

Education savings plans (ESP), which offer a tax-free investment for education, sound like a good idea, but it’s critical to find out what kind of leverage these have over your money. There are only two available, The Education Fund (TEF) from the Australian Scholarship Group (ASG) and Lifeplan’s Education Investment Fund (LEIF).

ESPs are designed for saving for tertiary education, as the earnings on investments are paid directly to the nominated child. These earnings are taxed as income for the student (income up to $16,000 is usually tax-free for students over 18). However, high tax rates apply to children under 18 – anything interest above $416 up to $1307 is taxed at 66%. If a child has interest income of more than $1307, the whole amount is taxed at 45%. See our report on Kid’s savings accounts.

So while your child is under 18 it’s better to only withdraw contributions to help with education expenses, as you can do this taxfree, however it will reduce the earnings. Earnings are taxed at the company tax rate of 30%, but if the earnings are used for a broad range of education expenses, the ATO refunds all tax paid on them to the fund.

Lifeplan Education Investment Fund

Strategy

The fund can be set up by parents or grandparents for a nominated student, and there is no maximum age restriction for the student. Minimum initial contribution is $1000, and additional contributions can be made as a lump sum of at least $500 or through a regular savings plan of a minimum of $100 per month. Maximum contributions per child are currently $428,000.

Pros
  • Tax advantages – if earnings are used for a broad range of education expenses, any tax paid is directly refunded to you.
  • Costs covered include a wide range of full-time and part-time education, and programs for children with physical, intellectual or learning disabilities. Expenses include tuition fees, uniforms, a living allowance and accommodation expenses.
  • Converts to an insurance bond if you decide not to use the earnings for education.
  • You can select any one or a mix of 16 investment options from six different investment managers from cash to share investments.
Cons
  • Fees such as management costs apply.
  • No longer tax-free if you don’t use the earnings for education expenses.

ASG The Education Fund

Strategy

With TEF the earnings of the investments of all parents are pooled to benefit only the children who enter and successfully complete eligible tertiary education. Your contribution is based on the age of your nominated child when you enter TEF (maximum entry age is 10), star ting from $11 per week and increasing by 8% per year throughout the contribution period. 

According to ASG projections you could receive up to $9289, which you could use for secondary education – your total contributions after fees. If your child becomes eligible for the tertiary education benefit, assuming returns of 7% per year they could receive an additional $10,538. ASG also offers two other plans, one of which can only be taken in conjunction with TEF. Taking up one or both of these plans could increase your investment.

Pros
  • Provides a tax-effective option to save for education.
Cons
  • Any investment earnings and tax refunds are transferred into the scholarship pool. 
  • Only your contributions after fees are refundable should you decide not to continue with the investment (there can be deductions if the return of the investment was negative). 
  • Very restrictive conditions on access to the earnings and tax refunds of your investment. To get the maximum benefit, your child must study full-time for three years and satisfactorily complete each year of study. If your child elects a one- or two-year course, they only receive one or two years’ worth of the benefit. According to ASG, between 2009 and 2011 only about half of the children whose parents invested in TEF were beneficiaries after they started an eligible three-year tertiary course. While some children could have delayed their tertiary education, this still means a large percentage of ASG’s members missed out on their investment earnings. 
  • No choice of investment options – TEF uses an investment strategy they describe as “conservative-balanced”. 
  • Establishment and ongoing fees apply.
  • The TEF benefit for secondary and tertiary education is too low to cover a substantial part of the costs.
If you have a mortgage, consider paying it off first before putting money into an education fund. Salary sacrificing into super is also a good option. Both will only work if you can manage to pay education costs from your cash flow once the mortgage and your retirement have been taken care of.

If you’re on a high marginal tax rate, your next best option might be insurance bonds or education savings programs.

Think carefully before investing in The Education Fund from the Australian Scholarship Group, as your child will only receive the full benefit if they successfully complete an eligible full-time three-year course. While an investment in Lifeplan’s Education Investment Fund  is more flexible, tax advantages are lost if you don’t use the earnings for education expenses.

Pay off your mortgage

Strategy

Paying off your mortgage as quickly as possible saves you in interest and frees up your cash-flow. Make sure your mortgage has a redraw facility with low or no fees or an offset account, so that you have access to the money if you need to draw on it for education expenses.

Pros
  • Your return is the interest saved on your mortgage, currently probably around 6.5% - an after-tax return which is hard to beat by any other investment.
Cons
  • You need to be disciplined and don’t access the money for other expenses.

Salary sacrifice into super

Strategy

Contribute extra into super to make sure your retirement is taken care off before the school fees hit.

Pros
  • Tax advantages: Extra contributions up to a cap (currently $25,000) are taxed in the super fund at a maximum rate of 15%. Investment earnings are taxed at 15% and once you are 60 years old you can access your super tax-free.
Cons
  • Only works if, once you stop contributing to super, you have enough money freed up to pay the education costs out of your normal cash-flow.
  • Money in super is locked away and you can’t access it early.

Insurance bonds

Strategy 

Insurance bonds work like a managed fund and are available from a range of financial institutions allowing a range of investment strategies.

Pros
  • Can be set up in your or your child’s name. Some insurance bonds allow you to nominate an age when the ownership transfers to the child.
  • Tax advantages: If you hold the investment for ten years and contribute no more than 125% of last year’s contribution each year you won’t be taxed for the earnings. Earnings will get taxed within the insurance bond at the company tax rate of 30%. If the funds are accessed in the first 8 years then all earnings are assessable. If accessed in years 8 to 9 then two thirds (2/3) of the earnings are assessed and if accessed in the 9th year but before the tenth then one third (1/3) is assessed. So, if you are on a lower marginal tax rate than 30% you will receive a credit. If you are on a higher marginal tax rate you will need to pay additional tax if you access the earnings before ten years.
Cons
  • Entry, management and other fees may apply. 

Online savings accounts, managed funds, and shares

Strategy

Investments such as online savings accounts, managed funds and shares can be a way to set money aside for your children’s education. However, consider the flexibility of the investment: while online savings accounts are readily accessible, you would want a long-term investment timeframe for an investment in managed funds or shares. As you begin to approach the time you will need access to the funds, consider moving the money into a more accessible investment. 

Pros
  • Can be started at any stage and gives you freedom of choice for your investment strategy.
  • Can be suitable for people on a lower marginal tax rate.
Cons
  • Earnings will be taxed at your marginal tax rate, so  it might be a good idea to hold the investment in the name of the parent with the lowest marginal tax rate. 50% of all capital gains are tax-free, the rest is taxed at your marginal tax rate. Tax concession such as franking credits may apply.
  • Minimum investment amounts and costs such as brokerage, or entry and ongoing management fees, may also apply.
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“Grandparents may get caught out by gifting rules when they give money for their grandkids education and don’t check with Centrelink first”, says Craig Hall from the National Information Centre on Retirement Investments (NICRI). You are only allowed to gift up to $10,000 per financial year but not exceed $30,000 over a 5 year period. Any amounts in excess of above this will be counted as though you still own those assets for 5 years.

If you hold funds in trust for your grandchildren you will be ‘trustees’ and therefore responsible for the funds. This also means that these funds will continue to be assessed for your age pension under the assets and income test. 

  • If you are on a part pension due to your assets, every extra $1,000 assessed will reduce the pension by $1.50 per fortnight.
  • If you are on a part pension due to your income, every extra dollar counted will reduce the pension by 50 cents per fortnight.

For more information contact Centrelink’s Financial Information Service on phone 13 23 00 or contact NICRI on phone 1800 020 110.

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