Saving for your children's education

The sooner you start saving, the better.
 
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03.Education savings plans

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.

 

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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.
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