Funding your children’s education

ARTICLE

04 April 2024

4 mins read

Ask any parent and they will tell you that raising kids is expensive! The Australian Scholarships Group (ASG) calculations show that to send a child born in 2017 to a state school from prep/kindy to Year 12 will cost an average of $68,613 and for a 13 year private school education it is an average of $487,093¹.

If you’re thinking, “But hang on, isn’t public school free?”. Yes, the low tuition fees are voluntary, but there are still other education-related expenses, such as: uniforms, textbooks, stationery, excursions, music lessons, sports fees, digital devices and possibly tutoring.

Incur these expenses for multiple children and the sooner you start an education savings plan the better!

Research, make decisions and set an education savings goal

The key to managing the cost of education is to start early with research and planning. Kick off your planning by asking yourself the following questions:

Do we want to send our children to a public, private or faith-based school? There’s a wide range of fees charged by all the different types of faith-based and private schools.
If choosing a fee-paying school, do we want to send our children from prep/kindy or from high school?
If choosing a fee-paying school, what are their fees and do they offer discounts for siblings?
If choosing a non-fee paying school, do we want to send our children for additional tuition?
Are we prepared to pay for university costs such as textbooks and away from home accommodation?
Will we be paying for their university tuition fees or will they utilise the high Education Loan Program (HELP)? HELP is a very low interest rate government loan that covers university tuition fees and doesn’t have to be paid back until the student starts earning above an annual income threshold (for 2023-2024, the threshold is $51,550).

If you understand the cost of educating your child, you can make important decisions in advance. Your choice of school may determine where you choose to live, so planning your children’s education should start when they are very young or before they are born if you would also like to save for childcare fees.

Education savings options you may want to avoid

Some parents think depositing a regular amount into a bank account in their child’s name from their income or from gifts their child has received is a smart investment. The problem with savings accounts is that they offer extremely low interest rates which often don’t keep up with inflation - the investment is effectively going backwards. And if the savings account is in the child’s name, only a small amount of interest can be earned before it is taxed at a high rate.

Education bonds, also known as scholarship funds or education savings funds, are a type of investment bond that can have potential tax benefits - but if you get it wrong, you may end up paying more tax. They usually attract high fees and don’t offer many investment options.

Suggested education funding options

After you’ve chosen a school/s and have an estimate of costs including accounting for inflation, the next step is to look at how much you could set aside each month and where you are going to invest it.

Here are three suggested investment options to consider:

Your home loan – use an offset account or make extra repayments and later redraw to pay the school expenses. This option offers the certainty of knowing how much your return is because it is based on your home loan interest rate. However, this option requires discipline to make the extra payments and not be tempted to use the savings for “emergencies” or other needs and wants.
Insurance or investment growth bonds – offer a variety of investment options such as fixed interest, shares and property. If your marginal tax rate is above 30% and you can commit to a 10 year investment horizon, this is an effective investment vehicle because the bond is taxed at 30% and after 10 years earnings are returned to you “tax paid”.
Managed funds or shares – if you have a long investment timeframe and prefer a bit more flexibility in how your money is invested and have the right risk profile, this might be an option for you.

The value of professional help

If you are considering investment bonds or managed funds, these products can be quite complex and have tax implications, so it’s a good idea to seek the help of a financial planner. AIA Financial Wellbeing offers affordable, reliable and straightforward solutions for wealth advice needs.

An AIA Financial Planner can crunch the numbers for you and help set you up to meet your education savings goal, or if after determining that your choice of school/s isn’t affordable, assist you with coming up with an alternative education savings plan. If you’ve have had this discussion when your children are young, you’ll have time to be able to make other choices.

Reference

¹ https://www.asg.com.au/doc/default-source/Media-Releases/planning-for-education-index-2017/asg_edcosts_childborn_2017_nat_metro.pdf

Next steps

Talking to a financial planner can help you understand your situation and make confident financial decisions (big or small) so you can get the most out of life.

Disclaimer:
Copyright © 2024 AIA Financial Services Pty Limited (ABN 68 008 540 252, AFSL 231109), trading as AIA Financial Wellbeing. All rights reserved. This information is current at the date of this publication and is subject to change. This provides general information only, without taking into account factors like the objectives, financial situation, needs or personal circumstances of any individual and is not intended to be financial, legal, tax, health, medical, nutritional or other advice. Before acting on the information in this publication, individuals should consider its appropriateness having regard to such factors.