Saving for your child’s education

Many families are looking to ensure their children receive the best education possible (whether through the public or private system).

As households continue to see the cost of living expenses rise, families are tending to focus on meeting immediate living expenses, the need to consider planning for funding for your child’s education has never been greater.

Planning is important

Interestingly, the cost of education is increasing at approximately three times the other costs associated with general living (based on the Consumer Price Index) and is expected to continue to rise at a similar rate into the future. Planning for this expense helps you determine your short and long-term financial goals and create a balanced plan to meet those goals.

There are many factors to consider when looking at funding this increasing cost, including:

• Your tax position;
• Your debt position;
• The time-frame for the investment;
• The level of risk you want in any investment strategy;
• and even your level of discipline.

How do we do it?

There are many strategies available to meet the ongoing expense of your children’s education.

• Managed investments (and shares);
• Paying off your mortgage and redraw;
• Prepaid education;
• The grandparents;
• Insurance bonds;
• Education bonds and scholarship plans

Managed investments (and shares)

Managed funds allow you to build a diversified investment portfolio over time utilising the power of compounding returns and regular contributions. This investment portfolio can then be drawn down to meet annual education costs.

Managed funds offer you more control than an insurance bond or education savings plan, and provide access to capital without incurring penalties.

Unlike other strategies, there are no penalties for accessing this money early.

If you have $2,000 to invest, realistically you could only buy shares in one company – using a managed fund, you could have immediate exposure to multiple managers across different asset classes.

Investments can be tailored so that the asset class mix reflects the time horizon of the expected education expenses.

For example, growth assets can be redeemed to pay for secondary education expenses, while income-producing assets can be used for more immediate fees.

Paying off mortgage and redraw

Perhaps the simplest way to “save” for a child’s education is to accelerate or increase mortgage repayments.

Where the mortgage has a redraw facility, or an offset account, amounts can then be withdrawn to meet the education expenses when they fall due.

Did you know you can prepay education expenses?

If the school allows, an attractive option can be to prepay tuition fees years in advance. This will allow you to lessen the rise in education costs.

Some schools will allow prepayment directly to them, while others offer the option through financial providers. In the latter case, a credit is earned against future tuition fees for paying early.

The Grandparents

Parents who are expecting an inheritance can achieve significant advantages by having that inheritance “skip” a generation and be applied directly towards the education of their own children.

For example, a client may arrange with their parents to leave a bequest to their children, which could be held in trust by the parent or placed into a testamentary trust.

Insurance bond

An insurance bond is referred to as a tax-paid investment. While the final distribution is received tax free if held for longer than 10 years, the investor pays tax internally at 30 per cent along the way.

This treatment has made insurance bonds attractive to high income earners with a long investment timeframe – effectively, you are accessing the company tax rate.

If withdrawals are made before the tenth year, earnings become assessable to the investor on a sliding scale.

In addition to the potential tax advantages, investors are usually allowed to contribute up to 125 per cent of the previous year’s contribution each year, and enjoy the same tax benefits on those contributions as the original investment.

A parent or grandparent will generally hold the investment bond in trust for the child. If this is the case and the bond is redeemed prior to 10 complete years, any assessable income will be attributed to the parent/grandparent.

Education bonds and scholarship plans

Education bonds work in a similar way to insurance bonds, but are specifically tailored for education expenses. Each plan has a sponsor and a student beneficiary.

There are two accounts within a plan. The first is a contributions (or capital) account, from which you can make withdrawals for any purpose tax free; the second is an earnings account.

Investment income from the plan is taxed at the corporate rate of 30 per cent. A deduction is then claimed by the provider where the plan is used to pay for prescribed education expenses.

Provided the “earnings account” is used for this strict purpose, the provider is able to pass on this rebate, thus increasing the amount available to pay for education.

One drawback of these plans is that amounts paid from the earnings account are then assessable to the student and taxable at their marginal rate, which can be a penalty rate for minors.

As a result, these products are more attractive when used for tertiary education expenses.

Funding for your children's education can seem difficult.  With the right financial strategies and plan in place, reaching your goals may not be as hard as you may think.