Saving for your children's education

Thursday, 05 August 2010 10:40

Written by Ryan Love

Educating your children is a major expense — the sooner you start saving for it the better.

Parents often go faint when they see the cost of school and university fees — just how much depends on the schools and universities they choose. Australian parents spend, on average, $50,000 on education and childcare for each child.

Many parents pay school fees, as with most household bills, on an ad-hoc basis when they arrive in the mail.  A recent survey found that around only 50% of parents use savings or investments to pay school fees.  With most admitting that their savings will fall short.

Having the money available when children start school is a better option than borrowing to pay school fees. Paying interest on the borrowings can sometimes double the amount you would pay if you had saved the money.

To work out how much you need for your child's education, visit the schools website.  However you should expect private school fees to go up as schools spend more on technology and building projects. Over the past 15 years, private school fees have increased at around 7% per annum.

You will find that even a government school has significant costs. From uniforms, excursions and sporting equipment to textbooks, travel expenses and music lessons. The key to funding your child's education is to start early and save regularly.

But it is not as straightforward as opening an account and contributing regular savings. Careful consideration should be given to your education funding structure.  This may include a prepackaged education savings plan, managed funds or prepaying school fees.

Education savings plans

These are a tax-effective way to save that encourages the discipline of regular saving.

The downside is that education saving plans have relatively high fees, particularly for conservative investment options. Also, you must find out what happens to your investment earnings if you withdraw your investment early. Some plans will not pay you any gains.

Education saving plans offer a rare tax advantage. In some circumstances, the tax office allows the plan provider to rebate all the tax paid on investment earnings at the maturity of the "scholarship plan". The tax benefits vary from plan to plan and can be complicated.

Managed funds

If you like the idea of regular saving plans but want more flexibility, why not try other investments with lower fees? 

There are various index funds available with fees of less than 1% per annum.  These funds invest in similar sorts of investments to education plans, however there is no penalty if you need to access your money at short notice.

If you choose a diversified fund with investments in fixed interest, cash, property and shares, you can spread your risk and take advantage of long-term growth investments.

Most managed funds do not allow investments to be held in a child's name, but generally they will accept applications if an adult acts as trustee for the child and the trustee provides their own tax file number.

Direct shares are also attractive investments for children but, again, the investment may need to be held in the name of a trustee.

Some people prefer to use a flexible mortgage with a redraw facility to meet education bills. Whilst this can save mortgage interest, the downside of drawing against your mortgage is that most people love to see their home loan balance going down, rather than up. I can also be tempting to access these funds for an unintended purpose, such as to renovate the house.

Prepay your school fees

Some private schools allow you to pre-pay your school fees up to 10 years in advance. With school fees increasing rapidly, the ability to save money by prepaying fees a number of years ahead becomes significant.

Schools find the prepayment option attractive because it can reduce the risk of bad debts and bring their cash flow forward.

Check with your school to find out if pre-paying is an option.

For more information or to disucss what option works best for you, contact Ryan Love on 1300 856 338 or email This email address is being protected from spambots. You need JavaScript enabled to view it. .