There are many potential uncertainties when it comes to private education. Parents will typically spend hours discussing whether this is the right option for their children and, if so, which schools to consider. One thing that is not uncertain, however, are the significant private school fees payable, so it pays for parents to have a clear strategy in place to fund these costs while pursuing other vitally important financial goals.
According to the Australian Scholarships Group (ASG) Planning for Education Index released in January 2018, the cost of privately educating a child born in 2018 could approach almost $500,000.
It believes it could cost a whopping $475,342 to educate one child through the private system, and its estimates have soared 61 per cent in the last 10 years.
The index calculates the cost of private, faith-based and public education and believes prices will skyrocket further.
It estimates the full cost of primary and secondary education for a child born in 2018 could cost $66,320 in the public system, while faith-based education was estimated to cost $240,679 per child.
The figures include the cost of school fees as well as an estimate for extra-curricular activities, computers, travel expenses, uniforms, school excursions and camps.
They are in line with a rise in education spending recorded in the Australian Bureau of Statistics’ Household Expenditure Survey released last year, which found costs rose by up to 44 per cent in the six years between 2009-10 and 2015-16. Most of this increase came from extra spending on school fees.
For its forecast, the index surveyed 13,500 parents and estimated it would cost about $54,940 for non-fee education costs at private schools in metropolitan areas.
This cost dropped to about $47,950 in faith-based schools and $43,442 in government schools.
Overall private education costs were expected to see the highest increase, with estimates rising by a staggering 61 per cent or $180,128 in the last decade.
This figure dwarfs the 34 per cent rise in wage growth in the same period.
What this means is that education costs are demanding a far greater share of the family wallet than in the past, placing more burden on the average family, already challenged by the rising cost of living.
Strategies to help fund Private School Fees
Whilst these fee estimates may seem confronting and somewhat insurmountable, in our experience there are many potential strategies that can be implemented to ensure these fees can be funded without parents having to sacrifice the other important elements of their life.
Of course, there is no one strategy that suits all and there are many factors that need to be taken into account in determining the optimum funding approach for each family. Here are a few steps and strategies to consider based on our experience over many years in helping parents and grandparents with this funding challenge.
- Start planning early and crunch the numbers – the earlier investors start planning, the better. Mums and dads should consider the different costs of schools, what is actually on offer and the costs of extra-curricular activities (camps, uniforms, other education related expenses). The total annual fee cost will have a significant impact on the funding strategy that will be required in the end.
- Develop a plan – once you are clear on the costs and associated timelines, develop a written plan (perhaps with the assistance of an adviser) which if implemented, will maximise the probability of achieving the goal within the timeframe required.
- Start saving as early as possible – it is important to simply understand that starting to save for school related expenses as soon as a child is born is one of the more basic ways to take the pain out of funding private school fees later in life.
- Understand the concept of compound interest – compounding really is the most powerful savings tool at our disposal. Understand how it works and benefit from the way investing returns compound on top of each other in an almost magical fashion over long periods.
- Pick the right investment vehicle – this is all about maximising after tax investment returns. Seek advice on the most appropriate tax structure for your savings (examples may include options like family trusts, tax paid investment bonds, investing in a low income spouse’s name).
- Paying down the mortgage and redrawing later – making extra mortgage repayments or setting up mortgage offset accounts can dramatically reduce the money that you will eventually have to pay over time for your house. A flexible mortgage structure will allow you to then redraw some of these funds at a later time for education expenses.
- Investigate the use of investment bonds – can perhaps best be described as a tax effective managed fund and more suitable for investors subject to higher tax rates of income tax. The most significant benefit associated with this kind of product is that they essentially gain ‘tax paid’ status after you’ve paid in contributions for ten years. This is because the ATO will consider that tax was paid at the 30% company tax rate within the product. If you, therefore, have a marginal tax rate higher than 30% you will not have to pay any tax on earnings.
- Factor education into estate planning – parents and grandparents could also consider establishing dedicated education funds through a testamentary trust in their will as a tax-effective and flexible way to provide for the education of children or grandchildren. A testamentary trust is a trust created within and by a will, and which only comes into effect upon the will-maker’s death. It can only be established using certain assets. If you are a grandparent, leaving bequests via a testamentary trust for payment of education fees and related costs for your grandchildren may be a more tax effective method of providing for their education rather than leaving additional bequests to their parents that may be caught up in marriage breakdowns, business bankruptcy or litigation.
Funding education is a problem that all parents eventually have to confront. In our experience, with the right long term strategy in place it doesn’t need to be as difficult as it all may seem today.