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We all want the best for our children, including their education. For some they see the public education system as best for their children – it’s all about personal choice.
For those, who want to send their children to a private school how to fund it, quickly becomes one of their major financial concerns. In working through the financial implications of private schooling you should ask yourself three fundamental questions.
How much is it going to cost? Pretty simple question, right – well yes and no.
- How much are the school fees?
- How much are the uniform fees?
- Will there contributions fees for building costs, maintenance costs etc?
- How much will the extra-curricular costs be?
- Is there a difference between the costs for primary and secondary schooling?hen are you going to need the money?\
When are you going to need the money?
- Are your children going to attend private primary education as well as private secondary schooling or just secondary schooling?
- Will the costs be the same for each grade?
Will you fund these costs from savings or from cash flow (at the time)?
- What is your employment situation looking like for the future? Are you forecasting a significant increase or is your income likely to remain steady? Is there doubt over the future of your job?
- Are you likely to come into money in the future?
- Are your other expenses also going to significantly increase?
- What do you have in place if you lose your job or you cannot work due to sickness or injury?
If you conclude you need to start saving, what are your options?
Let’s go through the option and the pros and cons.
Option 1 – Use your mortgage offset account
A mortgage offset account is a savings or transaction account that is linked to your home loan. The balance in your account is “offset” daily against your loan balance (hence the name), meaning the lender pretends that you have paid those extra savings towards your loan.
Make additional contributions into your mortgage offset account.
Pro – Not only will you be saving but you also reduce your mortgage payments.
Con – There is a temptation to spend the funds before you require them.
Option 2 - A Savings Plan
This may include saving into a bank account or a managed fund. In a managed fund your money is pooled together with other investors. An investment manager then buys and sells shares or other assets on your behalf.
You are usually paid income or 'distributions' periodically. The value of your investment will rise or fall with the value of the underlying assets. The investment manager may be called a 'fund manager' or 'responsible entity'.
Tip - The bank account or the managed fund should be set up in the name of the lowest income earner within a couple to minimise tax implications.
Pro – You know the funds will be for the sole purpose of your children’s education rather than being mixed up with your other money.
Con – There will be tax on the return your money makes.
Option 3 - An Investment Bond
Investment bonds or tax paid bonds are available from a wide range of companies and are a popular choice for education funding. They provide a variety of investment options such as shares, property and fixed interest, that are not normally available to minors. The reason why investment bonds are referred to as a tax paid investment is because any earnings get taxed at the company tax rate of 30% within the investment. As long as money remains invested for 10 years, the investment provider pays the tax on the investment earnings so you don’t have to report the earnings in your tax return.
If you withdraw before 10 years, then you would need to include earnings in your (or your child’s) personal income tax return. However, you will receive a full credit for the tax already paid, so there is no doubling-up.
Pro – The returns the portfolio make are non-assessable so there are no personal tax implications and they do not effect Centrelink benefits (including Childcare benefits).
Con – The returns are taxed at 30% internally within the fund. To ensure you receive all of the benefits you need to hold the bond for 10 years.
Option 4 - An Education Fund
Education funds are special funds to help save for children's education. If you are considering an education fund you should check the following to make sure these funds fit your long term financial plan.
Pro – Often have add on benefits such as school fee payment plans.
Con – Can be expensive.
The right option depends on your personal situation, but no matter your situation a little bit of planning can reduce the financial stress of funding your children’s education.
Justin McMillan is an Authorised Representative of RI Advice Group Pty Limited (ABN 23 001 774 125), AFSL 238429. This information (including taxation) is general in nature and does not consider your individual circumstances or needs. Do not act until you seek professional advice and consider the relevant Product Disclosure Statement. The views expressed in this publication are solely those of the author; they are not reflective or indicative of RI’s position and are not to be attributed to RI. They cannot be reproduced in any form without the express written consent of the author.