Every parent wants the best for their children, and this generally includes a good education. We are lucky in Australia to have access to some of the best schools in the world, but that also means education comes at a cost - sometimes a significant one. So how do we pay for it?
With just about everything, planning early is a good idea, especially with the cost of education rising at approximately three times the rate of a family's other general expenses.
Planning is important
When starting to plan for this expense, there should be consideration given to your current surplus cash position, debt levels, timeframe to school fees, the level of risk you want to take on, and of course, your own level of discipline in sticking with plans.
How do we do it?
There are strategies of different shapes and sizes when it comes to funding the expense of school fees. These include (but are not limited to):
• Managed investments (and shares)
• Paying off your mortgage and redrawing at a later date
• Prepaid education schemes
• The grandparents
• Education bonds and scholarship plans
Let’s have a look at few of the more common strategies...
Managed investments (and shares)
Managed funds are a relatively easy way to build a diversified, liquid pool of funds that can be drawn on when and if required. The ability to contribute small amounts on a regular basis makes this a flexible option for many families. The value of the compounding returns means that starting early, and small, leads to it being a viable option for many. This type of strategy gives you much more control than others, by giving you access to the funds when you want it without many penalties.
Paying off mortgage and redrawing
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Where the mortgage has a redraw facility, or an offset account, amounts can then be withdrawn to meet the education expenses when they fall due.
Parents who are expecting an inheritance can achieve 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 and then have the trust income pay for fees when they fall due (this may be a conversation for another time)
Education bonds and scholarship plans
Education bonds 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.
There are pros and cons with education bonds and may need to be researched further to see if they will deliver you the outcome you are hoping for.
Trying to fund your child’s education can seem daunting and out of reach. But with the right planning and time on your side, breaking the savings plan down into smaller pieces over the years leading up to your little one starting school, can make it much more achievable.