From this week millions of kids start the new school year and for those with children in the private system the ever-increasing costs can be overwhelming.
Primary and secondary education costs have, on average, doubled since 2007 and high income families are now spending more than a quarter of their household budget on schooling. That’s according to a recent AMP.NATSEM report, The Cost of Kids, which also revealed private school fees are now costing on average $216 a week compared to public school fees at just $12 a week.
Rapidly rising costs do not seem to be deterring parents from choosing private over public schools. To the contrary, kids are being signed up for private schooling in droves. Today, just over a third of children attend a private school – that’s 10% up on 30 years ago according to the Australian Bureau of Statistics. If private schooling is something you’re considering, here are some tips on how to fund it.
Start planning early
Don’t don’t keep putting it off, start a savings plan – and do it early. The longer your timeframe the more effective your savings will be thanks to the benefits of compound interest.
Start by working out how much school fees will set you back. Don’t just look at the current fees and charges schedule and add up the cost listed for each year because private school fees rise by around six per cent each year, so you must factor this in when you do your calculations. For example, let’s say you have a child going into Year One at a school that charges $13,860 this year and lists $21,260 for the Year 11 /12 fees (fairly standard for a high-end private school today). When your child reaches Year 12 in 2024 you will actually pay $38,763.89 for their final year. So work out what the six per cent rise looks like for each year up to Year 12 and then add that together. Remember to also include in your sums the initial endowment fee most private schools charge, which can be up to $10k or more. In the above example modelled on an Australian private girls’ school the total fees from Years 1-12 work out to close to $300k.
Get smart with investing
Investing is a great way to save for your child’s education. If you’re not savvy when it comes to investing, it’s time to educate yourself. Read widely, seek advice from professionals and don’t be afraid to ask questions. Even if you do know about investing, seeing a professional is still a smart move because although you may have the expertise, investments take time to manage. Be honest with yourself about whether you are prepared to – and can afford to — spend the time managing your investments. Some investments you might consider when saving for your child’s education include: insurance bonds, mortgage redraw, high interest savings accounts, managed funds and direct share portfolios. Here’s an overview of each investment type as a basic introduction:
Insurance bonds are an investment product issued by insurance companies when they want to raise money. The underlying investments of insurance bonds are usually managed funds, however unlike investing directly into a managed fund there are big tax advantages to bonds if you follow a few simple rules. First, make no withdrawals for ten years and second, stick to strict contribution limits each year. Do this and you’ll pay no tax on your investment earnings when you draw down at the end of the ten year period. For example, if you plan to send your child to a private school in Year 5 and invested in bonds as soon as your child was born, you’ll meet the ten year rule and can start drawing down on the investment tax-free. And as an added bonus: if grandparents wish to save for their grandchildren’s education, bonds can be structured so they do not form part of the estate.
Using a mortgage redraw strategy can be a great option for some parents – but downright disastrous for others. It works as follows: you direct your education savings to your mortgage or offset account, lowering the amount of interest you pay on that debt. Later, you redraw the money to pay school fees. If you’re the type who has the discipline to save via your mortgage, this may work well for you. But if you also redraw for other purposes like upgrading the house, you may start going backwards.
Some savings schemes promise to help parents with saving for the cost of schooling, such as the widely known, not-for-profit Australian Scholarships Group (ASG). These schemes usually pool the money of members and invest them in bonds and other investments on their behalf. This ‘set and forget’ type investment may suit people who don’t want the hassle of active involvement managing investments, but there are pitfalls such as having no control over how your money is being invested, flexibility often being extremely limited and penalties usually applying for withdrawing funds early.
Direct share portfolios
Direct share portfolios are simply parcels of shares you purchase from a stock exchange such as the Australian Stock Exchange (ASX) and have the advantage of allowing you easy access to funds as and when you need them. You can purchase shares either via a stockbroker, who will charge a brokerage fee for their time and advice, or do it yourself online. Be warned though, DIY may be cheaper but it carries greater risk if you don’t have the expertise to know which shares to invest in and have the time to track their performance and know when to sell.
Managed funds are an easy way to invest. A managed fund allows you to pool your money together with other investors and then have a professional manage the investment of these funds on your behalf. They allow small investors to diversify their funds effectively and efficiently. They also ensure your money is professionally, constantly and consistently managed and it makes record keeping easier. The disadvantage is they may have a higher direct cost. Professional management is not provided for free, nor is reporting.
Ultimately, deciding how to invest and save for your child’s education is one of the biggest financial decisions you’re likely to ever make. Remember: decisions must be weighed against your timeframe, other life goals and your appetite for risk. Give serious consideration to what is going to work best for your family before making your decision, seek advice and review your plan yearly.
*Claire Esmond is an Authorised Representative of AMP Financial Planning Pty Ltd, ABN 89 051 208 327, AFS Licence No. 232706. Any advice given is general only and has not taken into account your objectives, financial situation or needs. Because of this, before acting on any advice, you should consult a financial planner to consider how appropriate the advice is to your objectives, financial situation and needs.