Q We plan to educate our children in the private system from years 7-12. We have 2 children Age 2 and 3 months, both boys. What investments should I consider to assist funding the costs of their education? We live on Sydney’s North Shore.
A. You live in one of the most competitive and expensive education markets in Australia. Whilst not wanting to debate the costs of education, fair to say that demand for Private School education substantially outstrips available positions, hence the urgency to register on a school waiting list “post partum”. Given where you live, you may be planning to commence Private School Education in year 7 but due to competition to secure a place, you may be compelled to start your children in year 5 which you may not have budgeted for.
Whilst the CPI index has hovered around 3%, according to the ABS, the cost of education has risen at roughly double this amount. Your friends who have children in Private school can share the pain of the “love letter” arriving in the post prior to the commencement of the school year.
The simplest way to fund the future costs of education is to actually pay down your mortgage as quickly as possible and then redraw to pay fees as and when they fall due. The reduction in interest costs is effectively a tax free rate of return that frees up personal cash flow to pay down debt at an increasing rate.
If you don’t have a mortgage, you can look to investment alternatives such as Investment trusts or Insurance Bonds. Earnings on Investment trusts are taxed at your marginal tax rate. Given your likely investment time frame of greater than 10 years, Insurance Bonds are beneficial if you earn more than $37,000. They are tax paid within the fund at 30% and tax free after 10 years.
There are a range of Education Bonds and scholarship funds marketed to parents to assist in meeting the costs of education. These funds are similar to Insurance Bonds and are taxed in a similar manner. These plans can be inflexible in that the fund must be used for education purposes. Usually there are financial penalties if you do not meet your contractual commitments to the provider. If considering these options, get advice and ensure you are aware of the fine print and tax consequences.
If you have an appetite for direct equities, Endowment Warrants provide exposure to a share with a requirement to deposit around 30 to 70% of the shares underlying value at the time of issue. The time frame is usually 10 years. Dividends are reinvested and the outstanding debt on the warrant will vary depending on dividends on the shares and the interest rates applicable. Ensuring that you have an appropriately diversified portfolio of shares in important if adopting this strategy.
Grandparents can meet the costs of education by drawing on their Allocated Pensions (tax free if over 60) whilst alive or bequeath the money to the grandchildren via a Testamentary trust in the event of death.
With education costs outstripping the CPI, if you have the assets, you could approach the school to prepay school fees in advance. Schools usually will assess this on a case by case basis and usually when the children have started at the school.
The best strategy to fund the future cost of education will depend upon your income, your assets, your debt and access to family support. There is one consistent view, the earlier you start considering how to fund the future costs, the greater options and flexibility will become available to you when the time falls due.