Q. We plan to educate our children in the private system from years 7-12. Our children are age 2 and 6 months. What strategies should we consider to meet their education costs?
A. The simplest way to fund the future costs of education is to pay down your mortgage as quickly as possible and then redraw from your mortgage to pay fees as and when they fall due. The reduction in interest costs from contributing to the mortgage 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 direct shares, Investment trusts or Insurance Bonds (also referred to as Investment Bonds). Earnings on shares and 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 $37,001. These Bonds are tax paid within the fund at 30% and tax-free after 10 years.
There is 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.
Regardless of the investment option you adopt, ensure that you have an appropriately diversified portfolio, aligned to your appetite for risk and your investment time frame.
With the cost of education outstripping inflation, if you have the assets, you could approach the school to prepay school fees in advance before a fee rise. Schools typically 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.
Q. I am concerned about the capacity of my children to fund the cost of Private school education for my Grandchildren in the future. How can I assist and are there any consequences I need to be aware of?
A. The cost of education has risen at more than double the annual inflation rate since the year 2000. Private School education fees now consume a substantial chunk of household income, making the cost financially unviable for many without extended family support. According to a 2016 CoreData survey, 32% of parents acknowledged receiving financial assistance from extended family to pay school fees.
A financial contribution by a Grandparent to meet education costs is considered a gift and accordingly, there are no tax consequences in paying these costs. The array of investment options mentioned above remain appropriate for an extended family to invest in.
Investment income or other distributions received to generate the gift or investment assets disposed of are still subject to normal Income tax treatment. If you have a Retirement Income stream such as an Allocated Pension, you can draw on this as it is usually tax-free if you are over age 60. If you are receiving Centrelink benefits, “gifting” restrictions would apply and may impact your benefits.
You could bequeath funds to meet education costs via your Will, typically via a Testamentary Trust. Seek advice from a Solicitor on how best to draft these conditions.
Whilst you may feel that supporting your grandchildren’s education is important to you, please ensure that your support does not come at the cost of your quality of life in retirement.