When it comes to raising kids, there’s not much that’s as important as ensuring they receive a good education. So, whether you’re thinking about your children or your grandchildren, ensuring you’ve thought ahead – particularly in relation to who you intend to pay for the inevitable costs – is paramount.
If you’re considering private school options, then of course the school fees themselves will be a major cost. Some things in life get cheaper over time (think tech) while some things get more expensive (definitely think private school fees). Few things are as certain in life as the ongoing prospect of the costs of private schooling continuing to escalate faster than inflation. Australia boasts one of the highest percentages of private school enrolment globally, and if this is the path you want to explore, you will no doubt be thinking about how to fund such costs efficiently. On top of that there’s uniforms, textbooks, extra-curricular activities and trips – it all adds up throughout the twelve-year plus journey most children face.
Then, of course, the chances are your child or grandchild’s education will not stop with secondary school. Attending university has never been more of a popular choice than right now, and although the HECS-HELP study assistance loan is an option to delay payment of the core course fees, there are a variety of other expenses to consider. These may include administrative expenses, more textbooks, possible accommodation relocation requirements and the growing popularity of overseas exchange programs. All in all, it isn’t going to be cheap.
What I’ve learnt along the way
At the end of last year, I saw my youngest complete his high-schooling. It was a bittersweet moment – a mixture of great pride as well as knowing he was rapidly closing in on adulthood and (ultimately) independence. The educational journey certainly hasn’t ended with university now part of his life (and my eldest already in her third year). However, upon reflection of our journey so far, it seems clear to me that there are two significant planning points to consider, depending on where you are in life.
Firstly, if you’re in the position where you’ve completed the schooling journey, the obvious question becomes “what to do with the cash previously committed to funding those fees?” Of course, the options are plentiful - pay down debt? contribute to retirement funding? travel? Whatever the right answer is for you, it’s a great time to re-evaluate your priorities and to consider your options seriously. This piece explores how to identify clear and precise goals that are realistic, achievable and important so you can determine what you want to do with that money.
However, if you’re at the other end of the spectrum, with younger children or grandchildren, now might be a great time to consider the funding implications of your education preferences. Forward planning particularly in a tax-effective manner, can make an enormous difference five, ten or fifteen years down the track when the larger invoices are likely to start kicking in.
Know your options
With all of the various educational costs in mind, it is worth planning ahead and building a strategy for how exactly you will fund it all. As a result of both the sheer scale of paying for your child or grandchild’s education and its obvious importance, doing your due diligence and weighing up the benefits and drawbacks of various strategies is a prudent approach to adopt. Simply investing in a child’s name is generally not a sensible option – any income (over $416) will be heavily taxed – and of course, the child in question is able to access the funds! While most will simply rely on funding future education costs out of future after-tax cash flows, there are potentially better options available.
A common strategy is to establish a share portfolio or savings account, where a parent acts “as trustee for” their child. Interest/dividend income earned though is generally required to be declared in the name of the adult taxpayer, and when the time comes to liquidate the portfolio (in order for the investment to serve its intended educational purpose), capital gains tax considerations can represent a significant financial cost.
An often over-looked option is the structure of an education bond.
Investing for your child or grandchild
An education bond is a type of investment bond that, when used effectively, has the scope to help investors mitigate significant tax obligations and boost their after-tax rate of return. It is a strategy well worth exploring for parents (and grandparents) who are yet to account for the education funding of their child (or grandchild). Designed to facilitate the entirety of an individual’s educational journey, education bonds can be contributed to by anyone and are taxed internally at the company tax rate of 30%. Achieving peace of mind in knowing that the funding of your child’s future is accounted for is one thing, but doing so in a tax-effective way that allows you to then effectively re-allocate capital to other priorities in life is an added bonus.
It is important to note that in spite of what the name may suggest, the capital invested through this vehicle is not locked in for educational purposes only. In the event that circumstances change and other needs arise, the funds are accessible for any purpose at any time, and control over how and where the money is invested is retained until it is withdrawn. Another strength exists in the form of additional estate planning benefits – the nature of the structure requires a beneficiary to be nominated, and in the event that the Bond owner passes away, benefits can still be maintained for the student via a Plan Guardian.
Technical considerations
When choosing an education bond to purchase, it is advantageous to determine that a chosen product is classed as a ‘scholarship plan’ under Australian tax law. Purchasing a bond of this nature through a friendly society or life insurer will result in the provider receiving a tax deduction for certain educational expenses, which the investor will receive in the form of a rebate when withdrawals are made to cover these costs.
Educational expenditure isn’t generally regarded as an activity that can be managed in a tax-effective manner. However, as we can see above, it very much can be, so long as the appropriate preparatory steps are taken. If you have any questions about education bonds, or are seeking a fresh perspective on your current financial strategies, please get in touch.
Disclaimer: This article contains general information only and is not intended to constitute financial product advice. Any information provided or conclusions made, whether express or implied, do not take into account the investment objectives, financial situation and particular needs of an investor. It should not be relied upon as a substitute for professional advice.