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Saving for school

Education costs are high, and they’re only getting higher. Did you know that over the last decade school costs have increased by 70%? Kinda motivates you to look at your toddler a little differently, huh? This guide is going to walk you through the average costs of a child’s education, and how to save for it.

The cost of education

The first step is to look at what type of education you’re looking into. Are you sending your child to public or private school? Are you sending them to a religious school? What are the associated fees? The simple reality of it is that you can’t know what you’re trying to figure out unless you differentiate the type of education you’re looking into.

The Australian Scholarship Group has released findings that education costs from preschool until the end of their education can range from $60,000 – $400,000 per child, depending on the type of education, the extra curricular activities, and so forth. Tertiary education also adds huge costs of upwards of tens of thousands of dollars, not to mention post secondary and living expenses.

In short, the costs range into the hundreds of thousands of dollars, depending on what type of education you’re looking into and what the child ends up wanting to be.

Starting to save, where to begin

Now that you’ve seen how costly it can be, you’re likely intimidated about where to begin in saving these amounts. The simple answer is to begin at the beginning, figuring out where you are exactly. Are you currently in debt? Is there equity in the home?  What’s your tax rate and are you investing appropriately?

These are all questions to ask yourself when assessing where you’re currently at. In short, you’re looking to see what kind of funds you have access to, and how you can best use that information to maximize your contributions to the education funds.

Beginning the budget

Now that you have some of your fees and flexibility in your personal situation figured out, it’s time to start thinking about how to budget for these expenses. Take some time with your partner to decide how much you can put away each week to save for your child’s education.

The best option is to start as early as possible, and to select a particular fund to help you save.

Education funds

There are a lot of different ways to save for children’s education, ranging from ESPs, to personal saving, to 50% child care rebates and more.

The first one to start with are ESPs, Education Saving Plans, that are offered through The Education Fund (TEF) of the Australian Scholarship Group, and Lifeplans Education Investment Fund (LEIF). Either one of these funds is a great way to get started saving for education, but only when used correctly.

ESPs are often designated savings plans, meaning the money can only be used for the purposes it’s set out for (often tertiary education). The other thing to keep in mind is taxes. The earnings on these investments are taxed to the student, usually tax free once they’re over 18, but 66% at under 18 (unless they earn more than $1307, at which point it’s taxed at 45%) . In short, it’s locked in until they’re 18 unless you want them paying high fees on it.

TEFs

This is the Australian Scholarship Group’s solution to saving for an education. They are to be used on eligible tertiary education. You can currently open with a contribution of $11 per week, optional increases annually.

Advantages of TEFs

  • Allows lower contributions ($11 per week)
  • Can receive an additional $10,538 if child receives tertiary education benefit
  • Multiple plans can be used with the TEF
  • Very tax effective

Disadvantages of TEFs

  • All earnings and tax refunds go to scholarship pool
  • Child must have the fund opened before age 10
  • Lack of choice for diverse investments
  • Low maximum benefit amount
  • No option for if child does not pursue education, only your contributions get returned (after fees)
  • Ongoing fees
  • Restrictive access to the fund, sometimes resulting in ineligibility of benefit at all (child must do 3 year full tertiary program to receive full benefit).

LEIFs

This is a fund that can be set up with an opening contribution of $1000, and subsequent contributions of $500+ or $100 every month, up to a maximum of $428,000.

Advantages of LEIF

  • Can be converted to an insurance bond if education is not an option
  • Flexibility in deciding one of six different investment managers to mix one of sixteen options for saving.
  • Taxes are often refunded if the entire amount is being used for only education amounts (tuition fees, uniforms, living allowances, accommodation)

Disadvantages of LEIF

  • Management fees
  • Not tax free if used for anything other than education

Saving strategies for personal finance

Now that we’ve looked at education funds directly, we’ll look into ways you can start saving more generally in terms of your personal finances.

Aim to pay off the mortgage faster

Paying off your mortgage quicker frees up cash in both literal savings on interest and in terms of equity on the home. Ensure that you’re working with a flexible mortgage that allows additional payments if you elect to do this.

Advantages

  • You save all interest saved literally, possibly as high as 6.5% after taxes

Disadvantages

  • Requires extreme levels of discipline

Insurance bonds

An insurance bond is an alternative to the education funds, that offers the added bonus of being flexible in usage (can be used for education or not). They act like managed funds and combined investments.

Advantages

  • Can be set up for you, your child, or your child once they reach a certain age
  • Earnings are not taxed so long as you don’t contribute more than 125% of allowed contribution and contribute for 10 years.
  • Earnings that are taxed are taxed at a rate of 30%
  • Able to be accessed early, with reassessment occurring

Disadvantages

  • Management fees
  • Other fees

Salary sacrifice into super

Sacrificing portions of your salary for the sake of your retirement, even before school fees are in, is a great way to save money with significant tax advantages.

Advantages

  • Earnings on investment only taxed 15%
  • Even after you reach maximum contribution amount you can contribute more at a taxation rate of 15%
  • Tax free access once age 60

Disadvantages

  • No early access to super
  • Only helps education saving if you have enough to contribute to both

Savings accounts, managed funds, shares

These investments are entirely flexible and can be allocated for your child’s expense without becoming inflexibly locked in to sole use for that purpose. That being said, though they tend to be readily accessible, longer term investments have higher yields and often do have restricted access.

Advantages

  • Can be used at any tax bracket
  • Can be started at any age
  • Total freedom and flexibility

Disadvantages

  • 50% of earnings taxed at marginal rate (other earnings tax free)
  • Fees
  • Possibility of dealing with minimum investment amounts
  • Tax concessions sometimes apply

As a grandparent

Be careful as a grandparent looking to contribute to children’s education. You can contribute up to $10,000 per year, but you can’t do this every single year without penalty. The rule is that no more than $30,000 can be given out over a five year period, or else you risk being taxed on money you no longer have.

Additionally, your pension can be assessed based on this ‘asset’ that you’ve given away, meaning you could be losing $1.50 for every $1,000 every two weeks.

If you’re looking to gain more information as a grandparent looking to gift in particular, contact Centrelink’s Financial Information Services at 13 23 00, or NICRI at 1800 020 110.