The cost of your children’s education is a topic you should consider well before your children start school.
The Australian Scholarships Group (ASG) has conducted research on the cost of education and states the amount for a private education from Prep – Year 12, will be around $367,569 per child. If you decided to send your child to a government school for the primary years and private for their secondary education, it will cost around $244,822 per child.
When you consider you’re already having to cope with mortgage repayments and the normal expenses of living, these school fees can be a daunting expense to consider.
However, careful planning can ensure you will have enough for their education. All you have to do is research the options and start to plan and save as early as possible.
Ways to pay for your child’s education
Savings account in your child’s name
This is probably the first option that comes to mind, but it does have it’s downside, the tax implications.
Tax rate for minors
|Other income||Tax rates|
|$0 – $416||Nil|
|$417 – $1,307||Nil + 66% of the excess over $416|
|Over $1,307||45% of the total amount of income that is not excepted income|
If the minor’s taxable income is less than $67,667, they will get the low income tax offset. The maximum tax offset of $445 applies if their taxable income is $37,000 or less. This amount is reduced by 1.5 cents for each dollar over $37,000. However, the low income tax offset will only reduce tax payable on excepted income.
SOURCE: Australian Tax Office
Alternatively saving in the name of the parent earning the least income
If either of you isn’t working or working part-time, chances are the marginal rate of tax they are paying is low. Therefore, having savings in their name may be of benefit while they remain in this scenario.
Prepaying School Fees
Some schools allow pre-payment of school fees up to 10 years in advance. School fees usually increase about 7% a year, (that has been the case for the last 15 years.) Pre-payment plans can save you a lot of money.
If you have paid down your mortgage then you might be able to access the equity in your home to pay school fees – even pre-pay school fees as above. Using mortgage equity will cause your home loan balances to rise but it requires no extra fees other than what you already pay, and it’s tax free.
Saving in an offset account against home loan
If you don’t have access to the equity in your home you might be able to save by using an offset account linked to your home loan. An offset account allows you to make extra repayments into a bank account attached to your home loan, effectively reducing the loan balance the bank uses to work out the interest you pay on your home loan.
For example, if you have a home loan of $400,000 and $100,000 saved in an offset account, the bank will calculate the interest based on only $300,000.
You must be a disciplined saver to use this option successfully for your children’s education but if you can it will benefit you many ways financially.
Investment bonds or tax paid bonds are readily available and are a popular choice for funding children’s education. Investment bonds provide a variety of options not normally available to children/minors, such as shares, property and fixed interest.
Earnings from Investment bonds get taxed at the company tax rate of 30% within the investment. As long as money remains invested for 10 years, the investment provider pays the tax on the earnings so you don’t have to report the earnings in your tax return. If you withdraw before 10 years, then you would need to include earnings in your (or your child’s) personal income tax return. However, you will receive a full credit for the tax already paid, so there is no doubling-up.
Education Savings Plans
Be aware of pitfalls with a lot of Education savings plans. Most of these plans can offer rare tax advantages, but be careful. Should you need to withdraw funds for an emergency, taxes can be very high. Some of these plans can be quite complicated but have high potential. Check out the Australian Scholarship Group or Lifeplan for more information. Be wary and go in with your eyes wide open if you choose these plans.
These funds have lower fees than most savings accounts and you have the option to spread the risk and take advantage of long-term growth investments such as properties or shares. These funds are not usually put in the child’s name, but held by a trustee.
Whatever option or combination of options you choose to save for your child education I’d suggest to start as early as you can and work out how much you will require, how much you will need to save to get there and then choose the appropriate ways. A good financial planner could also help you decide what is best for your situation.
Check out our MAKE MONEY page for more saving inspiration!
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