SAVING FOR YOUR CHILDREN'S EDUCATION
You may want your children to have the best education possible, but school and university expenses can be costly. This could take a chunk out of your family budget if you’re not prepared. Starting to save early will help you fund the education you want for your children.
Work out how much money you need
How much money you need will depend on whether you want your children to go to a public or private school, and whether you also want to pay for university or college.
For example, if you send two kids to a private high school which costs an average of $30,000 a year for each child, by the time they both graduate you will have spent $360,000 on school fees. And that’s not counting extras like school uniforms, equipment such as a laptop and calculator, school excursions and extracurricular activities such as sport, music, dance or drama.
Public schools are much cheaper but you will still be asked to pay for school fees, textbooks, uniforms, equipment, school excursions and extracurricular activities.
The cost of going to university or college can also vary. If your child is eligible for HECS-HELP (a government loan available to tertiary students) they can choose to defer payment of university fees. Even if they don’t pay fees upfront, there may be other costs such as books and materials, student union fees and transport costs. University or college websites will give you an idea of how much these things will cost each semester.
The earlier you start saving for your children’s education, the better. Education costs are usually a long-term goal that can take more than 5 years to achieve. Use the savings goal calculator to work out how much you need to save each pay to reach this goal.
Suitable investments for this type of goal, could include:
- Savings accounts
- Term deposits
- Mortgage offset or redraw account
- Managed funds and exchange traded funds (ETFs)
- Investment bonds
- Education funds
As with any savings plan, always make sure you can meet other financial obligations, like loan repayments and bills, before you start saving.
A managed fund allows you to choose a range of investment options and make regular contributions to the fund. Fees are typically around 1-2% of the investment returns. There are no restrictions on adding to, or cashing in the investment, or on what you spend the money on.
Also known as insurance bonds, investment bonds are a type of managed investment that has tax benefits if held for a period of 10 years or more.
Investment earnings of the fund are taxed at 30%, and paid by the investment company over the life of the bond. After 10 years the earnings are returned to you ‘tax paid’, which benefits you if your marginal tax rate is more than 30%.
You can make regular contributions to an insurance bonds, however contributions are capped at a maximum of 125% of the previous year’s investment. For example, if you opened the account with $1,000, the maximum you could contribute the following year would be $1,250. If you contributed $1,250 over the course of that year, the following year you would be able to contribute up to $1,562, and so on.
If you withdraw money early, some or all of the investment growth will be included in your taxable income, but you may be eligible for a tax offset. There are no restrictions on what you can spend the money on.
Education savings funds, also known as education bonds or scholarship plans are similar to investment bonds in that investment earnings are taxed at 30%, however when you withdraw money to pay for education costs, the fund can claim the 30% tax back. The savings are then passed onto you.
The downside of these is that they can be inflexible and not allow for changes to your child’s education needs or a change in your circumstances. For example, a plan may only allow you to withdraw your contribution, not investment returns, until your child enters tertiary education. What if your child chooses a different life path?
If you need help planning for your children’s education, or if you need more information about these types of investments, consider getting advice from a qualified financial adviser. Our video, Financial Advisers: The Facts and The Fiction, will tell you what to expect.