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How to fund your childrens’ education

Article
30 July 2020

Author: Ryan Francis, Business Development Manager, Australian Unity

As we approach the midpoint of an interesting and turbulent 2020 mainly caused by the global COVID-19 pandemic, it’s easy to forget that for most of us day to day life continues. The middle of any calendar year is usually the point in time many parents are completing school applications and going to interviews for their children, who are starting either primary or secondary education in the coming year. Perhaps, you have just completed an interview and are anxiously awaiting a reply or, you may have already received an acceptance offer from the school of your choice; wherever you are at in the education cycle, it’s certainly an exciting and proud time.

When it comes to planning for our children’s education, as parents we want to provide our children with the best opportunities possible, whether this be through public, private, alternative or faith-based schools. Whilst we as parents usually have a fair idea of what school system or school we would like to send our children to, how much thought do we actually put into how we will fund these future education costs, particularly before our children have even started school?

Year in year out, education costs continue to outpace inflation, and the past 10 years have been no exception. While inflation came in at 21 percent for the period, the rise in education costs clocked in at 57 percent, in other words education costs are rising at nearly three times the rate of overall inflation. This is an area of increasing worry for many Australian families. I have certainly had conversations with friends and family about how expensive it is to raise children now, and the fact that this is influencing decisions such as how many children to have and even how far apart to have them. In fact, the latest ABS Household Expenditure Survey noted that the most significant increase in household spending was in education.1  

Some think these rising costs are unique to the private school system, as public education is assumed to be free. However, as many of you will know, there are still costs associated with public schooling, such as uniforms, excursions, stationary and ‘voluntary’ contributions. In fact, a recent ABC news article found that some parents are being questioned by public schools as to why they are not paying “voluntary contributions” even suggesting payment plans putting additional pressure on parents. The article found that in 2017 parents in NSW paid a total of $75.4 million in public school contributions.2

These rising costs are not unique to primary or secondary schooling either. Just a few weeks ago the Government announced significant changes to the cost of some university courses.3 This may spell good news if your child wants to be a nurse or a teacher as the end cost of these courses to the student is actually proposed to go down, but should your child want to complete a commerce degree or law degree the end cost to the student is proposed to increase significantly. Could this result in your child’s vocation being dictated by the cost of the study rather than their desired career path?

So, the question needs to be asked if we prepare for significant life expenses like purchasing a house and retirement savings, why is it less common to make plans as to how you will fund your childrens’ education? Preparing early, making regular savings and letting compounding returns do the heavy lifting could be the difference between making a schooling decision based on affordability or your first preference of school.  

The good news is there are a number of strategies to assist with meeting the future costs of your childrens’ education, but it is important to be aware of the pros and cons of each strategy.

Depending on the amount of your savings and savings discipline one simple strategy is to use an offset account on your non-deductible debt, generally the home mortgage, and redraw the funds later for education expenses. However, this strategy requires extreme discipline as it is often too easy to look at your offset account and think funds are available to purchase a new car, caravan or a holiday, and the money for the kids’ education can be made up later.

Another option is direct investment in the name of the child, but this also has its limitations. In most cases, the tax-free threshold for children’s income is just $416 per year, and once income exceeds that threshold you are quickly paying tax at the top marginal tax rate of 45%. Even a simple high-earning savings account, near impossible to find in the current environment, could breach this threshold.

Investing directly in the name of one spouse can also be a valid option to fund education costs. In the case of one spouse being a lower income earner or not working at all, this solution might be viable in the current circumstances but does not factor in any changes to long term family dynamics. This might include a stay at home parent returning to work, unforeseen impact of capital gains tax on the sale of investments. The additional income may also contribute towards asset and income tests that could impact viable and efficient solution, however, when both parents are working, this can be challenging and may not give the best outcome from a taxation point of view. It can be complex to manage yearly tax consequences and may even result in the unexpected reduction or loss of peripheral benefits such as the childcare subsidy, health care rebate and so on, due to increased taxable income.

An approach that provides a lot of flexibility and a broad range of features are education funds - sometimes referred to as education bonds. Education bonds that are classified as Scholarship Plans under Australian tax law and have unique tax features not available with other savings and investment products. These funds are based upon an investment bond structure and can be used for a broad range of education-related expenditure at any age or level of education.

Modern education bonds allow investors to claim a broad range of expenses for their child as opposed to just tuition fees. Some of the allowable education expenses that can be claimed include uniforms, books, excursions, private tuition, student fees, residential boarding costs, rent and other accommodation expenses.

A single education bond can be used for the lifetime of your childrens’ education from primary school right through to undergraduate university, post graduate study or Technical and Further Education (TAFE) studies.

The investment income of an education bond is taxed up to a maximum rate of 30 percent. While the earnings accrue within the fund there is no assessable income to declare for either the investor or student. Only when funds are withdrawn will it affect assessable income and be taxed. Even then the tax may be minimised or not incurred at all. When a claim is made for education expenses from investment earnings, the education fund can obtain a refund of tax on the education expenses being claimed. This produces an education tax benefit which is passed on to the nominated student as part of the education claim and can be worth an additional $30 for every $70 of earnings withdrawn.

An education bond strategy is certainly not the only solution, and it won’t solve every funding need. It is important to do your own research and to seek professional financial advice. It is very much a case of ‘horses for courses’; look at your objectives and crunch the numbers to ensure you arrive at the right strategy and the right structure. Whatever your chosen strategy and structure, preparing early for your childrens’ future education costs will ensure you can give them the best education opportunities possible.

Important information


1 Various - Australian Bureau of Statistics (2017). Household Expenditure Survey, Australia: Summary of Results, Australia, 2009-10 and 2015-16 (cat. no. 6530.0). Retrieved from abs.gov.au/household-expenditure

https://www.abc.net.au/news/2019-03-20/parents-pitch-in-for-the-high-cost-of-public-schooling/10917358

https://www.abc.net.au/news/2020-06-19/university-fees-tertiary-education-overhaul-course-costs/12367742

The information provided in this document is general advice only and does not consider your individuals circumstances, needs, goals or objectives. You should consult your legal, financial or tax professional before considering any strategy or product.

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