With education costs running at double the level of inflation*, planning ahead to pay school fees should be done sooner rather than later, says Jonathan Philpot, partner at HLB Mann Judd Sydney.
He says high school fees at elite private schools for 2014 will set you back upwards of $25,000 a year, and that is before the costs of school uniforms, equipment, building fund levies and extra curricular activities are taken into account.
“You can be looking at a lump sum of around $200,000 per child for private high school education. This is a significant investment. If you wait until your child starts high school before you think about how to fund it, it is a large lick of money to find from after tax income each year. If you have two or three children in private schools, the costs are more burdensome,” he says
“Education costs are not just a consideration for those considering an elite private school. Other independent and Catholic schools can set you back thousands of dollars a year, and even public schooling comes at a cost that surprises many parents, with associated expenses in terms of uniforms, equipment, camps, excursions and other extra curricular activities.”
Whatever your circumstances and education hopes for your child, it pays to plan ahead for education savings, Mr Philpot says.
“There are a number of ways to save for education costs, and different options will suit different investors. It all depends on each families individual circumstances.”
Mortgage offset savings
“From a tax and certainty of returns perspective it is hard to beat paying down the mortgage, with a view to drawing it back when needed to cover education costs,” Mr Philpot says.
“Ideally you will hold these additional savings in a mortgage offset account. They can generally be established so that the one mortgage can have multiple offset accounts, and one of these would be earmarked for education savings,” he says.
“From a tax perspective this is the best outcome. You are reducing your non-deductible debt, and even in the current low interest rate environment, you would be hard pressed to achieve an after tax investment return elsewhere, that can match this result, with the same risk/return trade-off,” he says.
“Normally, this is the best approach,” he says. “The biggest risk is accessibility. Discipline is required to ensure the funds earmarked for education savings, are not used for other purposes.”
For this reason, some parents sometimes prefer other, more restrictive, investment options.
Investing in name of lowest earning spouse
“This option works well when the spouse earning the lowest income is earning less than $80,000 a year. That is, under the 37 per cent tax rate.
“It is an even better option if the spouse earns less than $37,000 as investments made in the name of lowest earning spouse utilise the benefit of the lower tax rate.
“The simplest way to implement this is to set up a regular savings plan to put away a certain dollar amount at regular intervals, and this is often done through a managed fund direct debit option.
“Parents have the option to make a regular investment in an equity fund or, if diversification is a key consideration, a balanced fund. This option provides investment diversification benefits that simply paying down the mortgage does not,” Mr Philpot says.
Education savings plans
“Specially designed education savings plans solve the problem of accessibility. The restrictive nature of these investments means that the funds saved, and the associated tax breaks, can generally only be used for education purposes.
While this makes them an attractive option for some, Mr Philpot says some investors do not like being locked in to this limited use for funds.
“They can be a useful investment option if both parents are earning incomes that are in the higher tax bracket. Those earning over $80,000 could find this a favorable investment choice. Education savings plans have an inbuilt taxation rate that is capped at 30 per cent and if the investments are held for 10 years or more that can be withdrawn without any further tax payable,” Mr Philpot says.
If retired grandparents have money parked within a superannuation structure, it can be a tax advantaged way to use some of these funds to help pay for their grandchildren’s education.
“Those close to retirement may chose to make additional contributions to build up their superannuation balance, in a concessionally tax environment, with the aim of drawing this money out in retirement and contributing to their grandchildren’s education,” he says.
“Education costs, particularly in the case of elite private schools, can consume a very large proportion of household disposable income. Where ever possible, it makes sense to defray these costs by starting an education savings plans early, in the years before your child starts school.” Mr Philpot concludes.
* For the 12 months ended September 2013, education costs rose by 5.7 per cent compared to the 2.2 per cent rise in the CPI. www.abs.gov.au http://www.abs.gov.au/AUSSTATS/abs@.nsf/mf/6401.0?opendocument#from-banner=LN
HLB Mann Judd Sydney is a firm of accountants and business and financial advisers, and part of the HLB Mann Judd Australasian Association.
For more information please contact:
Jonathan Philpot – Phone: 02 9020 4196
14 January 2014