Most parents want the best possible education for their child that money can buy. But that’s just it, you’ve got to have the money to be able to afford it.
Even a public school education, the so-called “free” education, is anything but. Books, laptops, software, software upgrades, extra tuition, stationery, sport equipment and other activities, must all come out of the family’s pocket.
Here’s a number strategies to help meet the future cost of children’s education, but most also have significant limitations.
SAVE EARLY – The most important thing is to start early. If you started saving at birth with an initial contribution of $1,000, then saved only $100 per month, invested in a ‘balanced fund’ earning 5 per cent per annum (net of tax) then by the time your child started high school around 12 years of age, you’d have amassed around $21,000.
Encouraging family members to make contributions at birthdays and Christmas, will also take some of the pain out of household budgets when it comes time to pay for an education.
GET OUT OF DEBT – This is the simplest and most tax effective strategy. Repay debt where the interest payments are non-deductible from a tax perspective, generally the home mortgage, so that this money can be redrawn for education expenses later. BUT this strategy requires extreme discipline and runs the risk of the funds being withdrawn to pay for lifestyle assets.
DIRECT INVESTMENT – This is another option BUT it has its limitations. In most cases, the tax-free threshold for children’s income is just $416 per year, and they are hit with a penalty tax of up to 66 per cent on earnings once that threshold has been breached. Even a simple high-earning savings account could breach this threshold.
TRUSTS – (Stay with me!) A trust structure may also be considered as a funding mechanism for education costs, with the most common type of trust being discretionary family trusts. A family trust is a vehicle to accumulate investments with the earnings or profits distributed in the most tax-effective way.
Essentially, the trust allows people to exercise discretion when distributing funds to beneficiaries. BUT trusts are expensive and may still fall under the confines of the minor’s penalty tax of 66 per cent. They are also complicated and often won’t stack up for small to medium levels of investment.
INVESTMENT BONDS – This approach offers the most flexibility and the broadest range of features for education savings. They can vary in design, features and operation. BUT investment bonds can take a little bit of time to understand.
Education funds are a type of investment bond that are classified as Scholarship Plans under Australian tax law have unique tax features not available with other savings and investment products, with the investment income of the fund taxed up to a maximum rate of 30 per cent, which is returned when earnings are used for genuine education expenses.
These funds are highly regulated (falling under both APRA and ASIC jurisdictions), based upon the time-tested investment bond structure and can be used for a broad range of educational related expenditure at any age or level of education.