Funding Education for Children or Grandchildren
Providing for the education of your children or grandchildren is one of the most meaningful financial gifts you can offer. In Australia, education costs continue to rise, particularly when factoring in private schooling, extracurricular activities, uniforms, and technology. For example, the cost of educating a child born today at a private school is likely to exceed $200,000 for primary and secondary education. In some instances, the total cost can climb significantly higher, reaching several hundred thousand dollars beyond this estimate.
Planning for these costs early can reduce stress and provide children with the best opportunities, whether enrolling them in prestigious schools or supporting their tertiary studies. However, with so many investment and savings options available, choosing the right strategy requires careful thought and consideration of factors such as tax efficiency, flexibility, and long-term growth potential.
This article will explore the various options Australians can use to save for education, including savings accounts, investment portfolios, and education bonds.
Options for Funding Education
Savings Accounts
Savings accounts are a straightforward and easily accessible way to save for education. They provide the benefit of liquidity and simplicity but come with certain limitations:
Pros:
Easy to open and manage.
Funds are secure and guaranteed (up to $250,000 in Australia).
Suitable for short-term savings or emergency funds.
Cons:
Returns are typically modest and may not keep pace with inflation.
Interest earned is fully taxable at the account holder’s marginal tax rate.
Lack of tax efficiency compared to other options.
Savings accounts can work well as part of a broader education funding strategy but may not be sufficient as a standalone solution for long-term goals due to their lower growth potential.
Investment Portfolios
Investment portfolios are a more sophisticated option for those comfortable with market risks. They include investments in shares, exchange-traded funds (ETFs), or managed funds, providing the potential for higher returns:
Pros:
Potential for significant growth over the long term, especially if starting early.
Diversification options can balance risk and return.
Flexibility in investment choices and asset allocation.
Cons:
Subject to capital gains tax (CGT) when investments are sold at a profit.
Income generated (e.g., dividends) is taxable, potentially reducing compounding benefits.
Market volatility may impact returns, especially in the short term.
Investment portfolios can be powerful when combined with professional financial advice to align with your risk tolerance, time horizon, and education funding goals.
Education Bonds
Education bonds are tax-advantaged investment structures specifically designed for education funding. They offer unique features that make them particularly suitable for funding long-term education costs:
Pros:
Earnings within the bond are taxed at a maximum of 30%, often lower than an investor’s marginal tax rate.
Funds can be used for any stage of education, including primary, secondary, and tertiary levels.
The bond owner retains control, ensuring funds are used as intended.
Education bonds generally do not impact eligibility for Centrelink or other government benefits.
If the bond is used for education purposes, any tax paid within the bond is rebated. For example, for every $70 of earnings withdrawn for education purposes, an additional $30 tax rebate will be added to your account.
Cons:
Tax rebates are only available when funds are used for education purposes.
Early withdrawals for non-education purposes may incur penalties or additional taxes.
Features and fees vary among providers, requiring careful selection.
Other Considerations
Some other tips and tricks to aid with
Prepaid School Fees: Locking in current prices can shield against inflation but offers limited flexibility if circumstances change.
Scholarships: Pursuing scholarships for children can be an effective strategy to manage costs. There are a wide range of scholarships available both full and partial that can be used to reduce costs.
Family Trusts: While trusts can be tailored for education, income distributed to minors is taxed at punitive rates, reducing their efficiency.
Education funding is a critical financial goal that benefits from tailored strategies to maximise returns and minimise tax liabilities. Among the various options, education bonds stand out for their tax efficiency, simplicity, and suitability for long-term savings. By planning and choosing the right structure, you can ensure your children or grandchildren receive the education they deserve whilst minimising financial stress.
It's important to seek advice as early as possible to implement an effective strategy. If you’re interested in more information, please don’t hesitate to contact us.
General Advice Warning:
Any general advice on this page does not take account of your personal objectives, financial situation and needs, and because of that, you should, before acting on the advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. Information contained on this page was correct at the time of posting.