Doing the maths on education

School education, like any investment, requires good research and often a substantial capital outlay.

Summary: Funding a school education – whether in the independent or public system – requires detailed research and a large capital outlay. For private education, the costs are largely in the annual school fees, while in the public system they can involve paying substantial sums to buy a home in the catchment zone of a school that achieves high education results.
Key take-out: In private schools, calculate on having to pay up to 5% more on the annual fees each year to take into account increases in teacher salaries and reduced government funding.
Key beneficiaries: General investors. Category: Strategy.

A number of grandparents who are Eureka readers have asked me to estimate what it costs to fund their grandchildren through private education. And, of course, the same question applies to young parents who don’t have the potential financial help of their parents.

There are such a great variety of different independent school fees that no simple answer is possible, but there are a number of steps you can take to get an accurate reading on the compass. Independent school fees vary from under $10,000 up to around $30,000 a year for year 12. The differences relate to what is spent on teachers; the amount of government aid; the class sizes; the general school and administrative fees; and sources of outside income.

So you need to select a fee range in selecting schools.

The first decision you therefore need to make is whether it is best to use the state system or the independent system. The state system at its worst is simply horrible. At its best, it can match the best independent schools. The problem is that a state school usually becomes a top school when it attracts an excellent principal and that principal is able to attract good staff. And then the rest follows. Parents wanting a good education for their children shift into the area and are prepared to pay a premium for houses in that area – often up to $100,000. Money is found for facilities and the school suddenly comes alive.

It is almost impossible for a state school to be a top operator without having the right people at the top. It is no different to companies or private schools. Of course, if the top principal leaves and is replaced badly the school can spiral downwards along with the house prices. And so, before paying top price for a house, make sure there is room in the school for your child and that the principal is not about to leave.

If you are heading down the state system, it is about grandparents helping their children buy houses in the catchment of excellent state schools.

In the lower fee end of the independent school system, including Catholic schools, there is also a lot of variation in how well the schools perform. The best indicators are talking to other parents, the NAPLAN (National Assessment Program – Literacy and Numeracy) scores and the high school’s median university entry scores. The NAPLAN scores tell you how much emphasis is being placed on the basics. Many schools have great difficulty with the basics because too many teachers themselves are not familiar with how to teach the basic skill requirements, particularly in English.  As in the state system, you need to do homework, but it is not normally necessary to move houses to get to a lower-priced independent school that is operating well.

Check the scale

In all independent schools you must check the fee scale.

When you are looking at an independent school it is a legitimate question to ask: “What will it cost to educate the child all the way through on the basis of current fees?” You need to do this because independent schools are very different in the way they allocate their fees across the various age groups. Some have a very low-priced entry and then lift their fees quite sharply as the child moves through. Others spread it equally, while others hold back the year 12 fees because it looks good in the public statistics.

There is only one guide that counts – the total set of fees. This will probably shock you, because even in a middle ranking fee structure the total cost will normally exceed $200,000 from Prep to Year 12, or say $15,500 a year. But that figure could be much higher or lower. And so, the next question you need to ask is, how much will the fees increase over the period and why do private school fees rise so much faster than inflation? Here I can help. The components of all private school fees are naturally different, but in essence usually around three-quarters of their costs are teaching salaries. Over the last decade or two there have been some very big variations in teacher salaries. Currently they tend to be increasing around the 2.5% to 3% mark per year in most state systems. I emphasise that I have not done a state-by-state comparison, but where you do have a sudden spurt in teacher salaries in one particular year it tends to settle down in the subsequent years.

So why is it that the fees simply don’t rise by the 3% if that is the base cost increase? If only it were so simple.

The first factor pushing the cost of independent schools above the standard teacher salary rise is the fact that teachers move through the various classifications as they become more senior. This tends to add about 1% a year onto the base rise, because these higher classifications carry higher salaries. Again, this depends on the age level of your teachers and larger or lower classification rises can sometimes apply.

Secondly, with independent schools government assistance is an important contributor to the total revenue mix. The amount of government assistance depends on how much is spent on education by the independent school, and which suburbs students come from. And so, if a child goes to an independent school in a low income suburb where, in comparison to other schools, there is not a large amount spent on the teaching salaries, the government aid can be very high. That, therefore, is reflected in the fees.

When a school draws its students from high income suburbs and spends large amounts on education, government aid is much lower.

The broad increases in federal aid tends to at least match inflation, and sometimes can be higher. State governments tend to see themselves as the funders of the state system, and many state governments have not increased their aid to the private system for some years. If you are in a state where that is the case, then the proportion of state revenue in the school’s total funding mix does not match the increase in costs. Accordingly, the state government’s “share” of those extra costs has to be borne by the fee-paying parents. The failure of state governments to match rises in costs can add about 1% to fees, although I must emphasise this will vary between states and between schools.

But you can see we are now up to a fee rise of around 5% on the basis of a 3% rise in teacher salaries. It doesn’t take a lot more additional expenditures, like extra capital expenditure or extra facilities or additional services, for the fee rises to creep up towards 6%.

The Gonski dimension

And it seems the Gonski Review has added a new dimension. Whereas the Commonwealth would sometimes lift grants by say 5%, increases in the middle to upper fee school range are now to be fixed at 3%. As you can see, that’s lower than the increase in costs on the basis of a 3% salary rise. If salaries rise by more than 3%, then many private schools will have to lift fees sharply. And that’s why, for the foreseeable future, we are looking at fee rises that convert a 3% teachers’ salary increase to about a 5% fee rise, with lots of variations along the way.

So once you have calculated the total amount that you need to pay for a child, you need to increase that by at least 5% a year over the student life of the child. And again the figure will shock you, but it is an annual bill and doesn’t come all at once. Unfortunately, a big a proportion of the state systems and also parts of the lower cost independent system do not provide a top quality education. Of course, if your grandchild (or child) is at the top level of capability, then they will probably perform no matter how bad the school is.

Conversely, the child who struggles at school may not respond in the best independent or state schools. All you can say is that their chances of a good education are increased in the independent system, or if you are prepared to pay big sums for a dwelling near a top state school. Moreover, you only have one chance to educate your children or grandchildren, which places quite a burden on parents and grandparents.

Grandparents are aware that they may live longer than was originally expected, so they need to be careful about spending too much of their savings on the education of their grandchildren.

On the other hand, it is far better to spend the money on grandchildren’s education than to leave the money in the estate when the opportunity of education has passed.

I, for one, have been blessed by being able to work longer than I expected, but I fully realise that not everyone is in that situation.

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