How to offset the financial impact of educating a child
Children might be a blessing but forking up the funds to finance a decent education isn't child's play. The more you have, the more expensive it gets. But perhaps the best way to think about saving for school fees is as an investment in your child's future.
How else can you feel good about having to find anywhere between $52,000 and $305,000 per child, depending on whether they go to a government or private secondary school? And that may not include all the unavoidable add-ons, including uniforms, books, excursions and extra-curricular activities such as music and sport.
Fortunately it doesn't have to be as daunting as it sounds. Myriad options for parents and grandparents - who are increasingly helping out - can help spread the pain. The key is, as with most things, starting early.
If you're going to be prepared you need to establish some sort of fund. Which investment vehicle you choose depends on a number of factors. Important considerations are the tax implications, as well as any impact an investment vehicle could have on the Centrelink entitlements of a parent or grandparent who holds an investment in trust for a child.
Then there is the time frame and risks associated with the various savings options and their suitability to your circumstances. Use our list of seven options to work out what's right for you.
1. BANK ACCOUNTS
A simple option would be for a parent or grandparent to open a trust account or an account in a child's name and start saving madly.
The downside is the impact of inflation and the penalty rate of tax which applies to income earned by minors - designed specifically to prevent people on a high marginal tax rate from investing in a child's name - and the low rate of interest earned.
While no tax is payable on income of $416, a rate of 66 per cent applies to earnings between $417 and $1307 in a child's name. Since this option would require capital of about $8000, it makes more sense to have the money invested where it is earning interest greater than a few per cent a year.
2. INVESTMENT BONDS
Starting with $500, an investment bond can be taken out on behalf of a child and a plan set up to contribute regular amounts over time.
Count Financial senior executive Dean Bornor says that, if the investment bond is held for 10 years or more, the earnings on the investment are only charged a flat 30 per cent tax and can be an alternative to paying the punitive children's tax rates.
"Because this tends to be a long-term savings plan, you can even teach your children about saving and compounding as they grow up," Bornor says.
3. POOLED SHARES
Most managed funds don't allow investments to be held in a child's name, so an adult would need to act as trustee for the child.
While this option offers access to a wide range of funds for short and long-term investment horizons, there are important tax implications to consider, such as whose name to have the money invested in.
If there is a non-working or low income-paying member of a household, the managed fund should be in their name. If it is invested in a non-working spouse's name, the tax is minimal.
The benefit of a managed fund is the spread of individual investments within a fund. The fund type - passive or aggressive - and whether someone is prepared to borrow to invest as a way of speeding up the returns depends on a person's time horizon and the level of risk they are prepared to take.
Jennifer Brookhouse, technical services manager at financial services group Zurich, says an advantage of a managed fund is it encourages a disciplined savings approach with a high level of flexibility.
4. EDUCATION FUNDS
Independent research company Morningstar says there are about 24 managed funds designed and marketed specifically to help with education costs.
Among the options available are Australian Unity's three friendly society bonds, four Commonwealth Bank education fund options and a suite of Lifeplan Friendly Society funds which are managed by a range of fund managers. The benefit of these plans is that the contributors can make tax-free withdrawals from the fund's earnings if the money is spent for educational purposes. If not, the investment is treated as if it is an insurance bond.
That is, the earnings are returned to the investor with tax already paid at 30 per cent, with no forfeiture of earnings and no penalty fees.
Like most managed funds, there are minimum starting investments and in most cases there are entry and exit fees, as well as annual management fees.
The not-for-profit Australian Scholarships Group is another pooled fund structure which is distributed independently via counsellors who visit people's homes. There is no minimum required to start it.
Being a friendly society, it claims a deduction on the interest earned, which means parents or grandparents who contribute to the fund don't pay tax.
However, the income eventually paid when the child starts their nominated education may be deemed income in the hands of the child, who will then be liable for tax.
Because of the time needed to generate enough income to pay the expenses, the Australian Scholarships Group will not accept membership for a child aged 10 or over.
In the event that a child doesn't finish school or go on to higher education, the money stays in the pool for the benefit of those students who do continue their studies and the pool is fully distributed among the beneficiaries.
Suzanne Haddan, managing director of advisory firm BFG Financial Services, says that, while the education-specific funds offer a disciplined saving approach, they may lack the flexibility needed by some families.
5. SAVING THROUGH A MORTGAGE
Haddan says it is possible for someone who is paying off a mortgage at the same time as saving for a child's education to combine the two. The idea is that you can redraw the savings at a later date. "If you have a home loan and open an offset account and put in regular savings, you are effectively earning about 7 per cent after tax.
Furthermore, it is risk-free and there are no tax or social security implications," she says.
"The downside is that the money gets used for other purposes like a new car or renovations. For this to work well it needs a degree of discipline."
6. DIRECT SHARES
Shares can be held on behalf of a child, with the parent or grandparent as trustee. A parent investing on behalf of a child would declare the income or capital gains in their own tax return, which may make a difference whether it is in the name of a high income-earning or low income-earning parent.
Gearing is an additional consideration under this investment strategy, although there are risks attached such as market volatility and poor investment choice.
As one of the most tax-effective savings options, it could make sense to use a superannuation account to accumulate funds for a future use such as education.
But since any money in superannuation is supposed to be to fund a person's retirement and cannot be touched until age 60, this option depends on a number of factors.
Using superannuation might, however, be an option for older parents or working grandparents who will pay no more than 15 per cent on their savings and no tax on the money when it is withdrawn.
A DECISION taken 15 years ago by the Tesolin family has started to pay benefits - literally.
When their first-born, Natalie, was aged one, the family began contributing to an Australian Scholarships Group Education Fund (ASG) which, this year, has paid for Natalie's first year at university.
Annette Tesolin admits to having felt nervous about starting such a fund soon after the birth of her first child but, happily, her fears have been unfounded.
"We got a lump sum cheque at the start of the year which was very handy," she says.
"After putting money away each month, we were anxious to see what would happen when we needed it, but it arrived right on time."
With three children at Catholic schools, the family needed to find an extra $4500 a year.
Annette says they decided to also start tertiary funds for their other two children - Lauren and Josh, now 16 and 13 respectively - regardless of whether they went on to higher education.
A stipulation of ASG funds is that if a child does not pursue further education, money earned on contributions made to their fund stays in the pool for the benefit of other ASG-fund students and is fully distributed among beneficiaries.
However, all members' contributions are returned at maturity, irrespective of whether the child continues on to post-secondary education or not.
"Even if they didn't go to uni or TAFE, it would still be money saved," says Annette.
Their decision to choose the ASG Education Fund stemmed from the recommendation of a trusted friend and a subsequent visit by an ASG salesman to their home (which in those days was both rare and welcome).
There was also a feeling of being part of a "family".
"They have been very professional," says Annette.
"There is a certificate for each of the children showing their education has been taken care of, and a monthly newsletter, and everything arrives on time, when you need it."
AS A school teacher, Michael Fracalossi knows the value of education. As the parents of eight children, ranging in ages from nearly 2 to 18, Michael and his wife Maria also know the challenges of how to pay for that education and all the ancillary costs associated with school and university.
With six children at private schools, Michael counts his blessings that there are generous fee discounts for families with more than one child at the schools as well as the NSW Government's student assistance schemes to help with books.
But at the start of each year - just when the family budget is tightest - he needs to find several thousand dollars to pay for uniforms and books.
This year Michael will draw down on one of his Lifeplan Education Savings Plan accounts to meet some of those expenses.
"I decided years ago that I wanted to put some money aside for the kids' education. I tried different types of on-call savings accounts but the interest paid was almost zero," Michael says.
"I was looking for something with flexibility, so if we needed the money we could access it. Quite coincidently, there was a flyer in our letter box about Lifeplan. I was interested in the 30 per cent tax saving and impressed with the return of about 6 per cent a year. I liked the fact that I could take the money out at any time," he says.
About two years ago he set up separate plans for the five youngest, into which he puts $50 each a month.
"The first year it was tough on the budget but I persisted so now at the start of the year we have this very useful buffer from which I can withdraw some funds for books and uniforms," Michael says.
"The aim is that by the time they get to university they shouldn't have a [Higher Education Contribution Scheme] debt," he says.
WHAT PRICE LEARNING?
THE Australian Scholarships Group 2008 secondary school figures show that parents of a student entering a government or other public secondary school for year 7 this year need to find a total of $5618.
This comprises $1660 in fees, levies and charges, $795 for requisites (stationery, textbooks, school bag, art and craft materials and sport equipment), $740 for uniform expenses, $786 for incidentals (outings, camps, private tuition, music lessons, instruments, sports coaching, drama, art or dance classes, travel and commuting to school) and $1637 for computer and internet costs.
This compares with the costs associated at a Catholic secondary school for year 7 of $11,445, of which $7267 is for fees and levies, $842 for requisites, $908 for uniform expenses, $790 for incidentals and $1638 for computer and internet costs.
Parents of students attending private secondary schools for year 7 can expect to pay about $21,112 for the 2008 school year. If an investment in a managed fund is started at the date of birth, a monthly contribution of $446 would be required over an 18-year period to fund six years of expenses of $12,000 a year during secondary school.
This assumes the investment is geared at a loan-to-valuation ratio of 50 per cent; 1 per cent entry fee into the fund; 5 per cent a year school fee inflation; 5 per cent a year income (of which 30 per cent is fully franked); 5 per cent a year fund growth; and the contributor is on a 41.5 per cent marginal tax rate.
If an investment is started when a child is 10 years old then, on the same assumptions, the required equity contribution increases to $1450 a month over the eight years remaining until the child finishes secondary school.
School fees of $20,000 a year would require $743 a month if the investment was started when the child was born or $2417 a month if it was left until the child turned 10 years of age.
Source: Centric Wealth
NOT only is education expensive but there are plenty of operators out there looking to extract extra dollars. Don't be swayed by the lure of expensive education software programs that promise to help your child get ahead.
That is the message from the Consumer Action Law Centre which anticipates a rush of software sellers setting up stalls at shopping centres and seeking parents with school-age children as they return to school after the holidays.
The centre's co-chief executive, Catriona Lowe, says: "We hear of costs ranging from $3000 to $6000 and added to that is the fact that the cost is not discussed until quite late in the process."
A typical scenario is for parents to come across a stand in a shopping centre with such messages as "Don't let your children get behind at school".
They might sign up for a consultant to visit their home and explain, say, a maths tutoring software package.
Throughout the sales process are messages about "not wanting to let your children get behind at school" and "looking after your child's education".
"We are concerned that such tactics impact on a consumer's decision-making process," Lowe says.
When it comes to discussing the price, parents who say they can't afford it will be offered a solution in the form of a financing deal.
"Parents are offered credit options that can carry very high interest rates. The crunch comes when they find that children don't want to use the software so they have made a very big commitment for a questionable product," she says.