Doing the sums on school fees

Sydney Morning Herald

Wednesday March 2, 2011

By John Collett

Parents looking to fund their children's future education need to start investing immediately. Parents who want the option of a private school education for their children need to start saving when their offspring are very young.Fees at the priciest schools are now $25,000 a year and are rising by more than inflation.The numbers are challenging for most people. Even assuming a savings plan is started when the baby is born with the aim of sending the child to a private secondary school, parents would need to put away about $900 a month for the 12 years until the child starts high school and for the six years at school, according to calculations by Matthew Walker, a financial planner and a director of WLM Financial Services. It assumes an earnings rate of 7 per cent a year after all fees and taxes, and assumes that school fees will continue to increase at a rate of 5 per cent a year.HOW TO SAVE ITThe next most difficult problem is the best investment vehicle for the savings. Directly investing in the sharemarket or managed funds gives flexibility over how the money is used but the savings plan may come unstuck if other uses for the money arise.Education savings plans have the advantage that the money is earmarked specifically for education.The oldest and best-known education plan is run by the not-for-profit Australian Scholarships Group. Its basic Education Fund helps cover the cost of public secondary and post-secondary education. The Supplementary Education Program helps parents save for private primary, secondary and tertiary costs. The Future Education Program starts before the child is born. The Commonwealth Bank Education Savings Plan has four investment options - from conservative to aggressive. It's flexible in that it can be started when the child is any age, whereas the Australian Scholarships Group's programs may have to be started before the child reaches a particular age. The investments' returns are linked to the performance of investment markets.Another option is an investment bond, which is just a managed fund that differs in the way it is taxed. Investment bonds, available through financial institutions, usually have a selection of underlying investments - from conservative to aggressive. Tax paid on the earnings is 30 per cent.No capital gains tax is paid if the bond is held for at least 10 years and nothing has to be entered into the annual tax return until the capital is drawn down.But there are restrictions on how much can be added to the bond each year. They can be particularly good for grandparents who want to help with their grandchildren's education. The bonds do not form part of the estate and on death of the grandparent, the bond is passed on to the grandchildren.MORTGAGE STRATEGYResidents of Sydney and Melbourne are likely to have big mortgages. The attraction of using the mortgage as a savings strategy is that the return is likely to be higher than from an investment product or education plan. The effective return on the mortgage is the mortgage interest rate, which for most people is about 7 per cent.Any other investment would have to return much more than that, as taxes would have to be paid as well as fees to the manager of the investment product or plan.The idea is either to pay off the mortgage completely and then use the freed-up cash flow to pay the fees, or to redraw the money from the mortgage to pay the fees.Alternatively, parents could start a mortgage offset account. These accounts are linked to the mortgage, though not all mortgages have offset accounts. The money in the offset account reduces the mortgage balance on which the interest is calculated.The money that accumulates in the offset account could pay school fees.Walker says the mortgage strategy is the most effective savings plan - even though it requires discipline to maintain the extra repayments.

© 2011 Sydney Morning Herald

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