Funding your children's education?

15 Nov 2012

By Shadforth Financial Group

In the event that you elect to send your children to a private school, this can be a costly exercise and although the tuition fees vary, you can expect to pay anywhere from $12,000pa to $30,000pa for a year 12 or university student.

The total cost of education is approximately $300,000 per child which essentially equates to an investment property per child. It is also worth noting that these costs generally rise at a faster rate than inflation and recent studies have suggested that the annual increase is approximately 7%.

Paying these costs is a large financial mountain to climb and there are a number of ways in which you can prepare for these looming bills including:

  1. Borrow – a common strategy for many people is to drawdown on their home loan to fund these expenses. The problem with this approach is that you still need to pay back this sum and for many people the accumulated debt can cripple your retirement plans.
  2. Pre-pay- most schools and universities give you the opportunity to pre-pay the fees at a discount. This can be a very effective option if you are organized and cashed-up.
  3. Education Savings Plans – these are tax effective structures that encourage the discipline of regular saving. The main advantage of these savings plans are that the Australian Tax Office has allowed some tax concessions on the earnings of these plans at maturity. The main providers of these plans are Life plan and the Australian Scholarship Group. The tax benefits of these plans vary slightly and you need to be careful when looking at these plans and consider how the money is invested, the flexibility offered and the cost structure. In the past plans offered were very inflexible, with older style plans only paying out the original amount investment with no investment return, if the child doesn't attend University or an approved TAFE.
  4. Standard Savings Plan – probably the most common approach is to put money aside regularly over time and invest these monies until they are needed.

What do I do?

Unfortunately I had a number of other commitments years ago such as reducing my non deductible home loan, so with 3 children at private schools I simply have a set amount (that is, the years fees divided by 12) deducted every month from my bank account (on pay day) and paid into a separate account at a different bank called "The education account". When the bill arrives at the start of each term I simply transfer money from the "education account" to pay the bill.

This is a simple, painless and effective way to manage my cash flow.

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