Funding Children’s Education

For many parents, one of the most important goals is providing their children access to the highest quality education. However, with private school fees increasing at twice the rate of inflation, and university fees also becoming increasingly expensive, the cost of education is putting a significant strain on many Australian household budgets.

Here we look at a few strategies to help fund your children’s education without stretching the family budget:

1) Start saving early

One of the most important steps is to initiate a savings plan as early as possible, thereby alleviating financial strain on your family budget during your children’s school years. Even a modest weekly contribution to a savings account can accumulate into a substantial sum by the commencement of high school, providing a solid financial foundation.

Here is a savings calculator to see the impact of regular savings over a long period:

Savings goals calculator – Moneysmart.gov.au

2) Use your offset account

Utilising an available offset account can be a very effective method to save for education expenses.  This approach offers the convenience and versatility of a standard bank account, while concurrently reducing the interest accrued on your home loan when funds are held in the offset account. Certain financial institutions even provide the option of multiple offset accounts, enabling you to allocate one exclusively for your child’s education savings, distinctly separating it from other financial goals you may have.

3) Invest in a diversified portfolio

When planning for future education expenses, utilising a managed fund or exchange-traded fund (ETF) can prove advantageous. Although investment returns in these options can be subject to volatility and lack the consistency of savings accounts or term deposits, historical data demonstrates that the share market has generally outperformed more conservative assets over extended periods. If you have a longer time horizon, it may be prudent to explore the potential benefits of a diversified ETF or managed fund.

Here is a compounding interest calculator which shows how a small increase in annualised income or growth can significantly impact long-term returns:

Compound interest calculator – Moneysmart.gov.au

4) Invest in tax-effective vehicles

There are certain investment options, such as investment bonds, that offer notable tax advantages and can be well suited for education purposes. Investment bonds, when held for a minimum of 10 years, can benefit from income being taxed at the company rate of 30% and potentially exempt from capital gains tax.

One particular type of bond, known as an education bond, not only enjoys these benefits but also provides an additional 30% uplift on withdrawals specifically utilised for education-related expenses. This means that if a withdrawal of $7,000 is made for educational purposes, the bond holder can receive a grossed-up amount of $10,000, subject to meeting specific criteria. Such education withdrawals can be taken tax-free up to the student’s threshold (as the beneficiary of the bond).