One of the scariest parts of the current GST debate in Canberra has been the prospect of extending the tax to cover education expenses.
Many parents with kids in private schools would struggle to pay an extra 10 or 15 per cent on top of existing fees, prompting the Independent Schools Council of Australia to warn of a potential surge of students back into the state system.
The cost of private school education is already an expensive thorn in parents’ sides. The top schools in our capital cities charge as much as $25,000 per year – you can double that figure if you want to include boarding for rural and regional students – which is a sizeable dent in the household budget.
So how can parents of a newborn child today manage their finances and investments to make sure they’ll have the cash required for school fees five, 10 or 15 years down the track?
“It comes up in almost every conversation I have with parents,” says Chris Magnus, a partner at Ark Total Wealth Financial Planning.
“Even if you are ambivalent about sending your child to a private school, you need to take steps to save money because you want your decision to be based on something other than whether you can afford it.
“And the earlier you can start saving for private school fees, the earlier you can start taking advantage of compound interest.”
The big problem at present is that savings account interest rates are low, meaning investments in riskier asset classes might be needed to build the required nest egg.
Make a plan
Mr Magnus recommends parents set aside about $25,000 to $30,000 a year to cover tuition costs, excursions, books, extra-curricular activities and private tutoring.
In order to raise the funds, parents can take the low-risk option of setting aside money every week in the mortgage offset account or consider riskier share and property portfolios.
Those taking the latter road need to get solid financial advice, because both property and share markets come with risk profiles quite different to those seen in the years before the global financial crisis.
“One option is to buy an investment property and sell it down the track or borrow against it to unlock the equity,” Mr Magnus says. “However, you need to make sure you bought a solid investment that will appreciate in value.
“You could also invest in the share market, which would mean you would not have to pay capital gains tax, and you can always sell a part of the portfolio as it is a more liquid investment.
“But shares are also a lot more volatile and, as we have seen in the past 10 years, they can take a dive.”
The trick to investing in property or shares is taking a 10-year approach, Mr Magnus says, “to give your investments time to realise the value”.
Many parents opt for specialised Education Savings Plans (ESPs), which are essentially managed funds for the purpose of raising tuition fees.
“They are quite conservative investments in that the risk is low and the return moderate,” Mr Magnus says. “All of the hard work is done for the investor, and there are some inbuilt fees to be aware of.”
Financial planner Michael Miller of MLC Advice Canberra says saving and investing in an education investment bond can be tax effective for high-income earners.
“You need to check the conditions of the provider because they do vary from one to another,” he says, “but the earnings are taxed at 30 per cent which is lower than the marginal tax rate of many investors.
“With careful management of how and when you spend the money, you might end up with tax-free earnings.”
Mr Miller says the best part about an education investment bond is its name – there’s no mistaking what that money is meant to be for, so it’s less likely to be spent on a new car or expensive holiday.
“We’ve seen grandparents setting them up for grandchildren, or parents starting an investment which other family members contribute to for birthdays and other special occasions,” he says.
Whichever investment path you take, it makes sense to shop around when your child finally reaches school age.
According to the CEO of education website School Places, Natalie Mactier, there are a few myths surrounding private school fees.
School Places connects private schools with parents looking for last-minute school places. The site has 100 private schools on board – mostly independents with a few Catholic and Christian schools – and the fees range from under $5000 up to a handful of $25,000 places at the top schools.
“School vacancies are a moveable feast and places do become available at private schools outside of traditional enrolment times,” Ms Mactier says.
“Some of these schools may even offer discounts to fill a place quickly, it could be up to a 40 per cent discount sometimes on fees, which may apply for the first year or even up to three years.”
Ms Mactier adds that 60 per cent of the schools on the site have been offering fees at discounted rates.
“There is this idea that private school fees are extremely unaffordable. While there are some expensive pockets, most of the schools on our site offer fees between $8000 and $10,000 and we have a few schools that are offering places for under $5000.”
It will be months before we know whether a GST hit on education is part of the government’s tax-reform agenda. If it is, that’s another reason to get your school fees saving and investment plans in place sooner rather than later.