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Education and Investment
How to set up an education fund for a child
As the cost of both public and private education continues to soar, many parents (and grandparents) are planning for the future by setting up education funds for their children. But where do you start and what options are available?
Hands up if you’ve ever had to dip into your savings account to pay for education? There’s plenty of parents out there that have. And with the increasing costs of education, we’re seeing expenses rising every year.
This alone makes a great case for planning for the future and setting up a dedicated education fund for your kids. Let’s take a look at some of your options.
Why plan for the future?
We recently wrote about the changing Australian job market and the types of jobs our kids are likely to be doing in the not so distant future. In fact, business models across the globe are already changing to accommodate things such as advances in technology and automation. If current employees, even now, lack the necessary skills to do their jobs, our kids will need to enter the employment market with a far greater skill set than we ever needed.
And these extra skills mean more focussed education. And a focussed education costs money.
How much will it cost to educate your child?
We regularly conduct research into the costs of schooling which is consolidated and analysed by Monash University, drawing on the MySchools site, and the ASG/Futurity Parents Report Card survey 2020. For a child born in 2018, estimated costs for 13 years of schooling, from prep (or pre-school) until the end of Year 12 are:
Government schools - $66,320
Faith based schools - $240,679
Private schools - $475,342
And this is before your child has even started university or any other tertiary education.
The best way to deal with these costs is planning ahead. Here are a few common ways to set up an education fund for your child or children, that all offer different levels of risk, reward and tax benefits.
Education fund savings bank account
Ah yes, the tried and tested way to save money is the good ole’ bank account. With the very best of intentions, you regularly put money into your child’s education fund savings account. You’ve even set up a direct debit so each and every pay day, a set amount will be deposited into a special high interest bearing account. This account will lay idle and untouched until your child starts school and you need to access the money to pay for school fees, uniforms and books.
But we all know in this low interest rate environment bank accounts are not as high interest bearing as they once were, so your savings won't grow as much over the long term as compared with other types of investments.
In 2021, with cash rates still very low and unlikely to rise anytime soon, your money will not be generating any significant amount of interest. Even if it remains untouched for a few years as planned.
You can always choose to save money into higher yielding accounts but can have strict rules regarding minimum deposit amounts and access to your savings.
A term deposit is an amount of money you invest for a specified amount of time. It’s a low risk, fixed term investment, usually between three months and five years, with a fixed interest rate. Unlike a bank account, you cannot make any withdrawals during the fixed period. Well, you can but there’s usually hefty early withdrawal penalties attached.
But in a low interest rate environment good returns on term deposits can be hard to come by. And then there’s the possible tax implications. Other than a fixed term interest rate and big penalties for withdrawing funds, it’s much the same as a standard bank account in terms of the benefits of saving for your child’s education in this way.
For those prepared to take a few more risks there are a range of different investment options available via the sharemarket. These can include direct shares, index funds, managed funds, and exchange traded funds (ETF).
While we won’t go into detail in this article about each of these four options, shares are considered growth investments, and come with an increased risk in price volatility. with the potential that your investment may fall. So you would need to be in a position to be comfortable with the ups and downs of the market.
Which can make them a challenging investment for education purposes when you might need to have access to your capital at a particular time.
When it comes to setting up an education fund for a child, Education Bonds can be the answer. Saving for your child’s future is, quite literally, the main reason the bond exists. Although there is some flexibility that comes with this too in terms of being able to be used for other purposes.
An Education Bond is designed for you to tax-effectively save and invest to accumulate the funding for your education-purposed objectives. These Bonds also offer tax and estate planning features.
Education Bond funds, much like your superannuation funds, give you the option to invest in growth investments. Therefore, they receive a higher rate of return. This makes them very attractive when compared to the currently low interest rates of both savings accounts and term deposits.
What the Australian Taxation Office (ATO) has to say about interest payments
If you're an Australian resident for tax purposes and you've received interest from any source in Australia, you need to declare this income on your tax return. The interest amount is added to your taxable income and tax will be calculated based on the tax rates.
Where an Education Bond shines is in terms of its tax effectiveness.
- We pay tax on your behalf on the bond’s ongoing investment earnings at a tax rate of up to 30%.
- When you make a withdrawal for the purpose of funding education costs, you’ll enjoy the Education Tax Benefit. This amounts to an additional $30 for every $70 withdrawn from your investment earnings, when paid as education benefits.
- If you withdraw earnings for non-education purposes, and you have held your Bond for more than 10 years since the first contribution, you will generally receive a tax-free withdrawal.