6 strategies to help pay for private school education
Would you prefer to send your child to private school or purchase your own home?
For some Australians, this is a genuine either/or proposition, with new research* revealing that the total cost of a private education for one child in Sydney could be as high as $540,000.
For those living in other states and territories, the situation isn’t quite as dire. Melburnians can expect to pay up to $502,000 in private education costs over a child’s lifetime, while in Queensland it’s a relatively mild $360,000.
These may seem like outrageously inflated figures, but when you review the annual tuition at some of the country’s top schools, it’s clear that they’re accurate At Sydney’s Cranbrook School, for instance, 2015 fees are up to $33,000 per year – for tuition alone. Factor in textbooks, uniforms, excursions and other expenses, and this could quickly chew through $40,000 annually; multiply this across 12 school years (plus pre-school), and a half-million dollar price tag makes sense.
“Private school fees can be more expensive than the top MBA in the world, after a five-year degree in a top Australian university”
So what’s a parent to do if private schooling is on the agenda – but living off baked beans and two-minute noodles is not?
First and foremost, you need to decide how much you’re willing to spend, says Lacey Filipich, co-founder of Money School. Half a million dollars per private school education “seems extortionate for a typical private education”, she says, and while some schools demand these fees, others are more affordable.
“I would advise parents to think twice about committing this kind of cash. This is more expensive than the top MBA in the world, after a five-year degree in a top Australian university,” Filipich points out.
“The traditional purpose of a private high school education has been to get the best possible entry score to university, but this is declining in importance in our entrepreneurial world.”
If you’re sold on your child graduating from an exclusive private school but your financial position doesn’t match your goals, she suggests that you consider prioritising high school only.
“Recognising that some people like to send their children to private primary schools to take advantage of the ‘feeder’ systems, it's probably more important to target a higher standard of high school if funds are limited and you can't afford both,” Filipich says.
That said, if you’re committed to funding a private education for your children from pre-school onwards, you’ll need to prepare as early as possible.
The following strategies may help you to start saving effectively for your kids' educational needs:
1. Start saving smartly
At the premium end of the private school market, you’ll require around $500,000 to cover one child’s private schooling costs.
“Saving this amount means putting aside $25,000 after tax a year for 20 years, discounting any benefit from interest earned or growth from investment,” Filipich says. “It's simply not enough to start when school starts; you need to get ahead of the game. So start now – even if your child isn't born yet!
“The compound effect means you may only have to set aside half the amount or less if you can get reliable growth.”
Make sure you “[G]et as much bang for your buck as you can,” she adds. “At a minimum, use term deposits to earn interest and grow your education stockpile. If you are willing to take some risk, learn and apply an investment strategy,” she says. “The compound effect means you may only have to set aside half the amount or less if you can get reliable growth.”
2. Leverage your mortgage
For home-owners, a standard savings plan is rarely the most tax-effective strategy, says certified financial adviser Peter Horsfield, founder of SMART Advice. Instead, leveraging your mortgage could be a much more profitable way to go.
“When you park your savings in your mortgage offset account, you’re not going to get taxed on the interest,” Horsfield explains.
“Yes, the loan will eventually go back up when you draw those funds out to pay for education costs, but in the interim, less interest payments equals more money that you can use to reduce your overall debt.”
For instance, a $600,000 loan at 5 per cent would cost $30,000 annually in interest. With $100,000 in an offset account, you could save $5,000 in interest (untaxed profits), an amount that could be used to reduce your principal to $595,000.
“This is one of the most suitable strategies for parents, particularly now that deducting school fees is no longer a fringe benefit deductible employer expense,” Horsfield says. “It’s a simple way that people can accelerate their debt repayment, and know that they can access that money again for expenses such as private education.”
3. Buy an investment property
You need an investment timeline of “at least 10 years” for this strategy to work, says Chris Magnus, partner and financial advisor at Ark Total Wealth in Sydney. Anything less, and your property may not grow in value sufficiently for you to tap into equity for educational funding.
“You need to find a property in a high-demand rental area, and you want to stay away from areas that are going to be volatile, like resource towns that go through big booms and crashes,” he says. “Invest relatively conservatively into areas with a high level of transport, infrastructure, hospital and schools, and that will go a long way to decreasing your risk.”
In 10 to 15 years’ time, when you need to draw down on the loan to pay for school fees, you can then borrow against the property’s equity to fund your children’s education.
“Note that the education portion of the debt won’t be tax deductible,” Magnus adds. “If you decide to sell the property, you’ve got the potential of capital gains tax – and you’re selling an asset that may continue to grow further.”
4. Apply for an academic scholarship
If your child truly shows an aptitude beyond their years, you may be able funnel their educational success into financial savings.
“Many schools offer academic scholarships for potential students of limited financial means,” Filipich says. “It means doing some tests and maybe an interview in the year preceding high school, but if you've got a bright child it's worth a shot!”
5. Park your funds in a share portfolio
An investment in a share portfolio could be a smart and financially savvy strategy to save for your child’s education.
“If you’re thinking about investing for your children’s education, you’re going to be investing for the longer term…”
“Historically, investing in the share market has returned the highest returns overall when compared to other asset classes,” explains Rodney Greenhalgh, head of investment product solutions at BT Financial Group.
However the downside to the share market is that it can have volatility, as happened during the Global Financial Crisis.
“For this reason, share investments are more suitable for those with a 10-year timeframe, with five years being the minimum period you should be aiming for,” Greenhalgh says.
“If you’re thinking about investing for your children’s education, you’re going to be investing for the longer term and a 5 to 10 year time horizon allows time for the share market to peak and then recover from any troughs along the way,” he says.
“Also, the earlier you start to invest a certain amount in shares every month, the sooner you start to compound those returns.”
6. Invest in a scholarship fund
If you want a ‘set and forget’ investment plan that manages your education savings strategy on your behalf, then a scholarship fund may appeal.
Magnus adds, “There’s a certain level of discipline built into this, in terms of managing payments and doing administration on your behalf, but these funds generally tend to be quite conservative.
“Scholarship funds also tend to be quite structured and rigid in terms of how the payout is structured. Generally, other strategies tend to be a lot more flexible to your individual circumstances.”
* Australian Scholarships Group Planning for Education Index, January 2015