The rising cost of education

As the education sector faces a shortage of teaching staff, the challenges to keep up with constantly changing technology and growing governance demands, fees can be expected to keep rising.

A family sending two children to private school from years 5 to 12 could be up for costs of up to half a million dollars as private school fees again rose beyond inflation in 2015, with an increase of 3 – 5% across Australian schools at all levels. So how will we pay for our kids’ education?

There are a growing number of education specific investment products on the market. While they focus on planning for school fees they often have the unintended consequence of tying your money up for long periods of time and tend to attract significant fees. Traditional investment vehicles – cash, shares and investment bonds – tailored to suit individual circumstances of a parent or grandparent often remain the best way to plan for future costs of education.

I think it makes good sense to start with a cash account for a child under five and then move into shares or managed funds once you have $2,500 plus saved or if you are ready to introduce your children or grandchildren to the principals of investing. The main thing is to arrive at a tax-effective solution that will serve your needs over what can be a 15-20 year period if you have two children starting school a few years apart. That means getting good holistic advice that allows for your changing financial circumstances over time.

Savings accounts

A high interest savings account is the simplest starting point. It allows children to learn about the benefits of saving, while earning a higher interest rate on the balance.

Pros:

Ability to withdraw after short periods of time if you decide to redirect funds elsewhere.
Requires a low investment amount to start with, depending on the type of account.

Cons:

Quick and easy access to funds can be too tempting for some families.
Generally lower return when compared to other types of investments.
Minimum balance requirement and terms, conditions and charges may apply.

Shares and managed funds

Shares are a good investment choice for long-term growth and tax-effective dividend income.
A well-chosen balanced share portfolio held over the long-term is also likely to provide a superior return than many other investment options. Managed funds are investments where money is pooled together with other investors. An investment manager then buys and sells shares or other assets on your behalf, which provides a diversified range of investments and allows regular contributions.

Products like FMD’s Active Management Service (AMS) Funds enable first-time investors to access a diversified portfolio of managed funds in a simple package managed by the FMD Investment Committee with oversight from independent research partners and the convenience of online reporting.

Pros:

Can be started at any stage and there are a wide range of investment options.
Tax concession such as franking credits may apply to Australian shares.

Cons:

Earnings will be taxed at your marginal tax rate.
Capital gains tax applies.
Minimum investment amounts and costs such as brokerage, or entry and ongoing management fees, may also apply.

Investment (Insurance) Bonds

Insurance bonds work like a managed fund, and are available from a number of financial institutions allowing for a wide range of investment strategies. For high income earners, insurance bonds can be a tax-effective alternative investment vehicle to save for education expenses.

Pros:

Can be set up in the child’s name. Some insurance bonds allow you to nominate an age when the ownership will transfer to the child.
Holding the investment for 10 years has significant tax advantages.
Many bonds can be set-up with a relatively small initial investment and regular savings plans are also available.

Cons:

Restrictions on how much can be invested each year.
Entry, management and other fees may apply.

General advice disclaimer: This article has been prepared by FMD Financial and is intended to be a general overview of the subject matter. The information in this article is not intended to be comprehensive and should not be relied upon as such. In preparing this article we have not taken into account the individual objectives or circumstances of any person. Legal, financial and other professional advice should be sought prior to applying the information contained on this article to particular circumstances. FMD Financial, its officers and employees will not be liable for any loss or damage sustained by any person acting in reliance on the information contained on this article. FMD Group Pty Ltd ABN 99 103 115 591 trading as FMD Financial is a Corporate Authorised Representative of FMD Advisory Services Pty Ltd AFSL 232977. The FMD advisers are Authorised Representatives of FMD Advisory Services Pty Ltd AFSL 232977. Rev Invest Pty Ltd is a Corporate Authorised Representative of FMD Advisory Services Pty Ltd AFSL 232977.