The busy executive’s guide to financial planning for your child’s education

Like most things in life, a good education doesn’t just ‘happen’; it needs to be planned. As education costs soar and your list of options grows, it’s easy for time-strapped executives to feel overwhelmed. Poole Advisory can help you navigate these challenges and prepare a tailored financial plan to secure your child’s education.

The rising cost of education in Australia

Regardless of where you sit on the ‘private versus public’ school debate, there’s a clear and alarming trend in Australia: education is becoming increasingly expensive.

According to the 2023 Cost of Schooling in Australia Report by Futurity Investment Group, even “free” public education could cost close to $90,000 over their lifetime.

Total estimated cost of education for a child starting school in 2023

It seems that as the competition heats up for places at the perceived pointy end of education, costs will only increase further. By 2033, some of the top private schools in Sydney are tipped to charge fees of more than $50,000 a year.

In addition to school fees and tuition, you also need to consider costs such as:

• clothes and school uniforms
• textbooks and study materials
• school excursions and camps
• extra-curricular activities
• software and electronic devices
• school transport (e.g., bus passes)
• tutoring or additional academic support.

Once you factor in events such as graduation, school photos, or school-sponsored trips, the overall costs can well and truly skyrocket. That’s before your child reaches university, which many parents want to prepare for financially as well.

Three investment options to keep up with rising education costs

The unpredictable rise in education costs shows how important it is to start planning, regardless of your child’s age. Consistent contributions will accumulate over time and make your future expenses more manageable. The following options may be suitable when investing for your children’s education costs.

Education savings accounts

Also known as Scholarship Funds or Education Bonds, an education savings account is a type of investment specifically for education costs.

• Potential pros: Specialised tax advantages may give you better after-tax returns. You can tailor the fund to your needs with a wide range of investment options and the flexibility to modify beneficiaries.
• Potential cons: Complex to manage without the help of a financial advisor. Some funds have high fees and if you make the wrong decision, you may pay more tax.

Trusts

A trust is a legal arrangement where assets are managed by a trustee (you) for the benefit of beneficiaries (your children). Trusts can be a great way to set aside and grow funds specifically for educational expenses.

• Potential pros: You can distribute income to beneficiaries in lower tax brackets to reduce tax. Trusts are protected from your personal liabilities. You can specify terms for distribution on the trust deed to make sure funds are used for the intended purpose, such as education.
• Potential cons: If the trust doesn’t distribute its income, it might be taxed at the highest marginal tax rate. You can face tax implications when changing the trust’s structure or beneficiaries. Some trusts can’t be easily altered or revoked, limiting your flexibility.

You can read more about the advantages and disadvantages of trusts here.

Investment bonds

Not to be confused with government or corporate Bonds, an investment bond combines the features of both a life insurance policy and a managed fund. Investment bonds are known as a ‘tax paid’ investment because the tax on earnings is paid by the issuing company at a rate of 30%.

Providing you hold the bond for 10+ years, your withdrawals are tax-free outside of the issuing company’s 30% rate. Additional contributions are considered part of the initial investment and get the same tax benefits if you meet the 125% rule (your annual contribution cannot be more than 125% of your previous year’s contribution).

• Potential pros: The higher your marginal tax rate, the more attractive an investment bond can become from a tax point of view. Ideal for estate planning as you can nominate a beneficiary to receive the money directly if you die, bypassing your estate.
• Potential cons: Limited flexibility for contributions due to the 125% rule. Some or all profits on returns you withdraw within 10 years will be taxed at your marginal personal income tax rate.

If you’d like to delve deeper into the advantages and disadvantages of investment bonds, check out blog articles Investment Bonds Part 1 and Investment Bonds Part 2.