You thought real estate was expensive – wait until you take a look at the potential cost of educating your children. But, be calm; there are ways to make it manageable.
Having children costs you – physically, emotionally and of course financially; there are the shoes, the food, the karate lessons, the pocket money, the gadgets… but nothing drains the coffers like putting your child through school.
Paying for education is a financial commitment that can last up to 15 years, from preschool to the end of high school. According to the Australian Scholarships Group (ASG) 2017 Planning for Education Index, the average cost of full private education in metropolitan areas for a child born in 2017 runs to almost half a million dollars.
ASG chief executive John Velegrinis says when you multiply that by the number of children in your family, you’re talking some serious money.
“If you have three children the cost of educating them in Sydney or Melbourne’s private education system could top $1.6 million,” Velegrinis says. “That’s significantly more than the purchase price of the average family home.”
ASG’s survey, which takes into account additional costs such as uniforms, textbooks, trips and athletic pursuits, found the average cost in metropolitan areas was $68,613 for public schools, $239,672 for systemic schools (including religious schools) and $487,093 for private schools.
The average costs in regional areas were around 30-40 percent cheaper.
Public, private or systemic – what’s the cost?
While private schools represent the most expensive education choice, the Independent Schools Council of Australia (ISCA), says ASG’s headline figure of half a million dollars should be taken with a grain of salt.
“Our data shows that in 2015 the median Australian metropolitan Independent school fee was $6,079 per annum,” says ISCA Executive Director Colette Colman, “Nationally, nearly three quarters of metropolitan Independent schools are charging below $10,000 per annum.”
Velegrinis acknowledges ASG’s reported costs “represent the highest amount parents and families could expect to pay”, but maintains the true cost of education have risen dramatically over the long-term, regardless of the system you choose for your child.
“The cost of education has risen at two-and-a-half times the rate of inflation over the past decade,” Velegrinis says. “The estimated total cost of a government education across metropolitan Australia has jumped $13,587 in 10 years.
“Our research predicts the cost of education will increase, irrespective of whether you send your child to a government, systemic or private school.”
While many factors – not just financial – inform the type of school you choose, the financial commitment is one of the most important to consider. Before you decide where your child will be doing their studies, it pays to do your homework.
Six ways to save for your kids’ education
Richard Ebbs, Mercer Financial Advice Leader, talks through some common approaches to preparing for the education bills to come.
Many families with mortgages try to save through a mortgage offset account.
Pros: The balance in the offset account is deducted from the mortgage balance for interest calculations so the money in the offset account is effectively earning an interest rate equal to the mortgage interest rate.
You can withdraw money from the offset account to pay for other expenses, such as school fees, at any time.
Cons: This may be the most convenient route to dealing with the larger bills, but it is important to remember that each withdrawal comes at a cost, as these funds will now be subject to interest.
Some families interested in highly reputed government schools move into designated catchment zones.
Pros: The comparison of fees between the government and private schools represents a notional saving but very careful budgeting and consideration of those other associated costs would be important.
Cons: This is a very costly option to take with large upfront costs to take into consideration through the buying and selling of the home such as stamp duty and real estate agents fees. You can also expect housing in reputed school zones to come at a premium.
Savings and investment products
When looking at specific products such as education plans, managed funds or investment bonds it is important to be aware of the full features and benefits as well as the pros and cons.
Taxation features and associated fees are the more obvious ones along with investment risk of the investments choice itself. Another question might be “how would the education investment choice impact my other financial goals” and “who should hold the investment”.
There are a couple of savings plans dedicated to education and training costs. Australia's financial services regulator, ASIC recommends comparing education fund features with other investments, being particularly mindful of required fees, flexibility and tax impact.
If you have some money to invest and would prefer expert advice to make investment decisions for you, a managed fund might be for you.
Investment bonds are available through insurers and friendly societies. They may be attractive to higher earning parents because the tax paid on earnings is limited to 30 per cent. If the bonds are held for at least 10 years the money can be withdrawn with no further tax paid.
Each and every potential solution will require careful consideration and professional financial advice can make the difference to choose the right approach to meet your family’s needs.