While many parents around Australia ponder the question of whether to send their kids to a private school, one of the big factors that weighs into the decision is cost.
The cost of education has risen sharply, so preparing as early as possible for these costs has become even more important.
Even a public school education is not entirely free, with current estimates placing a cost of around $19,000 per child from kindergarten to year 12.
Private school costs are considerably higher with fees ranging anywhere up to $230,000+ for the most exclusive private schools. On top of that, a tertiary education can cost up to $100,000, depending on the university and degree chosen.
To work out the cost for your family at your preferred private school, take a look at Australian Unity’s Education Calculator. It’s a useful online application that can calculate how much it could cost you now and into the future. It will even include additional costs like books and computers.
By this stage you may be thinking you had best start saving before you even think about having a child.
There are three key ways you can go about paying for those school fees.
1. Build Savings
You can use a term deposit or savings account to build savings while your children are small. From an early age start putting money aside each month so you have the money on hand as they reach school age.
Be mindful that this is not a tax-effective option, as any interest you earn on the savings over time will be included as income.
Alternatively, you could use growth assets such as a share portfolio or managed fund. If you go down this path it is worth getting investment advice as there is no guarantee that your investments will be experiencing positive returns at the time you will need to sell them to pay for school fees.
2. Join A Scholarship Fund
Joining a scholarship fund is tax-effective and a good way of enforcing your savings.
However it’s important to read the fine print carefully to ensure this solution is right for you and you understand the terms you are agreeing to.
If you don’t you might find you can’t access the funds the way you want to. For example, we have known people who have had trouble getting their funds released once their child had completed secondary school because they wanted to do a course at a private college rather than go to university.
3. Access Home Equity
As long as you are financially responsible and disciplined, the most efficient way to put aside savings for education expenses may be to use your home loan, or refinance your home loan to include the following features.
Some home loan products can be linked to an offset account.
An offset account is a day to day banking account that can have ATM access and a cheque book if required. Any money you place in the offset account is deducted from your home loan balance each month – this reduces the amount of interest you pay.
Example: If you have a home loan of $600,000 and have $60,000 in your linked offset account, you will only pay interest on $540,000 of your home loan while that money is in your account.
This strategy will work in your favour financially as long as you can keep the money in the account and not withdraw it for any other purpose until you are ready to use it for your children’s education. So be sure to set a budget, a savings target and a plan and stick to it rigidly.
Another option is to have a home loan that has a redraw facility.
With a redraw facility you make extra repayments on the loan, and when it suits you can withdraw those extra payments.
Example: If your home loan repayment is $1,500 per month but you actually pay $2,000 per month, you will be $500 in advance on your repayments. After six months you will then be $3,000 in advance and be able to redraw this amount.
The fact that you need to go through a process to access the additional payments (every loan and every lender will have a different process) may mean that you are less likely to spend the money that you have allocated to school fees.
Note that not all loan products have redraw available. As an example it’s normally not available on fixed rate loans. Secondly, remember it’s only the extra repayments you can redraw, not all of your repayments.
Line of Credit Facility
The third option is to set up part or all of your home loan as a line of credit facility.
A line of credit functions exactly the same as a giant credit card – you have a credit limit (typically up to 80% of the value of the property). You are only charged interest on the balance used, and as long as you pay the minimum interest each month the unused portion of your credit limit is available to you. The convenience of this facility is also its danger. If your credit card balance is constantly up around its limit then you may not have the discipline to use a line of credit facility.
Treated with care, using your home loan as a vehicle to save for your children’s education has more advantages than disadvantages. It’s cost-effective, easy and inexpensive.