Ways to save for school fees

The young Prince George may well be destined for Eton, and the University of St Andrews – and even a few months at Geelong Grammar, if he follows in the footsteps of Price Charles – and it will no doubt be a costly exercise. Irrespective of whether you have greater or more modest educational ambitions for your own versions of mini-royalty, it?s certain that the fees, uniforms, books, excursions and numerous “optional? extras will cost a significant chunk of money; education is one of the few CPI groups measured by the Australian Bureau of Statistics to have almost always consistently increased at a far greater rate than inflation over the past two decades.

Over the past ten years alone the rise in education costs has been more than double the CPI rate. To note:

Year % increase % CPI
June 2013 5.7 2.4
June 2012 6.1 1.2
June 2011 5.9 3.6
June 2010 5.7 3.1
June 2009 5.1 1.5
June 2008 4.2 4.5
June 2007 4.3 2.1
June 2006 5.8 4.0
June 2005 6.2 2.5
June 2004 7.8 2.5
Total over 10 years 56.8 27.4

What are some ways of saving for those fees?  Three options are as follows:

An education saving plan

These types of investment products are offered by a small number of financial institutions and are specifically for the purpose of funding your child?s education. If the money is used for an approved purpose there are taxation benefits attached and as they generally involve a regular monthly contribution, they can be an easy “set and forget” way to save for education. Some issues to consider before investing, though, are the fees that are charged, the investment options that are available, and the purchases that are allowable. Also ensure that you ask the fund what happens to the money if your child drops out of school or doesn?t go to university. Under some plans you may find that while you receive your capital back, you forfeit the earnings on the investment.

A general regular savings plan

Another option is to simply set up a separate bank account or managed investment in your own name and commit to making regular contributions each month, to be put towards education costs at a later date. This type of strategy is flexible in that if you do not need all the funds for education costs you can use them for something else. Perhaps the biggest risk with this type of investment though is that the temptation is always there to spend it on something else!

Pay extra into your mortgage

If you have a mortgage then a very cost and tax-effective strategy can be to make regular additional payments into a mortgage offset account, to be redrawn down the track. This has the significant benefit of being effectively tax free (in that the “earnings” on your money are in the form of a reduced interest charge to your mortgage).  It also has the benefit of a very low investment risk because the money is not tied to share or property markets. Additionally it is flexible – you can start and stop the payments whenever you like and are not tied in to using the money for education. That flexibility can also be the biggest disadvantage as well though, as the temptation to use the money for something else – perhaps a home upgrade – is always there.

If regular savings are hard to find then another option is to put aside any lump sum payments – a tax refund perhaps, or a work bonus – towards funding education. Investing in your own education in order to command a higher future salary can also be a good strategy…

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