HOW TO MANAGE SCHOOL FEES ON A TIGHT BUDGET
Almost a third of Australian School Kids now attend a non-Government School. With school fees up to $30 000 per year (just on tuition) this adds up to a huge amount over a lifetime. Even more so for larger families, so here are some tips on how to manage the school fees and what to do if you can't.
School Fees Are One Of Life’s Four Biggest Costs
Considering school fees are one of the biggest expenses most families ever have to deal with, the decision often gets little attention. This could be due to parents focusing on which school, rather than the choice between public or private.
That's what happened to me when I chose the school (for my now 14 year old son). Ten years ago I believed ‘what was good for me will be good for him’, and accepted that private school tuition was something I just had to factor into the family budget.
This year, I took a different approach and read the school's information pack before I reached for my cheque book.
What I read shocked me. Well one page in particular, that listed the fees for 2015 for each of the 13 school years. It felt even worse when I added them all up. Of course I know how much I pay in fees each year and I still paid, but seeing the total was a real eye opener.
Tuition alone was almost $300 000, and this school is far from the most expensive in Sydney. More shocking is that School fees are rising faster than inflation and have been for over a decade now.
For a child born today, School Fees alone will be almost $400 000 for the 13 years (K-12).
7 Ways To Be Prepared and Manage the School Fees
1. Start Early
The earlier you start dedicating a portion of your family budget to school fees, the easier it will be to manage.
Sherpa Says: Set aside $1 500 a month from birth (into your Mortgage offset account) until he/she finishes High School. This will cover school fees for the lifetime of your 2014 baby.
Setting aside $1 500 each month can be tough with child care costs, but if you wait until your baby starts school, it increases to $2 400.
2. Defer the Move to Private Schooling
Do some research into the local State School and whether you feel comfortable with this option for the first few years. This would save you money, and also help you grow a network of local friends. If you want to make the move to a private school, perhaps wait until Year 3, 5 or 7.
If you wait until Year 3, you save around a sixth of the total cost. So rather than setting aside $1 500 a month, you only need $1 250. If you wait until Year 5, it drops to $1 000 a month.
Keep in mind that changing schools at Year 7 can be the most disruptive for your child.
3. Be careful of Education Funding Products
There are a number of financial products marketed as tools for Education Funding. The two most popular are by LifePlan and Australian Scholarships Group. Both are variations on Insurance Bonds (see below) but are better suited to funding University expenses.
The Australian Scholarship Group transfers all earnings (less fees) to a pool that gets distributed among those attending eligible university courses. This means if your child doesn't attend university, you only get your contributions back. To me, this doesn’t seem like a very attractive arrangement.
LifePlan provides a return whether or not your child goes to University, but the tax benefits (over and above those provided by a regular insurance bond) are available only when withdrawals are used to meet the eligible education expenses for a child over 18.
4. Use your Offset Account
If you still owe money on your home loan – your Mortgage Offset account can provide one of the best after-tax returns, and the risk is minimal. You effectively earn the home loan interest rate after tax (currently at 5%).
Sherpa Says: Keep an eye on the balance of your Offset account so it doesn’t exceed the balance owing on your loan. The interest you earn on the excess can be transferred to a high interest savings account or investment.
5. Insurance Bonds
Insurance bonds are a form of managed fund issued by an insurance company. They pay tax at 30% so you will save on tax if you earn over $37 000 per year. If you keep your investment for 10 or more years, your withdrawals are tax free.
You don’t have to include these earnings on your tax return, so it can help you retain access to Family Tax Benefit A (when compared to investing in your own name). Most allow you to choose the type of investment so you can allocate your funds to growth assets like shares, which can give better returns over longer periods.
Investment in an Insurance Bond can be protected from creditors if you are made bankrupt.
6. Talk To The Grandparents
Grandparents may be able to help - if they are retired and not dependent on the pension. Because money invested in their Super fund is both accessible and tax free. Be mindful of any Government benefits they might receive, so as not to affect those.
7. Put your savings where the tax is lower or negligible
Invest your savings in the name of the partner that pays the lowest rate of tax. If one of you earns less than $20 500 per year, they won't pay tax. And the tax rate is only 19% up to $37 000 so keep this in mind when allocating your savings.
WHAT TO DO IF YOU CAN'T AFFORD THE SCHOOL FEES
If you have problems paying your kids’ school fees, talk to the school about it as soon as possible. Most are understanding and many will provide alternative ways for you to pay. You may be able to avoid the disruption of changing schools if the problem is temporary. Examples include:
A payment plan
Deferring payments until circumstances improve
Providing access to scholarships or relief with books and clothing
Waiving fees based on a long family association, academic or sporting achievement
Payment in lieu, if you can provide professional services or other work for the school to offset the fees owed
Whatever you agree on, make sure it is something you can maintain, and get it in writing. Keep the school up to date of any changes that might affect your ability to pay.
Paying for school fees takes a big chunk out of any household budget. Getting prepared early can ease the burden. Make sure you know what’s right for your child and the trade offs you need to make.
Vince Scully | LifeSherpa
With over 25 years in Financial Services from consulting to management, Vince Scully is the go-to guy for wealth management and financial advice. Before creating LifeSherpa, Vince founded the Calliva Group; a fund manager, product issuer, adviser and lender. Vince is an adviser to the Wealth Management Industry, and prior to his role as CEO at Calliva, a senior member of Macquarie Bank’s infrastructure team.