Financial advice just got cheaper
A new ATO ruling means clients may be able to claim a portion of their financial advice fees as a tax deduction....
3 ways to cover the cost of private school fees
- 19 November 2024
- by Mazin Albassit
- 5-minute read
In Melbourne, 13 years of private school fees costs upward of $300,000 on average. Annually, the average cost is more than $12,000 but it’s not unheard of for independent school fees to be $20,000 or even $30,000 per year.
If you have more than one child, the costs to you can obviously be much higher. And additional costs for things like school camps, uniforms, books, equipment hire, extracurricular sports or music programs, and even class photos can add significantly to the overall cost.
Given this, it’s no wonder that 44% of parents are very intentional about preparing for the cost of education.
In this article, we explore three possible ways to fund private school fees:
- Savings
- Debt recycling
- Education bonds
Keep in mind, you may like to use a combination of these methods, and a Financial Advisor can help you decide which option(s) are best for your unique situation.
Option 1: Fund private school fees using savings
This is the most straightforward method. School fees are paid using after-tax cash savings from your regular pay.
BENEFITS
- Simple process
- No additional debt to drawdown
- No exposure to market returns
DRAWBACKS
- Cashflow may be impacted
- Exposure to inflation risk
- May put strain on achieving savings and/or financial goals
- Opportunity cost of using these funds elsewhere
- No tax benefit
Option 2: Fund private school fees using debt recycling method
Debt recycling is the utilisation of an existing debt (like your mortgage) to create a tax effective investment portfolio. For example, you might refinance your mortgage to access additional equity. Meaning you increase the amount you borrow against your home, which will provide you with extra funds.
The additional funds from this refinancing may then be invested into income-generating assets, such as shares or managed funds.
Given that we borrowed additional money to fund the purchase of income-producing investments, the interest incurred on the investment-funding portion of the drawdown will then be tax deductible. The tax savings can then cover some or all of the cost of the private school fees or may provide you with additional financial relief.
Over time, you may choose to use any additional income or tax savings to pay down the original mortgage and redraw more funds for additional investing, thereby continually recycling the debt.
By effectively managing debt and investments, families can potentially create a sustainable way to cover private school fees while leveraging their home equity.
BENEFITS
- Reduction in tax liability via deductible interest claim
- Likely to benefit from a lower interest rate than what is prevalent in the market when drawing from an existing home loan
- Additional exposure to market-lined investments
DRAWBACKS
- Debt recycling is a long-term strategy, so consider how it fits into your overall financial plan
- Principal and interest payment still need to be met from disposable income
- Interest rate rises may outweigh the expected investment returns
- Exposure to market risk
Option 3: Fund private school fees using an education bond
An education bond is designed to assist you in funding education expenses. They are often structured as managed investment schemes, where your money is pooled with other investors’ funds. The bond is managed by a financial institution or fund manager, some bonds have more flexibility in the investment selection then others.
One of the key features of education bonds is that it acts as a tax-effective investment option. The earnings on the investment are generally taxed at a lower rate compared to regular income marginal tax rates.
Funds can usually be withdrawn at any time, however when they are needed for education expenses there are certain tax benefits. Withdrawals for qualified educational purposes are typically see the bond credited back with tax paid on investment earnings, provided certain conditions are met.
Multiple beneficiaries (children) can be listed as beneficiaries of the education bond.
The balance of the bond is comprised of two components – the value of contributions made (capital) and the returns generated by the investments within the education bond (earnings).
Before investing, it’s important to review the specific terms and conditions of the bond, including fees, performance history, and withdrawal rules, to ensure it aligns with your financial goals.
BENEFITS
- Utilises the tax-free thresholds for each child
- Does not add to the bond owner’s personal taxable income
- Wide range of bond investment options to suit your needs
- An education bond can be used to cover university fees when the time comes
DRAWBACKS
- Education bonds are intended for long-term savings, so they are best suited for families who plan to invest for several years to build up a substantial fund for education
- Requires a substantial initial investment amount
- Costs may rise above what was determined at the beginning of the bond term
- Exposure to market risk
- There are limits on how much you can contribute to the bond, and some products might have minimum investment amounts
Seek financial advice
It’s important to seek financial advice before deciding which options might be best for you. Which method may be best can depend on many things including your other debts, your savings goals, your cashflow, your current investments, your risk appetite, your age, your income, and more.
At BG Private, we have experts in how to fund private school fees who can help you navigate the various solutions.
Contact us!
Contact our Financial Advisors via +61 3 9810 0700 or to discuss the best options for you to fund private school fees.
