The cost of knowledge
Rising education costs makes private education and university expensive. The cost of educating a child rose by five-and-a-half per cent in 2015 compared to average wages growth of around two per cent1. The reality is great chunks of household wealth are consumed by education. Annual tuition can cost up to $35,000 for private secondary schools with uniforms, excursions, building levies and extra-curricular activities additional.
How much do I need to save?
Funding annual fees of $35,000 for six years requires around $220,000 to $240,000. If you start saving ten years out this means putting away $20,000 to $25,000 annually2. This kind of savings program is incredibly tough for young families and is why grandparents and other relatives often contribute. Factoring in the goals, risks and objectives of the entire family can identify competing goals but also options. It may be effective to cover education costs via less direct routes like paying down non-deductible debt earlier or boosting super but the suitability of other strategies depends on factors like age of parents, salary level, home equity and job security, so seek advice from a qualified advisor.
What type of investment should I choose?
Suitable investments will vary subject to the timeframe. Shorter periods may limit options to cash or term deposits whereas growth-focused listed investments such as blue chip shares, Listed Investment Companies (LICs) and Exchange Traded Funds (EFTs) may suit when funds are not required for at least five years (preferably 7-10 years). A longer investment term helps average out the short-term ups and downs of the market providing a better chance of an overall positive return. Although specific education savings products are available, investing via shares, LICS and ETFs can provide more flexibility to manage fees, access funds, and change savings levels should circumstances require it. They can also provide good levels of diversification and cost effectiveness and are generally easier to manage as only one investment needs to be tracked.
Blue chip shares
These stocks of well-established companies have traditionally strong long-term balance sheets and earnings. Investors may be able to specifically target companies that pay fully franked dividends, stocks with dividend re-investment plans, or stocks in a particular sector (i.e. mining). Even though blue chip shares are established companies and less likely to experience total capital loss, they do still experience volatility in their share price on a daily basis
Listed Investment Company (LIC)
LICs trade on the exchange like a stock but their business is to invest in other selected companies. An LIC exposes you to a diversified group of investments at much lower cost than trying to buy them all individually. While a range exist on the ASX, you should look for good quality older style LICs retaining a low fee structure. Prices fluctuate on a daily basis but try to buy when the market price is not at a premium to the net asset backing of the LIC.
Exchange Traded Funds (EFT)
ETF securities track an index, commodity, or basket of assets like an index. They also trade on the exchange like a stock. Usually very low cost, they can provide a very effective diversification strategy. EFTs have a passive investment approach whereas LICs seek to add value compared to the asset class they are investing in through active management.
Who should hold the investment?
There are a range of options and each has tax implications so it’s best to speak to an accountant.
Lowest tax rate payer
If one householder has a low tax rate expected to remain consistent over the investment life then they may be most appropriate, but it’s not advisable to hold investments in the name of a minor (under 18) as investment income over $417 per annum is taxed at rates between 47 to 68 per cent.
Trustee for the minor (child)
As trustee for the minor, the adult can hold the investment in their name, but the Australian Taxation Office (ATO) must ascertain the ‘true owner’ for taxation purpose. They do this by deciding who controls the investment and who is using the income. Where the adult makes all investment decisions and uses the income, they are considered the ‘true owner’ and all dividend income and net capital gains are taxed at their marginal tax rate. If the income is re-invested or held, then the child is considered the owner with all dividend income and net capital gains taxed at their rate (as above).
Discretionary (family) trusts
Formal trust structures like discretionary (family) trusts can be effective but are more complex and costly to run and therefore are only worth considering if large sums of money are available to invest.
Education costs look set to continue to rise. Coupled with a low growth outlook, planning now can make all the difference. If you have the financial stability to commit to long-term investing then consider growth-focused investments for their flexibility to fund a good education – something that you can’t put a price on.