School fee funding
for doctors and dentists
Everyone wants the best for their children, which includes offering them a good education.
However, this is becoming much harder financially, as the cost of education
is rising exponentially compared to the broader consumer price index.
Current school fee estimates for a child born in 2016, including education expenses from preschool until their final year could cost approximately the following: $60,000 for a public school; $200,000 for an independent school (e.g. Catholic); $400,000 for a private school.
This includes school fees, extracurricular activities, uniforms, books, transport, etc. As you can see, unless you are certain that you will be able to fund these expenses from your cash flow, it is best to start planning for school fees early, as it is not going to get any easier or cheaper.
It is important to understand that there is no single strategy that is optimal and will work for everyone. The issues you will need to consider include:
– Your income and marginal tax rate;
– Your capacity to save (i.e. surplus cash flow);
– Your timeframe (how long before you need to access the funds);
– Your investment experience and tolerance for risk.
With that in mind, please find below a brief overview of a few different strategies and options to fund school fees.
Some parents will be able to fund all or part of the school fees from their cash flow. If you are fairly confident about your long-term income, then this may be a suitable option.
Prepaying school fees
Whilst not all schools will offer this option, it may be a good opportunity to limit the impact of rising school fees, as they increase at a higher rate than inflation.
However, prepaying fees also comes at an opportunity cost, as the funds could have been applied elsewhere, such as paying off the mortgage for example.
Paying off the mortgage
Paying off your mortgage may provide one of the highest risk-free returns you are able to achieve. By paying more than the minimum repayment now, you are creating a reserve in an offset or redraw account, which you may call upon later when you need to pay school fees.
However, leaving the reserve ‘untouched’ requires discipline and this may thus not be a good solution for everyone. Also, some parents would rather keep the funds in a separate account, so they can watch it grow.
An insurance bond is a type of managed fund investment that is ‘tax-paid’. This basically means that the investor is not personally taxed for any income or gains whilst owning the bond; instead, tax is paid at 30% within the bond itself.
The final distribution is tax-free if the bond is held for more than 10 years, and if during that time you did not contribute more than 125% of the previous year’s contribution.
This may be a good investment option for parents whose marginal tax rate is higher than 30% (i.e. most doctors would be in this position); however, you need a long-term timeframe if you want to maximise the tax benefits. There are also investment-related fees applicable to these products, so you will need to consider that.
Education bonds are a type of insurance bond that comes with extra tax benefits, as long as the proceeds are used for genuine education expenses.
Regular savings and investments
Some people prefer to have more flexibility and control over their children’s education funds. Also, more favourable tax outcomes may potentially be achieved compared to insurance bonds, depending on your personal circumstances. Hence, regular savings or investment plans may be a suitable alternative. You control when and how much you invest, into which assets, and when and how much you access.
If funding your children’s education is an important goal for you, you should seek financial advice sooner rather than later and start planning for the funding of it, as it is a serious financial commitment. We would be happy to discuss your options.
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