The Cost Of A Private Education And How Parents Can Plan For It - A Financial Planners Perspective
In September this year Core-Data surveyed 1000 parents about their preferences and experiences with education in Australia. Of the parents they spoke to 70.8% had considered or were currently sending their children to a private school. According to the ABS there is a total of 1.3 million students being educated in the private sector and as a proportion this has risen from 31.6% in 2002 to 35% in 2015. When this is refined to only secondary students 41% of are educated through the private sector.
It is clear to see the majority of parents would like to send their children to a private school however amongst the survey group, 84% of the parents that were currently sending their children to a private school stated a sacrifice was required to be able to fund it.
This article looks to break down the cost of a private education and consider strategies that will help to limit the stress and sacrifices that many parents face.
Comparison of costs of private education
The reasons that parents gave for choosing a private education varied from:
Standard of education
Just as there are a wide range of reasons, there are a wide range of schools to cater to each of them. I have compared numerous school in Adelaide and at the cheaper end you may be looking at fees from $3,500pa in junior schools up to $5,500pa in senior schools. At the higher end of the market you could be looking at anything up to $15,000pa for junior school through to $25,000pa for senior schools.
For the purpose of comparisons, even whilst public schooling is free there, are still a cost for materials and services which can vary from $150pa to $1,000pa depending on the school.
Funding a private education
For 16.4% of those surveyed, funding private education required only a small financial sacrifice if at all. When discussing funding education with my clients the main concern is the overlapping years where multiple children are in a more expensive secondary school. If you were to have three children enrolled in years 8, 10 and 12 at one of the more expensive schools this could cost you as much as $70,000 for the year, even when including the family discounts offered.
When asked how they fund the costs of schooling the answers varied from:
Surplus cash flow
If you happen to have the surplus cash flow to fund this without any further sacrifice you are doing very well. However, as noted previously, for 84% of families, this is not the case and some form of sacrifice is required.
Cut back on discretionary spending
This is the solution for the majority of families and it may involve cutting back on entertainment and eating out (50%), holidays (49%), hobbies (44%) or renovations (30%).
Ask for family to assist
Of those surveyed 30% have at some point asked for support from their family to fund the costs of private education.
Work another job
16% of those surveyed worked more than one job.
Incur additional debt
6% of those surveyed had taken out a loan and 4% had redrawn from their mortgage.
How Financial Planning can help
For most, appropriate financial planning will help to remove the stress by establishing a strategy that will fund the expense as they fall with a less erratic impact on your cash flow.
As an example I have looked at a three child family with each child separated by 2 years with the eldest starting school next year. I have based the fees on those of a nearby private schools which vary from $6,000 in Reception through to around $15,000 for Year 12. In my modelling I have assumed that the school fees increase by 4% each year based on recent years’ data. The expenditure on school fees for the family would appear as below:
Evaluation of alternative funding strategies
As you can see, the cost will gradually increase until 2029 at which point the school fees peak at $61,800. To smooth out the impact that the fees have on their cash flow I have sought to invest a regular amount each year from 2017 onwards. In the years where the school fees are less than annual contribution the surplus is directed to the investment and in the years where the fees exceed the annual contribution the investment is redeemed to fund the cash flow shortfall.
When looking at the options for investment I have considered three options:
1. Invest across a diversified portfolio
2. Invest in a tax effective bond
3. Direct the funds to an offset account.
Strategy 1: Invest across a diversified portfolio
Based on the time the that the funds will be able to be invested before being needed to cover the school fees, I have used a used a fairly conservative portfolio of investment with 50% in growth assets and 50% defensive assets. Using the past 25 years of returns the average has been 8.27% pa before tax. When evaluating this I have also assumed a marginal tax rate of 37% plus the Medicare levy
Using these assumptions this strategy would require an annual contribution to the school fees and investment of $26,520. In the case of a 2 child family this would be $20,500 and for a single child an annual allocation of $11,900 would smooth the cashflows. This is seen below:
Strategy 2: Invest in a tax effective bond
When you are planning on investing for a period of greater than 10 years another investment option you can consider is a tax effective bond. Tax effective bonds (also known as insurance bonds) are an internally tax paid investment product. You can make additional contributions over the life of the bond of up to 125% of the amount you contributed in the previous year and money can be withdrawn from the investment bond at any time. In the instance where you were to withdraw your money before the 10 years’ time frame some of the income may be taxable, depending on when the withdrawal is made. Any funds not withdrawn during the first 10 years are not subject to any further tax than the 30% that has already been paid making them a good option for things like education expenses. By investing in a similar portfolio as the last scenario but investing via a tax effective bond they would be able to reduce their annual contribution by $450 to $26,070.
Strategy 3: Direct the contribution to an offset account reducing the interest of a non-tax deductible mortgage
The final option I have considered here is for those with a personal mortgage to contribute to an offset account which in turn reduces the amount of interest you are charged on your mortgage. In the case where the interest is not tax deductible the comparable rate of return is quite high. For example, on a mortgage with a rate of 4.5% and a personal tax rate of 37% plus Medicare, the equivalent after tax return on the funds in an offset account is 7.4%. By accumulating the funds in the offset account, reducing interest you would have otherwise paid, and then drawing down from it to cover the school fees, the annual contribution would be further reduced to $25,125
Evaluation of alternatives
Amongst these three investment options, the equivalent after tax return of the funds in the offset account is greatest and as such will require the smallest ongoing contribution. With interest rates also currently at historic lows this rate would only increase if rates were to rise. The other benefit of this strategy is there is a very low risk associated with the funds being invested in an offset account compared to the volatility experienced by the alternative investments. This is not an exhaustive list of strategies that can be used and the actual strategy that would be recommended will change depending on your individual circumstances.
I have also projected this using a very simplistic view where I am assuming that it is possible to make even contributions each year. In reality this not going to be the case. For example where one spouse is only working part time while the younger children are yet to start school their cashflow may not support additional contributions until the spouse returns. In which case the actually strategy may look more like this:
If a private education for your children is important to you and you would like to talk about this in your own context, or for any other financial planning queries please contact me for a financial consultation.
It is important to note that this information is intended to be general in nature and it has not taken into account your current financial position, needs or objectives and thus it should not be relied upon. For the purpose of the projections I have assumed investment returns based on the historical returns of comparable investment which does not necessarily indicate future returns. It is important to seek specific personal advice that is suitable for your individual circumstances and which addresses your goals and actual financial position.