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Saving for your child's Education

For a lot of us, one of the biggest expenses going forward is our children's education, even if we don't choose to use the private school system. If our children go on to further education, for example university or TAFE, they will need continued financial support or will end up with a large debt to pay when they start working.

We can plan to make this easier for the kids, and for ourselves if we start saving when they are young. So what are the options?

Pay as you go education

The default option is just to pay the bills as they come in, which is what we do now for pre-school. So there's a peak in the expenses once a term, which always coincides with paying for swimming lessons and a new term's 'Hop, skip and jump', or whatever the latest activity is, and suddenly our bank balance isn't looking as healthy as it could.

If we go the private school route for senior school, these peaks are going to be considerable higher, and even without school fees, there are still expenses each term to be taken into account.

The other thought for us, and if you're an 'older' parent you might agree, is that by the time the kids go to university, we are going to be at that time of life where we want to slow down, and not work as hard. (Actually, we'd like to do that right now, but let's be reasonable!) We want to see the mortgage payments coming to an end, so we have more cash or we can earn less money and still have the same lifestyle. If we send both kids to private school and then help them through university, we need a better option than pay as you go.

Education Savings Schemes

There are savings schemes out there that have been specifically set up for your children's education. The advantage of these is the tax breaks. Because they are aimed at education, the Government offers tax concessions that you cannot get with a standard savings scheme.

An education savings scheme will encourage you to be disciplined in your saving, and those savings are specifically for education. Two friendly societies with education savings schemes are:

Both are allowed by the tax office to rebate all tax paid on investment earnings at the maturity of the education savings plan.

If you are interested in these, I would suggest you meet with them to find out all the details.

We discussed our savings options with ASG, and there are a couple of things we were previously not aware of. If our children decide not to go on to further education, we would get back the money we have paid in, but we would forfeit the investment earnings. These are returned to the pool of funds and shared amongst those who do go on to further education. This is obviously an incentive to encourage your child to continue their education in some way, but at the age of 2 or 3 when you might start saving, it could be hard to judge if this is going to be the path your child chooses.

Education savings schemes are a relatively conservative investment option. Look at the rates of return and compare to your other options. Also check the fees you pay and be aware of what happens if you have an emergency and need early access to your savings.

As always, please consult with you financial advisor before making any investment decisions.

Drawing down on your mortgage to pay for Education

If we look at this from a purely financial perspective, then you are better off putting the money you could save for education into your mortgage and reducing it as quickly as possible. For example, if a savings plan offers you 5.8% return, and you are paying 8.8% on your mortgage, then putting an extra few hundred a month into your mortgage each month is going to put you in a better position overall financially. You save paying 8.8% on that money, and you don't pay any extra fees.

The way to do this is to have a flexible mortgage with a redraw facility, which can be an offset account or a credit line, for example.

However, if you do this with the thought that when you need that money for school fees, you will draw down off your mortgage, then you need to be prepared to see the mortgage go up as well as down.

An offset account is a good way to reduce your mortgage as any money in that account is taken off the principle amount for calculating interest. You could add $500 a month into the offset account which is to be used for education costs in 7 or 8 years time, but for now is working for you in your mortgage. You will be able to see that money easily as the offset account is separate from the main mortgage, so you can keep track of your savings. However, you can also access it easily, so if you are not disciplined in your budget, this may not be a sensible option. At least if the money goes to a separate savings scheme, you cannot access it for day to day spending, and you are encouraged to be disciplined in your saving.

If you do go down this route, one suggestion is to keep track of the savings you have put into the mortgage for education in a separate spreadsheet, so you know exactly where you stand.

Setting up a savings account or managed fund for Education

Unfortunately, saving for your child is not as simple as opening a bank account in their name and adding money to it. Children are taxed on investment earnings, so if you put an investment in a child's name and it creeps over the tax free threshold, they will be taxed at the high tax rate. This is set up like this to discourage parents from splitting their income in order to avoid taxes.

Also, if an account is in a child's name, they officially have access to it, and may choose not to use this money for education.

One option is to set up a trust account, where you hold the investment in your own name in trust. If this is done, you will incur tax at your own marginal tax rate. For this reason, it is best to choose the parent who is on a lower marginal tax bracket as the trustee for the child's savings.

There are lots of different savings plans out there such as Exchange Traded Funds or Managed Funds. With a diversified fund you can spread your risk across fixed interest, cash, property and shares and hopefully take advantage of long term growth investments such as property and shares.

Whatever option you choose for saving, it is worth doing some research and getting advice as to which is the best option for you. The one thing that's clear though, is that the sooner we start saving for education, the easier things are going to be in the future. We can still look forward to taking it easy as the kids get older!

More Practical Help:

Budget Options

Are you spending too much money? Do you want to cut back but you're not sure where. This section includes some suggestions to keep the budget on track. (more)


You probably have home or contents insurance or car insurance, but what about Life Insurance or Income Protection Insurance? If you're an at home mum or working part time, there is probably one main income earner. If anything happened to them, how would you survive financially? (more)


Just because you are not working full time anymore, doesn't mean you should be ignoring your superannuation. There are couple of things you should be aware of that could help with those retirement savings even while the kids are small. (more)

Government Benefits

Are you aware of the Government benefits for families and what your entitlements are now you have children, even if your partner earns a decent income? (more)

Making a Will

Everyone over the age of 18 should have a will, but now that you have children it is even more important. You want to be able to say what happens to them if you are not around, and to make sure they are cared for emotionally and financially. (more)



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