Paying for Private Schooling

Private school fees can be expensive. In major cities around Australia, it can cost upwards of $500,000 per child to fund 12 years of private schooling. 

This cost is not tax deductible, meaning a person in the 37% tax bracket needs to earn almost $800,000 to pay for this schooling.

Despite this, in 2013 the percentage of Australian children in non-government schools hit an all-time high of almost 40%.  So, if your clients have kids, or are contemplating kids, then there is almost a 40% chance that they will send them to a non-government, fee-charging, school. These clients will almost certainly benefit from your help in best-affording those fees.

One way that some advisers seek to help out here is to recommend an insurance bond-based savings plan to fund school fees. This is almost always a mistake, but it becomes even more so in the highly likely event that the parents of these young children will also have a relatively large non-deductible home loan. (Most parents of school-aged children do - its the loan on the family home).

What are the dynamics of an insurance bond?

Insurance bond net income is taxed at 30% in the insurer’s hands. What’s more, there is no CGT discount on any capital gain that occurs. This makes an insurance bond a comparatively poor way to pay for anything, but especially an after-tax cost such as education.

Paying down the mortgage:  At current home loan rates of around 4-5%, paying down the home loan gives a capital guaranteed effective pre-tax earnings rate of about 8-9% p.a. for higher income earners.

Paying down the mortgage: At current home loan rates of around 4-5%, paying down the home loan gives a capital guaranteed effective pre-tax earnings rate of about 8-9% p.a. for higher income earners.

What are the alternatives?

A far better method is to use any money that would have been dedicated to the insurance bond to simply pay off the home loan (either directly or by using an interest-offset account to negate interest). At current home loan rates of around 5%, doing so gives a capital guaranteed effective pre-tax earnings rate of about 9% pa.

Paying off debt reduces the interest expense on the home loan. When the time comes to start to pay the school fees, the money not being spent on interest can instead be used for school fees. Alternatively, the family may choose to redraw from their home loan, or withdraw money that has been deposited in an interest offset account, happy in the knowledge that the money has been create a superior, untaxed benefit until that time.

Support from family

Please also remember that anecdotal evidence suggests that at least half of private school fees are funded, partially or completely, by grandparents. The above logic still holds: if you are, or are likely to become, grandparents, then helping your adult children minimise their home loan is typically the best way to go about doing so.

Using Super

Superannuation can be another way for working grandparents to help out here – the closer those grandparents are to being aged over 60, the better super becomes.

So please remember: the best way to pay for that new baby’s school fees is probably to pay off mum and dad’s home loan as fast as possible.


HOW WE SUPPORT CLIENTS

At Profy Finance and Wealth, we have supported business and clients who are looking to finance commercial property assets, through:

  • Helping them get clear on their objectives
  • Arrangement and recommendation of SMSF or structures to suit their situation
  • Helping clients take an active approach to their investments
  • Ensuring Debts and Mortgages are well managed and with good providers
  • Ensuring financial affairs are structured effectively
  • Helping them plan for any taxation outcomes
  • Wealth planning, investing, and retirement

At Profy Finance and Wealth, we cover financial advice and mortgage & finance broking to get more holistic results for our clients. Learn more about how we could help...