A hip-pocket lesson

Fees are rising each year by about twice the rate of inflation.
Fees are rising each year by about twice the rate of inflation.

By this time each year, the kids are back at school and parents have received fee notifications from their children's schools. With fees for year 12 at the most expensive schools reaching up to $30,0000, many parents will wish they started a savings plan and started it early.

Parents can always put money into a bank deposit but it will not earn much interest, says a financial planner and director of WLM Financial Services, Laura Menschik.

With school fees rising each year by about twice the rate of inflation, parents might have to take on some risk and invest mostly in growth assets, such as shares and listed property, to boost their capital, Menschik says.

For those with at least 10 years to invest, Menschik likes investment bonds. They are long-term ''tax paid'' investments. About half a dozen insurers and friendly societies offer investment bonds. Bonds pay tax at the company tax rate of 30 per cent. After 10 years, the money can be withdrawn from the bond without more tax having to be paid.

They are particularly attractive to parents in higher tax brackets. Bonds have a range of investment options with different mixes of assets. Some will have big exposures to conservative investments, such as fixed interest and cash, and others will have higher exposure to shares. You can usually change between the underlying investment options.

There are also savings vehicles specifically designed to save for education. Australian Scholarships Group has savings plans to help cover the costs of public and private schooling and post-secondary education and training.

And the Lifeplan Education Investment Fund, which is provided by Australian Unity Investments, helps parents pay for education expenses. The fund has access to 16 investment options from six fund managers. The plans use investment bonds as the underlying investments. Menschik says they can be good for helping parents keep on track because they are specifically earmarked for education. However, they can be less flexible and have higher fees than if the parents invest in investments bonds directly. For parents with a mortgage, making extra repayments into the mortgage and withdrawing the money later to pay school fees can be a good way to go, Menschik says.

There is a simplicity to the mortgage strategy.

There are no costs as there would be for an investment, though some lenders might charge a small administration fee each time a redraw is made.

The effective interest rate on the money is steady, changing only when the mortgage interest rate changes.

With other investments, such as shares and the investments bonds that invest substantially in shares, there is always the risk of a downturn in the sharemarket just before the money is needed to start paying school fees.

Menschik says the mortgage strategy requires discipline to keep making the extra repayments and use the redrawn money for the intended purpose of the children's education.

The head of Australian Unity's Lifeplan, Matt Walsh, says there is usually no single solution for parents. It will likely be a combination of investing, using the mortgage strategy and putting windfall financial gains, such as tax return payments, towards the children's education.

Also, as the children get older, often the parent doing the primary caring will increase their hours of paid work, he says.

This story A hip-pocket lesson first appeared on The Sydney Morning Herald.