My eldest child is in Grade 5. We really want to send her to a private school, but we earn $150K between us. We have a mortgage that we pay around $5,000 per month on. Are we right in thinking we can still afford to send our child to private school?
Top answer provided by:
Paul Howden
Hi Jane
The desire to support and educate a child is a high priority for many parents and while the costs can be significant, it really comes down to priorities.
There are a number of investment and savings strategies that parents can utilise in preparation for a child’s education. Obviously the earlier you start the easier it is to accumulate the necessary savings to meet private schooling expenses. Private school fees can vary significantly, with the NSW average being around $22,000 pa (source: AFR 20/1/16).
In simple terms, a regular savings strategy into a suitable structure/product, depending on individual circumstances, can achieve the best outcome.
Options can include Investments in a child’s name (usually for small savings due to tax implications), an Education Savings Fund, Insurance bond, offset accounts and depending on a parent’s age -Superannuation (if access is likely to be available when funds are required).
Given that your child is in grade 5, I’m assuming you’re keen to get them to private school either now or in the near future, (high school).
If you assume $2,000 per month is needed, it comes down to looking at budgets. With little time to save or invest, managing the extra expense out of cash flow will be your challenge.
My suggestion is to review expenses: entertainment /lifestyle, mobile phone/ internet/ pay TV, - are they worth giving up to fund your child’s education? Other expenses such as health and personal insurances can they be reviewed and potentially restructured? Can your superannuation or employer pay some directly?
Once you have been through the household budget, you can then look at the mortgage and redraw options. Can your personal mortgage be reviewed and/or repackaged to free up extra funds while the fees are being paid?
Another strategy to achieve some immediate savings in the future is to request your employer to increase the tax you pay - even $20-$30 a week - will result in the potential for a larger tax refund each year and if increased over a few years can provide a significant refund to support school fees.
A strategy using a combination of the above should get your child to private school. The simple strategy is to get that little bit extra out of your budget in a few different ways to get the funds needed.
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Comments7
"Hi Jane, Based on the information you have provided I'd questions the feasibility of sending your daughter to a private school. Where you and your husband earn $150k between you this will leave you between $103,900 and $115,200 (rounded) after tax depending on how the income is distributed. Once you then take out $60,000 for mortgage repayments this leave you only $43,900 - $55,200 for your entire cost of living. As I don't know your actual cost of living I'll refer to the ABS Household Expenditure Survey of a couple family with dependent children for a proxy (note the most recent data is from 2010 so I have adjusted the figured by 14% to take into account the impact of inflation as per the ABS inflation data). Current housing costs (mortgage/rent) $18,048.39 Domestic fuel and power $2,636.18 Food and non-alcoholic beverages $17,338.21 Alcoholic beverages $2,085.47 Tobacco products $703.06 Clothing and footwear $4,090.91 Household furnishings and equipment $4,625.62 Household services and operation $6,200.10 Medical care and health expenses $5,064.88 Transport $16,619.74 Recreation $12,848.35 Personal care $1,897.55 Miscellaneous goods and services $11,451.71 Total goods and services expenditure $103,609.58 Total ex mortgage ($85516) If you were to take out all of the non-essentials (alcohol, tobacco, recreation, misc. spending and cut down on a few other areas) you could probably get by on about $45,000 for a young family which would put you very close to a small surplus or a cash-flow neutral position with probably not enough left over to fund private education. Can you afford it? You need to really sit down and look at your budget, I have a pretty simple budget spreadsheet that I have developed to use with my clients which is avaliable on my website www.hartwealth.com.au. Given you are repaying $60,000 per year you must have a loan circa $850-900k (based on a 25-30 year term) it would not be advisable to take out more debt to fund private education."
Peter Gehlert 16:09 on 08 Sep 16
"firstly - with high school commencing in 2 yrs, you dont have the timeframe to invest in growth assets, secondly - with a debt to income ratio of 40%, you are already in financial stress, you need to pay down debt therefore, do a budget and accept state school meets the needs of 90% of the population."
Good 21:19 on 25 Jul 16
"Yes all good advice, but we should also look at alternatives for the client. Coach them as to their reason for private schooling. It is a massive cost burden on parents when you look at the before tax cost. If, as above, we take $22,000 as the average cost, parents are looking at close to $40,000. With the average income edging $70,000 pa this is more than half on one parents income. Why not a good public school? Most doctors, dentists and lawyers come from the public school system, save their money and redirect into paying off non-deductible debt, and if their children need extra help, spend it on tuition. "
Anthony S 09:44 on 25 Jul 16
" The first thing to define and set a very clear goal: to whom and when you like to make for provision for the private school at what cost. Who: How many children? assume that it is not the just the eldest child you like to send to provide school for. When: High school? which year? What cost: Future cost can be forecasted School fee can be provided one or combination of two ways: Cash flow or lump sum You will need to save, work out your current cash flow surplus and how you can improve that. If savings are directed to offset, the mortgage will be paid down, then you will have more cash flow to pay private school. ( $5,000 per month mortgage payment currently) If savings are directed to investment or offset account, lump sum can be provided at school time. Lastly consider saving and investing options: Offset, Debt recycling to start invest early, insurance bond can be used (It is a more committed type of saving and investment method, the key is doing the right thing over long time. Although technically it may be better to pay down the debt first) "
bob 07:04 on 25 Jul 16
"Also remain cognisant these fees increase 5% pa despite being in a low inflationary cycle, which means in 6 years time your $22k is nearly $30k pa after tax! Also look at ancillary costs of overseas vocational trips, replacing uniforms, books, sports equipment & transport etc. $22k is being pretty generous from my experience"
rob 15:38 on 22 Jul 16
"Can someone please explain why you would invest in insurance bonds when you have home loan, and why you would pay tax early to get a later tax refund? I am at a loss to understand how either strategy could ever be of benefit. Some better ideas are explored here: http://www.dover.com.au/school-fees-the-big-issue/"
Terry McMaster 15:30 on 22 Jul 16
"Sound advice Paul - obviously the earlier you start on a plan the more opportunity you have to save. That being said, with discipline and a good plan private school education is not out of reach of most middle class families in Australia."
Andrew H 14:29 on 22 Jul 16