Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 193

The gift of education and the cost of funding it

Benjamin Franklin said that “an investment in knowledge pays the best interest”, but given the rates of interest on offer at the moment and the spiralling costs of education, saving enough to fund your kids' or grandkids' education can be a real challenge.

Wouldn’t it be great to know that school fees were covered? One less big ticket item to worry about, and the confidence of knowing that you are in a position to make the best educational choice for your child, without being unduly influenced by the price tag.

Education, particularly private education, can be monumentally expensive. For the vast majority of Australians, unless they win the lottery, they will be paying for education as they go, and feeling the pressure. As returns on savings attract tax, attempts to save consistently for a long-term goal can feel like one step forward and two steps back. Super is great from a tax perspective, but it’s not much help if your children will be starting school before you’re 65.

The true cost of education can be surprisingly high

Costs vary enormously depending on the choices you make, but you can be sure of one thing – education is expensive. According to recent research, parents of a child born today, who has a fully government funded (public) education, including university, will spend in the order of $200,000 on education. A fully private education, on the other hand, comes in at nearly $700,000. And a mix of the two will be somewhere in between (based on the Australian Scholarships Group calculator). It’s a lot of money to save, and if you have more than one child, it’s daunting.

Education is more than simply tuition, and the desire of parents to give children a well-rounded education has added to the total cost. An increasing number of parents are concerned that an intense focus on academic excellence in some schools is overshadowing the social and emotional growth of their children, and that children should be more engaged in activities other than academic studies.

This means extra-curricular activities, which many parents see as crucial to a well-rounded education, but which incur additional costs.

A realistic estimate of education costs should include extras such as books, uniforms, and stationery, but also the costs of extra-curricular activities such as sport, music and dance.

Start as soon as you can in a tax-effective structure

An investment bond is an insurance policy, with a life insured and a beneficiary but, in practice it operates like a tax-paid managed fund. As with a managed fund, you choose from a broad range of underlying investment portfolios which can range from growth-oriented to defensive assets.

An investment bond has several features:

  • Tax effectiveness

Returns from investment bonds are taxed at the company rate of 30% within the bond structure and are then re-invested. They are not distributed to you as income. This means you do not need to include them in your annual tax return, and if you hold the bond for 10 years, all funds are distributed entirely tax-free.

In addition, depending on the underlying investment portfolio, dividend imputation credits and other credits may apply, making the effective tax rate less than 30%. This compares very favourably with the top marginal tax rate of up to 49%.

  • Affordability

There is no limit to how much you can invest in an investment bond. You can start with as little at $500 and make additional contributions every year, up to 125% of the previous year’s contribution.

  • Flexibility

Investment bonds are most tax-effective when held for 10 years or more, but the funds can be withdrawn at any time if needed. If the money saved is not in fact needed for education, it can be used for any other purpose.

  • Ownership and transfer

If you are saving for a child’s education, you can choose to invest in the name of a child over the age of 10, but this means the child will gain full control to decide how to spend the money once he or she reaches age 16. The preferred option in most cases is to hold the bond in the name of a parent or grandparent. This avoids penalty tax rates for children under 18 if they make withdrawals in the first 10 years, the adult stays in control, and the bond can be started for a child younger than age 10.

This is an option preferred by many grandparents putting money aside for a grandchild’s education.

Saving for your child or grandchild’s education may be one of the most important challenges in your financial life. The key to success will be keeping three things in mind: Start as early as possible, be realistic about the costs and choose a structure that allows you, and not the taxman, to keep as much of your savings as possible.

 

Neil Rogan is Head of Investment Bonds for Centuria. Centuria is a sponsor of Cuffelinks. This article is for general information only and does not consider the circumstances of any individual.

 

RELATED ARTICLES

The next generation and investment bonds

How to put money away regularly for your kids

banner

Most viewed in recent weeks

Australian house prices close in on world record

Sydney is set to become the world’s most expensive city for housing over the next 12 months, a new report shows. Our other major cities aren’t far behind unless there are major changes to improve housing affordability.

The case for the $3 million super tax

The Government's proposed tax has copped a lot of flack though I think it's a reasonable approach to improve the long-term sustainability of superannuation and the retirement income system. Here’s why.

Tariffs are a smokescreen to Trump's real endgame

Behind market volatility and tariff threats lies a deeper strategy. Trump’s real goal isn’t trade reform but managing America's massive debts, preserving bond market confidence, and preparing for potential QE.

The super tax and the defined benefits scandal

Australia's superannuation inequities date back to poor decisions made by Parliament two decades ago. If super for the wealthy needs resetting, so too does the defined benefits schemes for our public servants.

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

Getting rich vs staying rich

Strategies to get rich versus stay rich are markedly different. Here is a look at the five main ways to get rich, including through work, business, investing and luck, as well as those that preserve wealth.

Latest Updates

SMSF strategies

Meg on SMSFs: Withdrawing assets ahead of the $3m super tax

The super tax has caused an almighty scuffle, but for SMSFs impacted by the proposed tax, a big question remains: what should they do now? Here are ideas for those wanting to withdraw money from their SMSF.

Superannuation

The huge cost of super tax concessions

The current net annual cost of superannuation tax subsidies is around $40 billion, growing to more than $110 billion by 2060. These subsidies have always been bad policy, representing a waste of taxpayers' money.

Planning

How to avoid inheritance fights

Inspired by the papal conclave, this explores how families can avoid post-death drama through honest conversations, better planning, and trial runs - so there are no surprises when it really matters.

Superannuation

Super contribution splitting

Super contribution splitting allows couples to divide before-tax contributions to super between spouses, maximizing savings. It’s not for everyone, but in the right circumstances, it can be a smart strategy worth exploring.

Economy

Trump vs Powell: Who will blink first?

The US economy faces an unprecedented clash in leadership styles, but the President and Fed Chair could both take a lesson from the other. Not least because the fiscal and monetary authorities need to work together.

Gold

Credit cuts, rising risks, and the case for gold

Shares trade at steep valuations despite higher risks of a recession. Amid doubts that a 60/40 portfolio can still provide enough protection through times of market stress, gold's record shines bright.

Investment strategies

Buffett acolyte warns passive investors of mediocre future returns

While Chris Bloomstan doesn't have the track record of his hero, it's impressive nonetheless. And he's recently warned that today has uncanny resemblances to the 1990s tech bubble and US returns are likely to be disappointing.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.