Should you invest in Education Bonds for your child’s future?

Safely and effectively finance your child’s education with Education Bonds.

Whether you’re a parent, grandparent, or another family member, you may be thinking about the young people in your life and wanting the best for their future. While there are several options available to help fund education costs, education bonds are a low-risk and tax-efficient way to start saving for a child’s educational needs. They are specifically designed to maximise your savings, and be available to fund any part of the education process. You can also often start them from as little as $500 AUD.

For formal schooling the average cost of an education in Australia, from preschool to Year 12, for a child born in 2022 is reaching around the half a million dollar mark. These costs are also set to rise in the future, with a predicted 39% of schools set to raise their fees this year.¹

Currently, over $40 billion is spent each year on education from private sources.[1] While there are more cost effective options; such as Government schooling, subsidies, and scholarships available, this is still a tall order for most working families.

On top of this, university tuition fees have the highest price bracket – the fees for which are obviously in addition to those already paid for standard schooling. With half of the younger generations set to obtain a university degree in the future and the average university debt around $28,833, it is important that families start to factor these costs in as early as possible.²

How educational funding can benefit your child’s future

While it may seem obvious that an education is important for equipping children with the tools to pave a career path for themselves, it is arguably more important today than it has ever been in previous decades.

In his report “Investing in Education” by Mark McCrindle, he points out that “[t]he world of work is changing, in known and unknown ways.”³ Our younger generations, Gen Z (those born between 1995 and 2009) and Gen Alpha (those born between 2010 and 2024) “will comprise nearly 40% of the workplace by 2031”.⁴ 65% of this workforce will also, notably, be working in professions that don’t even exist yet.⁵

These generations are also set to “work much later into their lives than any previous generation”.⁶ This is a lot of vocational pressure that the youth of today are facing. It’s therefore of vital importance that they get the education necessary to ensure that they can face this pressure head on, with the necessary skill sets and confidence.

Thankfully, there are ways that you can give your nearest and dearest a head start in life by helping them to access the education that they deserve.

What are Education Bonds?

An education bond is a long-term investment bond that’s used to meet the costs of educational expenses. This can include all expenses associated with Government, Catholic, and independent schooling, as well as university tuition fees. As a matter of fact, any form of education can be potentially covered by education bond investment funding.

Education bonds are renowned for being a tax-efficient option for those looking to invest money into their child’s future education. This is because education bonds, like all investment bonds, have a maximum tax rate of 30% on investment earnings. For people who earn over $45,000, this is particularly appealing as their marginal tax rate is over 30%.

However, unlike other forms of investment bond or superannuation investments, you can access any amount, or the entirety of your bond at any point during your investment period. You can also do this without incurring additional tax, if you hold it for 10 years (and meet the 125% rule).

Education bonds can only be issued by “friendly societies” which are society-based companies that can issue funding for life events including tax-effective investment bonds, scholarship plans and funeral bonds. This funding is issued under the Life Insurance Act 1995 (Life Act) with societies regulated by the Australian Prudential Regulation Society (APRA).

Pros vs Cons

There are two predominant types of tailored education bonds available for people looking to invest in a child’s schooling and/or university tutelage. These are generally classified as “Family Education Bonds” and “Individual Education Bonds”.

A Family Bond is a type of Education Bond that is geared towards people who are looking to fund the education of more than one child. With a family education bond, you can appoint several beneficiaries under a single, flexible bond.

With an Individual Education Bond, you appoint a sole beneficiary. The processes of and benefits involved with these two types of education bonds are often very much the same. It is always worth contacting a professional financial advisor to ensure that you are making the best possible fiscal decision for you and your family, especially if you are intending on making large donations to numerous family members.

Pros

• Tax-free contributions. Paying money into an education bond doesn’t attract any tax at any time.
• Allocate single or multiple beneficiaries under a single bond. Can be used for multiple children and/or grandchildren, as well as philanthropic giving.
• Bespoke to your specific investment requirements. You can tailor your investments to meet your education spending goals. For instance, if you’re planning on covering education costs throughout schooling and university, you can work with your bond provider to work out the most effective amount to invest on a regular basis to ensure that you meet these goals.
• Choose where your funds are allocated. You can opt to invest your money in higher or lower risk funds, ethical funds, etc.
• Low risk. Because all investment bonds are backed by the Australian Government and regulated by the ATO, education bonds are considered a low-risk investment strategy.
• Withdraw at any time. Unlike some investment bonds, you can withdraw money from an education bond at any time.
• Flexibility. Children’s educational needs change, depending on their unique skill set and desires. With an education bond you have the flexibility to fund any direction they need or want to take in life.
• Tax-effective. Investing in an investment bond is tax-effective if your marginal tax rate is above 30%. This is because the investment bond only pays tax at 30%, and there’s no personal tax liability to you after 10 years.

Cons

• Tax-effectiveness is circumstantial. Depending on your earnings, investing in an education bond may not be the most tax effective option for your particular circumstances.

Alternative ways to save for your child’s education

There are numerous savings plans that you can utilise to invest in a child’s education. Whether it be specifically designed education bonds, other forms of investment bonds, savings accounts, or alternative methods. How you invest in your child’s future should be based on what’s best for your personal circumstances and financial situation.

1) An offset account

Using an offset account against a home loan is a common form of investing in a child’s education. Returns on an offset account are accrued at an after-tax interest rate that is equal to the interest rate charged by your current home loan issuer.

Similarly to an education bond, offset accounts usually allow you to withdraw funds at any time. Unlike education bonds, these funds can be used for any purpose – not just a child’s education.

Pros

• Tax-free return. If you have money in an offset account, your bank or other lender will only charge you interest on the remaining outstanding balance of your home loan. This then generates an after-tax return equal to the interest rate of your home loan. For example, if you have a home loan of $400,000 and an offset account of $100,000, you will only be charged interest on a balance of $300,000. This means that you are technically “earning” a higher interest rate, in savings, than if you had that money elsewhere. This is because interest rates offered by banks on savings are generally lower than those charged by banks on loans.
• Can be used for multiple purposes. Having an offset account doesn’t limit you to spending the funds on education. This can make it useful as an emergency fund for other potential unforeseen costs, such as medical expenses.

Cons

• Offset accounts are only available to people with home loans. It almost goes without saying, but a major downside to an offset account is that you can’t have one unless you have a home loan. If you aren’t a homeowner, or you’re someone who has already repaid their home loan in its entirety, an offset account isn’t for you.
• Temptation. Because you can use the funds for anything and not just education, the temptation to withdraw education funds for other purposes can make this type of “education” investment a risky business. Unless you have immovable self-discipline, this type of investment may not work in your favour.
• Income and home loan rate dependent. This investment option is only effective if the home loan market and the investor in question’s taxable income stay in positions that are favourable to the investment outcome.

2) A family trust

Standard family trusts, like specified education trusts, can be used to fund educational costs. However, because they are not specifically designed for educational investment purposes, they are a more outdated method of saving for your child’s future. They often involve substantial establishment costs, and are more complicated to set up than other forms of investments.

That being said, you can sometimes add an education bond to an existing family trust, and combine the benefits of both.

Pros

• Combine the benefits of a family trust with an education trust. If you have an existing family trust, you may be able to add on a specified education bond. This can help you to reap the benefits of education bonds, without having to set up an entirely new investment plan.
• Tax benefits. Family trusts incur a Capital Gains Tax (CGT) 50% discount. And, if after-tax distributions are re-contributed to the trust in question, the average rate of tax on returns could be lower than the maximum 30% tax rate that applies to investment bonds.
• Business owner benefits. If you’re a business owner, you can contribute to a family trust as a corporate beneficiary and be taxed at the marginal tax rate of 30% (like education bonds). You may also be able to offset some of your corporate tax obligations and protect your personal assets in this way.

Cons

• Higher establishment costs. While you can set up an Education Bond from as little as $500, it usually takes an absolute minimum of $1,500 to set up a family trust.
• Higher management fees. The ongoing fees involved in a family trust may be higher than other forms of investment funds.
• Complicated to establish. Family trusts can be a complicated investment strategy for people who are new to investment and should be approached with caution. It’s always a good idea to speak to a professional financial advisor prior to making these kinds of decisions.

4) ETFs and investment funds

Investment funds ETFs, or exchange-traded-funds, are a type of pooled security investment fund. These managed funds operate similarly to mutual funds and standard investment funds. Unlike mutual funds, ETFs are a passively managed investment option.

While you can utilise both of these types of investment funds for educational purposes, their structure and tax benefits are similar to that of Education Bonds – which are subject to the same regulation, rules, and tax implications.

Which option is best for me?

Education Bonds are a great way to start saving and investing for your family’s future education. They deliver the same benefits as other traditional investments and saving options, with the bonus of additional unique features. These features help make it a flexible, tax effective and dedicated education fund to cover a lifetime of education expenses and more.

As always, when looking to start making regular contributions to an education savings investment, the best route is always to seek professional advice prior to making any financial decisions.

Everyone’s personal situation is entirely unique, and speaking to a financial adviser can help you to establish your personal goals and desires, as well as those of your family.

1 Futurity Investment Group, Total estimated cost of education for a child starting school in 2022, 2022
2 Mark McCrindle, Investing in education: Preparing emerging generations for life, 2022
3 Mark McCrindkle, Investing in education: Preparing emerging generations for life
4 Ibid
5 The Future of Jobs, World Economic Forum, 2016
6 Mark McCrindle, Investing in education: Preparing emerging generations for life

1 Source: Australian Council for Educational Research (ACER), 2015