A new study indicates Australian school fees are increasing and many parents may struggle to meet rising costs on time.
The 2016 ASG Planning for Education Index demonstrates just how high education costs are per child.
Cost per child
The table above shows that to educate just one child starting private school in Metropolitan Australia in 2016 is forecast to cost almost $500,000. That’s right, almost half a million dollars for private education per child before a child even reaches university.
School fees and other associated education costs can be some of the highest expenses families face in their life time. The numbers above only calculate forecasted school fees. They do not take into account uniforms, books and other course materials, technology, extra-curricular activities and sports.
The most obvious way to pay for your children’s education is to start saving from when they are born. But with rising living costs and multiple child households it is not always possible to afford such large costs upfront. More parents than ever are seeking other payment options.
So how do parents pay school fees other than using savings?
- Credit Cards
Some parents will use a credit card to make the required payment instalments throughout the school year. Considering the high rate on many credit cards, this can prove to be an expensive choice. Many credit cards do have interest free periods but usually for only up to 60 days which may not be enough time to repay the full amount.
- Personal loans
Some parents will apply for a personal loan to pay school fees in a lump sum payment and then repay the personal loan throughout the loan term. Loan terms can range between 1 year and even as high as 7 or 10 years depending on your financial position and credit health. Using a personal loan can be very costly due to high interest rates and may not assist your ability to afford school fee payments in the future.
- School fee credit products
There are creditors who provide finance specifically for school fees. These products are essentially personal loans. Some of these products have interest rates as high as 10%. Some products allow you to repay school fees in a lump sum, then require you to repay the creditor with interest on a flexible repayment schedule. This can be helpful for many parents, however, loan terms can be very long meaning you are still making repayments years after your children have completed secondary school.
- Using a mortgage and an offset account
Using a mortgage with an offset account is becoming a popular option for parents who have equity in their mortgage. There are a few different ways to pay school fees, especially expensive private school fees, with a mortgage. Popular ways include refinancing to release equity and then using that equity to make a lump sum payment.
This is effective for some parents as home loans usually have much lower interest rates than personal loans and credit cards.
So instead of taking out an additional loan at a higher interest rate, using the equity within your mortgage may save you thousands in interest long term. However, this strategy does increase the amount and loan term of your mortgage so you must be disciplined and maintain a budget.
Using an offset is a great way to manage school fees each year, especially if you have multiple children. An offset account is an account which can be linked to your home loan and allows you to make withdrawals. Parents can place money into their offset, including equity they have cashed out, and when it’s time to pay fees, they can pay them directly from the offset account. An offset leads to savings because it reduces the overall interest paid into the home loan.
For example: If your home loan is $500,000 and there is $100,000 in an offset account, interest will only be charged on $400,000.
For more information on how an offset account works, or to find out if you can use your equity to pay school fees, have a chat with our friendly team today. We’re here to help.