Education Savings Plan

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Education Savings

Putting saving back on the "to do" list.

Every parent has a number of issues top-of-mind when it comes to matters concerning their children. The younger the child is, the more the concerns are concentrated on current situations…are they safe? are they warm? are they fed?…and the list goes on.

Without a doubt, every parent wants the best for their child – perhaps even better than what they were afforded themselves. Of course, all parents start out with the best intention of providing for their children’s needs. The only problem is, time catches up with demand and the monetary shortfall equates to providing what can be afforded at the time instead of what the parent would really like to provide.

Often times, it doesn’t come down to those who have money and those who don’t. Usually it’s merely the difference between a person who planned ahead and a person who didn’t.

As a parent myself, I discuss the trials and tribulations of my children with friends who are also parents, we often shake our heads and laugh. Our children, who provide us with so much joy, can also scare the living daylights out of us! Nightmares of the child choking, falling, getting lost in a shopping centre, getting a hold of a knife on a counter – all intended with the sole purpose of making sure our heart is still beating, and fast.

When we think of these experiences we connect with what we value most, and yes, it is our children. Because we value them we want the best for them. The best is couched in the terms of the parent themselves. In some cases it may be the best clothes, the best toys or the best bedroom to play in. But there is one thing that pretty much most parents agree on, and that is that they want the best education they can provide for their child.

What parents are able to provide might revolve solely around their income. And, in some cases, that might be correct. But being able to provide a quality education does not mean that you have to be Midas to afford it.

There is no special trick or magical computation that is going to turn your salary into one that will provide a more expensive (e.g. private school) education if you are on a medium to modest income.

The only person that could possibly rescue you from your predicament and help you achieve your goal of a quality education for your child is in fact, yourself.

Identifying early on, and the earlier the better, that your child’s education is a priority, should equate to dedicating some energy towards this goal.

So now you are quite probably in the mood to consider how you might save towards the education expenses of your child or children. The next step is to determine how.

It’s probably too tempting to put your education savings into your normal bank account, as it would be so accessible that you would find yourself unable to separate your day-to-day living expenses from your education savings.

Then the search might begin for other savings or investment products that could fulfill your need to save towards the future education expenses of the kids. The criteria to determine your choice might navigate around the answers to the following questions:

• Is my money safe?
• What are the charges, penalties and fees?
• How much do I have to put in?
• What if I need to get at it? Can I? Will I be penalised for doing so?
• Are there any tax benefits?

Most of us have experienced receiving the dreaded Superannuation or investment statement with negative symbols next to our earnings! A horrifying thought, but a reality just the same.

So safe means two things really, first that the company will be around in 10-18 years when you need to draw down on it for education expenses. And second, that you can be assured that your investment will grow, not decline, in value. Finding an investment product with a reputable company that is capital guaranteed should achieve both criteria.

What are the charges, penalties and fees?
This is probably the scariest part because no matter how many questions you ask in the beginning and no matter how many times you read the literature – you always seem to get duped over one aspect or another.

What you thought was relatively simple and straightforward becomes a quagmire of penalties for this, fees for that, charges to do this, etc. Then, you probably think that it’s all your fault – because you didn’t read the fine print! Or perhaps you read all the print, both big and small, but you couldn’t understand the jargon and figured that it would be all right and proceeded anyway.

The key to not being duped is to read all the literature on the product – ask a lot of questions and be sure you understand the answers! Also check to see if what they’re saying matches their literature. You are putting your hard-earned money into something that is supposed to help you provide for your children – this is one product you do not want to make a bad call on!

A reputable and ethical company will put their fees and charges up front. They will encourage you to read their literature carefully – not just take their word for it that it’s a good product.

How much do I have to put in?
Of course, it has to work in your budget. However, you need to remember that if you put in a little you’ll get less in the finish than the person who put in a lot. There is no magic wand that will convert your contributions into multiples beyond a competitive return on your investment. That said, just getting started is probably the most critical thing to do.

As time grows, so probably will your income, and with a good education savings plan you should be able to increase your contributions whenever you like. What is more, you should be able to either reduce, or suspend altogether, your contributions in the event your family falls on hard times.

Don’t think that your contributions need to be restricted to stringent monthly contributions either. Good education savings plans should let you put in additional money whenever you like. How many times have parents collected little nest eggs when their child had a birthday or at Christmas? What better place to store this money than in the child’s own education savings plan?

Not all people like to make monthly commitments. An education savings plan that will let you make lump sum payments, at any time, may be the better choice for some. Grandparents especially, who want to help out but not intrude, might look to an education savings plan for their grandchild. In this instance, being able to set a bit aside for their future education expenses represents a timeless gift.

What if I need to get at it? Can I? Will I be penalised for doing so?
The last thing you would probably want to do is touch the money you purposely set aside for your child’s education. But the reality is that if an emergency occurs you will need to call in all of your resources and your education savings may be one of them.

You will want to make sure that you can get to your money – at any time. Even more important is that you are not penalised for doing so. Of course you don’t want to tap into it – but an emergency is an emergency. Some companies might just give you back your contributions but have you forfeit your investment return – because you supposedly broke the agreement. Be sure that if you need to get your money out that you get it back plus the return it earned during the time it sat there.

Are there any tax benefits?
This above all other aspects will be the key decision point for a person deciding on an education savings plan. Why? Because proper education savings plans offer special tax benefits that are not normally offered in usual investment and savings account products.

You put your money in, it earns interest, and you pay tax on the interest. That’s the normal procedure, however, with an education savings plan you don’t pay tax on your interest as long as you use the money for genuine education expenses.

Your next question is probably, what are genuine education expenses? Well some education savings plans will compartmentalise you into plans just for secondary schooling, or just for tertiary education – depending on the age of your child. The better alternative would be to let you save then determine for yourself, how you want to spend it on education expenses. This would also mean that there would be no age restriction on when you can set up a plan for your child.

An education savings plan that lets you claim preschool, primary, junior primary, secondary, post secondary (TAFE or University or any other registered training organisation) as well as genuine education expenses such as uniforms, books and school excursions – gives you total flexibility and control of where, with whom, when and what you want to claim for.

Remembering that with a flexible education savings plan you can still withdraw your money for any purpose – albeit forfeiting the tax benefit on the interest earned.

The big picture
We all connect with the value of being a parent. We want the very best for our children. We know that a good education does more than provide them with qualifications – it provides our children with opportunities.

As a grandparent, the desire might be to help out the children with their children as the gift of a good education doesn’t wear out, doesn’t break and doesn’t get stepped on in the hallway (let alone having to bend over and pick it up!).

Whatever they choose as a career is beyond our control, and rightly so. But knowing that they had choices, were given every possible chance to express themselves and learn, is probably about the best gift you can give your child or grandchild.

You most certainly cannot predict their future, but anticipating the expense is the secret to their success (and your peace of mind).

Robbee Spadafora, MBA(Adv)
Mother of two, Sister amongst six, Aunt to seventeen

The material in this section is intended to provide general information on particular subjects and should not be considered a substitute for professional advice. For more detailed information, you should talk to an independent expert in the relevant area concerned.