Lessons to be learnt for parents on private school fees

It’s a question reverberating around many homes this month, but there are some ways to soften the costs.

There are a number of ways of easing the pain of school costs and, as always, read the fine print.

How on earth will we pay the school fees next year? It’s a question reverberating around many Australian homes this month as school years come to a close.

One sliver of good news for fee-paying parents is that the relentless pace of accelerating private school fees over the past decade may finally be slowing.

Figures released to The Weekend Australian by eduction finance company EdStart suggest fees over the past year grew by 3 per cent, a slowdown on average annual increases of ­between 4 and 6 per cent over the past decade, chief executive Jack Stevens says.

Stevens suggests the moderation in fee increases is based on both supply and demand factors but one key reason has been the negligible lift in wage growth over the past year, the outstanding costs faced by most schools.

There is some evidence the significant flows of students into the private system in recent times may have cooled as fees swelled to unprecedented levels.

One measure of the expense and pressure exorbitant school fees have placed on families — and on the ability of families to invest more broadly — has emerged in the worrying trend towards using debt to fund school bills.

Recent media reports show that about 22 per cent of school fees were paid from credit cards, though a closer examination may reveal the credit card facility is used simply for efficiency or even for the modest offset provided by frequent flyer points.

The latest industry survey for EdStart shows 37 per cent of parents use some form of debt or financial assistance to pay for fees.

Here’s the breakdown. Credit card payments where interest was paid on the cards (11 per cent), “loans” or assistance from the school (8 per cent), loans or gifts from family (7 per cent), loans from alternative financial providers (6 per cent) and loans from a bank (5 per cent).

Though there are signs that fee increases at schools have levelled off, the challenges of funding fees when there is little wage growth means the cumulative sums required for schools are very steep. Richard ­Atkinson of Austock Life, a provider of insurance bonds, suggests even where school fees are not at the so-called “elite” level, such financial requirements need serious strategic thought.

“Three children in private schools at, say, $20,000 each for 13 years (he’s assuming primary and secondary) comes to $780,000 after tax. This requires a dedicated investment focus,” Atkinson says.

Despite the enormous after-tax cost of paying school fees, there is surprisingly little attention paid to the issue, in contrast to mortgages or superannuation. However, with the advent of specialist finance services, a handful of useful ideas have filtered through the system: here are some of the best.

Last minute discounts

Some schools don’t know until near the start of term how many places have been filled. According to schoolplaces.com.au, a private school vacancy service, “For last-minute vacancies, a short-term discount is frequently applied ranging from 10 to 50 per cent.”

Pre-payments

Few private schools will reject the offer of prepayment. It is rarely prudent for a business to reject cash up front. For the few families that can afford this luxury, the advantage has been that with school fees running at multiples of inflation, you save over the course of a child’s education. However, if fees continue to slow down as they have in the last year, and inflation picks up, this facility may be less attractive.

Specialist products

For all the effort by the finance industry to create the impression there are highly advantageous education products, most specialist bonds are primarily adaptations of existing insurance products. Though there are some tax advantages, there may also be additional expenses with any product. The key bonus should be that the specialist bond can match the timing of the education terms a lot more closely than standard loans.

Scholarships, bursaries

Read the details of school fees on private school websites carefully. Some are all-inclusive. The same goes for details of scholarships and bursaries: the essential question is whether the family is really so much better off taking up what may be, at worst, a limited discount on a school that is more expensive than might have been required. Scholarships are academic awards granted on exam results. Bursaries are less transparent. In theory, bursaries offered at the discretion of the school are for cultural imperatives, such as supporting poor families or families from the bush, or to develop a particular initiative, such as getting more girls into the IT industry.

A bigger mortgage

Financial adviser Will Hamilton suggests there are merits to increasing a mortgage, especially when coupled with an offset facility. He says with rates at rock bottom levels, it may a good idea to fix a portion of the mortgage.

Looking across this area, the only good news appears to be that the pace of private fee acceleration may be slowing. The bad news is that as a cost, it has to be taken as an after-tax expense. Many investors believe education is a cost like any other and you pay for the best you can afford.

With careful planning, those costs can at least be softened.

Wealth editor James Kirby hosts a live investment Q+A every Wednesday at 12.15pm at www.theaustralian.com.au