Over the past 20 years private school fees have risen by more than double the rate of inflation, with the most prestigious grammar schools costing well into the $40,000 range for year 12 and some above $50,000. Remembering that school fees are not tax ­deductible, a family with two children in private schools on the highest marginal tax bracket needs to generate pre-tax income of close to $200,000 a year just to pay school fees before even thinking about mortgage repayments and other living expenses.

It therefore comes as no surprise to hear wealth managers such as Jamie Nemtsas at Wattle Partners suggest that 70 per cent of clients are paying school fees for their grandchildren.

But should seniors be really footing the bill, and is it worth it?

The typical profile of a private school family consists of a higher than average household income but similarly higher than average level of expenses and liabilities, particularly in the area of mort­gages or rental payments. Although we have seen the first RBA rate cut since 2020, these families have seen their cash flow deteriorate over the past few years due to either rising mortgage repayments or 20-30 per cent increases in average rent prices.

While cost-of-living pressures continue to affect working families, their retired parents are invariably in a much healthier financial situation. Times are good for retirees who have been enjoying the benefits of strong sharemarket returns from their super and rising interest income from their cash investments. As such, children in their 30s and 40s are increasingly knocking on their parents’ door, cap in hand, asking for assistance on private school fees as a form of early inheritance.

Over the past 20 years private school fees have risen by more than double the rate of inflation.
Over the past 20 years private school fees have risen by more than double the rate of inflation.

If family support is not available and parents wish to enrol their children in (or maintain) a private school education, there are options available, but they come at a cost. Several companies offer unsecured finance for private school fees. However, the interest rates can easily run into double digits and, although not as bad as credit card interest rates, these debts usually take many years beyond when the child actually finishes high school to fully pay off. A less expensive option is to refinance the home loan and put the extra borrowed amount aside in an offset account and draw upon it as school fees fall due.

There will always be mixed views on whether private school is worth the hefty price tag. From an academic perspective, the average private school performs better than the average public school, but selective public schools historically are top of the pops.

Aside from academic considerations, private schools have more resources and are able to provide an enhanced education experience compared to their lower-budget public school counter­parts. In addition, there is the all important reputational kudos of private schooling that is very much alive and well. There is no doubt that having a private school education on your resume will open many doors in the corporate world, but as one senior banking executive put it: “Although a private school education gives you a foot in the door, if you do not have talent, that same door will be promptly slammed shut.”

If $200,000 was gifted towards school fees today, either as a lump sum or paying school fees directly, it means a lot more than the equivalent amount in 20-40 years as a death inheritance. By that stage the children would themselves be in their 50s and 60s and less likely in need of a financial injection.

For grandparents wanting to establish a longer-term legacy-style education fund for their grandchildren, investment bonds are a popular option. They are simple to set up and benefit from a 30 per cent cap on tax if the investment bond is held for 10 years or more. However, there is a lesser known variation, an education bond. Classified as a “scholarship plan” under tax law, they enjoy a distinct tax benefit.

While 30 per cent tax is paid on earnings and gains each year, the same as a normal investment bond, if withdrawals are made for educational purposes, the tax is rebated back in cash in addition to the withdrawal amount. In other words, if used correctly it can be a tax-free investment structure.

The main limitation is that withdrawals are treated as taxable income in the hands of the minor, so it is far more tax-effective to use this structure for university costs opposed to primary and high school expenses. Children under the age of 18 only have a $416 tax-free threshold before paying 47 per cent tax, whereas 18-year-olds switch to adult tax rates and have a $18,200 tax-free threshold.

Grandparents’ private school fees financial assistance is almost always graciously received. It is provided at a point in their children’s lives where their household finances are stretched by large children and housing costs.

James Gerrard is principal and director of planning firm financialadviser.com.au

This article first appeared in The Australian.

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