An Investing Compass listener requested article looks at how parents can lessen the blow of private school fees, and the opportunity cost of doing so.

Having a child is a significant commitment. Part and parcel is the meaningful cost of education.   

Education costs may start almost immediately with pre-school. It does not give parents much time to prepare financially. The financial commitments increase5 or 6 years later for primary and secondary school.

The Cost of Education Index from Futurity Group looks to illustrate the cost of education and how it changes year to year. The latest edition shows that education costs for a child that starts public school in 2025 in a major city will be up to $123,294 to Year 12.

Many families will pay less than this amount, with large amounts of ancillary costs included in that sum including private tuition, sports equipment and transport.

At the same time, we see some prestigious private schools upwards of $50,000 per year (Kambala, 2025 fees for Year 11/12). The cost for private schools can vary but are a significant cost, with fee increases outpacing inflation consistently.

It is difficult for parents to prepare for costs this large in such a short time frame. It is particularly difficult as costs continue to rise and ancillary costs can be difficult to estimate as you move forward. According to research from Edstart, the average increase in private school fees was 4.1% in 2024, compared to a 3.4% inflation rate. Over the last decade, private school fees have increased by 60%, compared to 25% for inflation.

There are ways that parents can prepare or lessen the burden, but there are also important opportunity costs to consider if you are considering more expensive education.

A properly costed goal

The key to a successful goal is to come up with an educated estimate about how much this financial goal will cost. Many parents know what school they would like to send their child to. The annual fees are easy enough to find out, and historical increases can be used to estimate future costs. More challenging are the costs above tuition that must be considered.

You have no idea whether your child is going to be a musical prodigy or have Beckham’s right foot (I am not a football fan but Love Actually tells me that this is a good indicator of sporting performance). It will be tough to understand precise costings but in this case, averages can be used as a goal post until you have more clarity as your child gets older.

Some of the costs that you may want to consider above tuition and yearly increases are tuition, extra-curriculars and private tuition. Futurity Investment Group have estimates for each of these ancillary costs. They also have a cost estimator.

For the purpose of costing this goal, we will use the averages that they provide for each type of school, including ancillary costs. You will likely be able to have a more precise estimate based on potential schools you are considering.

School fees by type

Source: Futurity Investment Group These numbers are population-weighted and projected over a 13-year period and provided as a guide only. The actual costs cannot be guaranteed. 

Let’s start with the ways that you’re able to plan and prepare for school fees through investing.

Unlike retirement savings, where individuals typically have decades to accumulate wealth, school fees are a short- to medium-term financial goal. This requires a more immediate and strategic approach to investment and income generation. It requires cashflow flexibility.

Income-focused investments

Passive income is a tool utilised to fund a variety of financial goals. It is particularly useful for goals that require ongoing funding, such as education.

The first step is understanding the income that you are going to generate. This will change, but there are several main asset classes that issue income:

  1. Property: rent (Gross yield sits between 4-5% since 2010 - SQM research)
  2. Fixed income and cash: interest (Average over the last 10 years, 3-4% - Moneysmart)
  3. Shares and managed funds/ETFs: Dividends/distributions (Average 3-5% over the last 10 years, with a franking rebate between 1-2% - ATO)

It is important to note that these are gross returns, and different asset classes attract fees, transaction costs, maintenance costs and taxes. When you receive income, tax needs to be paid on it. Keep this in mind when assessing your return.

You do not need to prescribe to one church and can diversify across these asset classes. The general rule is that the more secure the income stream, the lower the return. Any income investing strategy should consider the sustainability of the income stream.

I’m going to keep this simple and invest in shares and managed funds/ETFs. For this example, I will use the Vanguard High Yield Index Managed Fund. The 5-year distribution is 5.54% (at 31 January 2025).

To simplify this example, I will take a conservative franking rebate of 1%, bringing the income to 6.54%.

As I’ve used a managed fund, there are no brokerage costs to consider like with shares and ETFs, or any maintenance costs such as house repairs with property.

Then – we must consider tax. For someone on a median salary of $100,000, the effective tax rate is about 23%. You can work this out using websites such as paycalculator.com.au.

(Tax paid/gross salary) x 100 = effective tax rate.

This brings the net return to approximately 5.03%.

The maths is simple from there. What is the capital base needed to generate your school fees with a 5.03% return?

Divide the school fees by 5.03%. If we look at an averaged cost of an Independent school in a metro city, this is $27,000. The capital base required is about $535,491. This of course assumes that you do not draw down on capital.

That is a large capital base that is not feasible for most people.

Alternatively, you could adjust your goal. As I mentioned at the beginning of this example, you may be happy to receive 50% of your income payments from your fund. You could adjust your goal down to reach it quicker and supplement your short-term savings for school fees.

This goal may work for parents who have access to a large capital base through inheritance, or savings. With this strategy, the capital base is not being touched which allows it to be repurposed for future goals – including retirement, or travel, where the passive income can be redirected or the capital base can be drawn down on.

As the funds would be sitting outside of the superannuation environment, it could be used to fund an early retirement. The above averages from Futurity Group account for school fee increases so inflation does not need to be accounted for until the capital is repurposed for another goal. My travel goals article goes through the impacts of inflation and strategies to account for it with passive income.

Education bonds or investment accounts

I’ve written about education investment bonds before. The cost of education has many parents looking to alternative ways to fund it. Education bonds have specific tax advantages for investors but have strict withdrawal and spending requirements to be eligible for these tax advantages.

One particular point to note about education bonds is that they require fore planning. They do not immediately help parents who have acquired an education bond at the birth of their child. They are required to reach a maturity of 10 years to access the tax benefits.

You can read more about them here.

Offset account and mortgage strategy

Another strategy that parents can use to prepare for school fees is to maintain an offset account balance to help with cashflow flexibility. Building capital in an offset account is a tax-effective way to approach school fees. Unlike investment fees, your offset is not taxable, which can provide significant savings – especially for parents that are in higher tax brackets.

Mark speaks about hurdle rates here and how to understand whether paying off your mortgage is more effective than investing.

The interest savings from building the offset requires a bit of mental accounting when redirected to school fees, but also simultaneously assists in reducing the debt owed on your home. This can significantly increase quality of life, especially in retirement where housing is one of the largest costs. Reducing or eliminating that cost by retirement can help with longevity of retirement savings and stability in retirement.

There are no fees or tax on an offset account. The return that you will receive will be the interest amount that you are saving. Currently, 6% is a good reflection of the interest rate you would receive on a variable owner occupier loan.

What are you giving up?

The point of this article is not to persuade parents to choose one option over another. It is a deeply personal choice about what you believe is best for your children. It is important, however, to understand the consequences of the decisions that you make and how that changes the options and opportunities available to you.

Futurity offers a schedule of expected payments for tuition. If I had a child that was born in 2021, these are the costs that I would be looking at for metro schools.

School year costs

Source: Futurity Investment Group

Investment account

If the funds were invested elsewhere over the years of schooling, before taxes and costs, an investment account returning 7% p.a. would result in $258,645 for Government, $671,637 for Independent and $334,386 for Catholic education. Of course, this assumes that you’re foregoing schooling for your children altogether.

The opportunity cost of sending your child to an Independent school is $294,654 and $75,742 for Catholic.

For someone whose child is born when they are 30, this is an opportunity cost of $995,000 ($638,210 inflation adjusted) if retiring at 65 if they go to an independent school. Depending on the ancillary costs that are included in these assumptions, this could be much larger.

Lifestyle

Often large costs like this mean that they are detracting from other financial goals. This will differ from person to person. Could the amount that you are spending towards tuition mean that you will have a later retirement than you would like, or that you have to cut back on holidays, hobbies and expenses?

Like the reader who requested this article, many parents have a preference for a type of school and are willing to sacrifice on lifestyle.  

Setting your kids up

If this is money that was going to be spent on their education, are there other options to further their life? They would receive an almost $300,000 head start upon leaving government school compared to Independent, or a $76,000 head start compared to Catholic.

If the investment is held onto until your child’s 30th birthday, it could be a $710,000 portfolio at a 7% p.a. return (or $515,704 adjusted for inflation). Invested in the Vanguard High Yield Index Managed Fund would throw off almost $40,000 a year in passive income with the capital untouched.

Final thoughts

I have never had to make the choice about where to send kids to school and there are many benefits to each type of schooling that have to be weighed up. It is a personal choice. Whatever option you choose, there are multiple ways to prepare for the costs associated with education. Find the one that works for you and your family by understanding the true return that you are getting after fees and costs.

Understanding the opportunity cost is an important step in making a decision about where to send your children to school, and how the decision will impact you and your child’s life.

 

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Previous Future Focus columns:

  • Buying a home out of reach? Try these financial goals instead.
  • A better way to use financial advisers' favourite investment strategy
  • Why I use managed funds
  • Why I don't hold cash
  • Why I won't commit to an SMSF
  • Read this before you pick an ETF
  • Every Aussie deserves a fair go with super

Resources mentioned:

Save on tax with education bonds: The tax efficient way for parents to save on education expenses. 

Should you invest or pay off your mortgage?: How does the benefit from extra mortgage payments compare to investing in the share market?