The biggest increase in household spending is in education with a 44% jump in six years, this is according to the ABS Household Expenditure Survey in Australia. As the costs of education continue to increase, education-funding options are also rising in popularity. One of which is seeing grandparents helping out by funding their grandkids’ education.
It’s easy to understand why some families would welcome the Bank of Mum and Dad as a form of financial help. Parents are expected to pay up to $40,000 annually for a Year 12 student for a private school alone, excluding any boarding fees or additional expenses.
While grandparents are willing to offer funding assistance, here are several of the common approaches of financing a child’s education so families can decide which is the right one to take.
Education Savings Bond
An education savings bond provides a flexible and tax-effective way to pay for a wide range of education expenses for children. What you need is an initial contribution of $1,000 to establish the bond, then regular payments to grow the capital.
As investment income in the bond is taxed at a maximum 30% rate, income is only assessed and taxed after the funds are withdrawn. For a broad range of education expenses, the education fund can claim a tax refund of $30 for every $70 of earnings withdrawn so tax may potentially be minimised or not incurred at all.
If your grandkids don’t need the funds yet, you can use the money for any other purposes such as for home deposit. Although, this withdrawal does not qualify for the Education Tax benefit and will be assessed as investment income.
Investment in a child’s name
Before, grandparents could purchase shares in their grandkids’ name. It can still be allowed today, however, it has become less favourable due to the tax implications of making a child the beneficiary.
The tax-free threshold for children’s income is $416 per year, and is hit with a 66% penalty tax on the dollar once earnings exceed. If a child under 18 receives investment income, including dividends or savings account interest, the parents would be required to lodge a tax return on their behalf.
A trust as an education-funding option for your grandkids
A trust may also be considered as a funding option for education costs, with discretionary family trusts as the most common type. Usually, a family trust allows individuals to exercise discretion with their fund distribution to members to protect assets such as business or property and provide different tax benefits. Again, exceeding income may fall under the child’s penalty tax rate of 66% if unearned trust distributions to a minor exceeds over $416 in the tax year. Speak with a financial adviser if you’re considering setting up a trust.
Grandparents may use their own super fund for their grandkid’s education when they reach a preservation age, which usually is 55 to 60, and have met conditions of release. With this approach, you have to make additional super contributions before using the funds once you are able to access it.
Using a reverse mortgage to fund your grandkids’ education
Through a reverse mortgage, you can unlock some equity in your home to access funds without selling your property. For seniors, the most common use of these funds is to support their lifestyle in retirement. Any other purposes you may see fit are also allowed, which may include funding the education of your grandchildren.
We are an Australian company who has been offering assistance to seniors with their funding needs. Through the ASAG Reverse Mortgage, one of our equity release solutions, you can access some of your home equity to become the Bank of Mum and Dad and help with your grandchildren’s education expenses. Like any form of borrowing, the decision to get a loan must be considered with your financial situation in mind, so it’s important to discuss this first with your family and a financial adviser.
For more details on our reverse mortgage loan and other equity release products, contact us on 1300 002 724. To get started with your own assessment, you may use our free tool below and see what your available equity is.