School fees: the big issue

[ July 29, 2015 ]

Clients need strategies. Clients need ideas. Clients need an adviser who can put a texta to a white board and explore thoughts and possibilities that interest clients and grab their attention, and worries. Thought explorations are by their nature imprecise and imperfect. You sometimes get more than halfway in before you suddenly realize it’s not going to work. But you then pick up part of it, twist it around a bit, and just as suddenly you realise it’s now going to work. It’s just not the idea you started with. It’s much better than that. One BBQ stopper conversation is the rising cost of school fees. Most clients will want to talk about school fees. How much, and how to pay? Young soon to be parents, parents and grandparents (that probably covers 90% of your client base) are all thinking about them. For many clients school fees are a bigger issue than retirement. Dover would love to see more adviser SOAs tackling the big issue of school fees and how to pay them. And I expect your clients do too. A suggestion Why don’t you send this e-mail, or something like it, to your clients, and invite them in for a chat about private school fees, the pros and the cons? Why don’t you raise the question of private school fees in your next client meeting? Get out your texta and start scribbling. The following are some private school parent conversations that have worked for me:

Which school?

I can recall a meeting at a client’s home some 15 years ago. I was told they wanted to live in Brighton, drive a BMW and send their daughters to Haileybury an expensive private school in Melbourne’s bayside belt. My SOA took a more realistic tack. They were fifty and had no assets, so I instead suggested Mordialloc, a Magna and Kilbreda, a catholic girls’ school in nearby Mentone. Haileybury was nearly eight times as expensive as Kilbreda, and they had three secondary school age daughters. In today’s dollars it was more than $75,000 a year compared to just over $10,000 a year. Most people have to earn nearly $150,000 in pre-tax income to fund $75,000 of private school fees. The girls were smart cookies. They would do well anywhere, I said. My clients hated my advice. But they acted on it. And they used the money they saved to pay for a house (this was 2000, not 2015), some super and a holiday to boot. The girls turned out fine and, for the record, now earn more than mum and dad. An after hours meeting at their (rented) home paid off: the preliminary chitchat disclosed a Catholic background, of the lapsed variety. So it was a small step to a low cost catholic education. Here is a list of catholic school fees: List of Catholic school fees. That’s bang for your buck.

Where school?

These days we have seen many clients move close to state schools that perform above average in the elusive ATAR stakes (HSC in Sydney). Yes, you pay a bit more for your home but you save a fortune in school fees. They are even talking about Balwyn High in Sydney: Balwyn’s on a high.

The lower cost private schools can be a good option too. By the way, the studies show that:

  1. the order for success at school by school is private, catholic, state but
  2. the order for success at university is state, catholic, private.

So, if you want your kids to do well at university send them to a state school. (And send your clients links like this one: State school kids do better at uni).

What about a scholarship? Smart mum

I know a musical mum who taught her ten year old daughter the trombone. Yes. The trombone.Two years later she won a half-scholarship to her (mum’s) preferred school. You guessed it, as a tromboner. It helped that she was the only applicant: I mean how many ten year old girls can play a trombone? Smart mum.

What about a scholarship? Not so smart mum

The other side of the scholarship coin is a cruel regime of after-hours tuition and rote learning and a never ending fixture of stress filled practice exams as hundreds of kids compete for a handful of scholarships. We know of kids on the scholarship trail at age 5: they have tutors every night, weekend, and school holiday for years.Not so smart mum, and just plain dumb dad. The cost is huge. And it’s cruel. You can read about it here: The secret life of them.

Is it worth worrying about?

Australia is the land of opportunity, and opportunity presents in many different ways. Educational opportunities abound at all ages.Just wait until the June mid-year uni intake and that course with the soaring January entry score is suddenly advertising for students. Or you can enroll in a TAFE diploma and articulate it into a university degree and beyond: I know one excellent accountant with a PhD (in SMSFs of all things) who left school at age 15. I know a dentist who left school at age 16 to become a motor mechanic (and now has a profitably side-line fixing his dentist colleagues luxury cars!*) *Just joking. But he did save heaps by maintaining his own car.

Is it worth the cost?

I once read an article where the author compared paying expensive private school fees, and the expected return on investment (ie a bigger salary) with paying extra tax deductible super contributions. There is no comparison. The extra super wins hands down, at least for the “top end” schools. Another interesting choice is whether to pay off the home loan faster or pay the private school fees. Again, the faster home loan repayment wins hands down, at least for the top end schools.

Who pays anyway?

I once met with a private school bursar who he confided that, on his calculations, more than half the school fees were paid by grandparents, not parents. He said his bursar colleagues observed the same phenomena. Think about that the next time you are at a dinner party and someone is boasting about their choice of school. But not mentioning their generous parents.

Keep perspective anyway

I can recall a meeting with a worried 35 year old dad. We were diligently exploring the pros and cons of private school or state school for the primary years. We suddenly stopped and took a reality check. He lived in Kew. The school was Kew Primary! Hardly a concrete jungle, where only the strong and the lucky survive. Those negligent parents. Sending their kids to Kew Primary! Problem solved (at least for seven years).

What about the financial side of things?

Assuming the private school decision is done and dusted, and the $2,000 enrolment fee is borrowed and paid, how can make sure you can afford the school fees when the first day of year 7 comes along? Well, some ideas for panicky parents are:

  1. start a savings plan now. Products are no good: they pay tax. Paying off the home loan is the best option, probably using an interest offset account
  2. create a new income stream now. Think about:
    • a second job, say working one night a week, and earmarking the extra income
    • work harder now to win promotions and a higher future income
    • improving your qualifications now, and hence your future earning capacity and security
    • starting a business to get a better and safer income, CGT free wealth and better tax planning
    • for a couple, the second partner going from say 50% employed to say 80% employed, and investing the extra income
  3. borrowing to buy income producing investments and reinvesting the net earnings to create your client’s own private educational fund. If you start at birth, borrow about $237,000 and invest it in Australian shares the earnings will pay for a private secondary school education and you will still have enough to pay off the original loan when your child is age 18. See the following graph for quick illustration and this spreadsheet for the calculation.private-self-funded-educational-fund
  4. Just brace yourself for some very big bills 12 years down the track or
  5. be nice to your own parents. You may need them soon.

Create some spreadsheets to show what happens under each option. Talk through what works best for them and their kids. Tell them what others have done. Let them see solutions, not problems. Become their primary adviser.

The Dover Group