It is stating the obvious that private school fees are expensive. If you are uncertain whether you would like to send your kids to a private school, I thought it would be interesting to consider some alternatives and put the costs into perspective.
The public versus private school decision is a very personal one influenced by many considerations, including financial. I acknowledge that many factors may be more important than financial consideration. However, in this blog I would like to focus solely on the financial implications whilst acknowledging that despite the costs and alternatives, many people will still choose to send their children to a private school.
How much will private school fees cost in the future?
Of course, private school fees can vary significantly in different capital cities and regional centres. As an example, secondary tuition fees for many private schools in Melbourne range between $30,000 and $40,000 p.a.
There are two noteworthy factors that must be considered. Firstly, on average, fees tend to increase at a rate that exceeds inflation. When planning for clients, we assume that fees increase at a rate of 5% p.a. As such, 10 years from now, school fees are probably likely to cost between $45,000 and $60,000. Secondly, these fees do not include additional items such as uniforms, books/computer, excursions/camps and so on. It is prudent to allow an additional 5-10% for these costs.
The cost in today’s dollars
Assuming you have a child today and you want to send them to a private secondary school that currently costs $30,000 + 5% for other costs, I project the total cost of secondary school will be $400,000 in future dollars, or $270,000 in today’s dollars. Of course, if you have more than one child and/or send your kids to a private primary school as well as secondary, your total cost will be a multiple of $270,000.
That’s a lot of money and a big drain on your retirement savings. Let’s consider some alternatives.
Buy a home in a good public-school zone
If you don’t have access to a good public school, you could buy a home in a good public-school zone and avoid having to pay for private school fees. According to this research by Domain, property prices can grow at a much higher rate than locations that don’t offer a highly regarded public school.
Of course, it is going to depend on the location and school, but I do not consider it unreasonable to expect that a property’s long term growth rate could be circa 3% p.a. higher in a sort after school zone (in fact, it could be a lot more than this).
Case study
Assuming you need to borrow an additional $1 million to buy a home in a good school zone, the principal and interest mortgage repayments will cost you approximately $68,000 p.a. (assuming an average home loan interest rate of 5.5% p.a.). If you purchase this property when you first have the child, the home loan repayments will cost you $1 million in today’s dollars over the 19 years until your child finishes secondary school. But I project this outlay has helped you accumulate $3.6 million in additional equity in today’s dollars (i.e., a 3% higher growth rate), so you are miles in front financially.
But what else could you do with that cash flow? Well, instead of borrowing $1 million to buy a home in a location that offers a good school, you could invest the $68,000 p.a. that you would have otherwise spent on home loan repayments. If you did that, net of all taxes, you would accumulate a portfolio worth $1.36 million after tax (in today’s dollars). That is still much less than your net additional equity in the home in a good school zone of over $3.6 million in today’s dollars.
In summary, not only does buying a home in a good public-school zone help you avoid expensive private school fees, but it’s likely to be a wonderful investment.
Invest the money you would have otherwise spent on fees
Whilst I know it doesn’t solve the child education problem, I wonder what if instead of spending $270,000 in today’s dollars on private school fees, you spent that money on an investment property.
I worked out that if you purchase an investment property for $900,000 when your child was born, the holding costs over the first 19 years are likely to be circa $270,000 in today’s dollars. Assuming a 7% p.a. growth rate, the property will be worth $3.25m in 19 years and after repaying the loan, selling costs, and paying capital gains tax, you could walk away with $1.1 million in cash. That would be quiet a head start for someone that has just finished school!
I acknowledge this scenario is not realistic, because it doesn’t consider how you will educate your child. Also, I don’t mean to trivialise the value of a good education. But it does help put private schooling costs into perspective.
How to fund school fees?
If you plan to send your children to private schools, you must consider how you will fund this expense. In my clients’ experience, earning capacity and therefore cash flow improves over time. As such, by the time your kids are ready for private schooling, you may be able to meet the expense from your day-to-day cash flow.
If you don’t anticipate being able to meet these expenses from cash flow alone, then you must begin saving as soon as possible. You can do that by parking these “savings” in your home loan (and redraw the money in the future). Your home loan is the best place to park cash because the return is guaranteed (i.e., the interest saving is guaranteed).
If you don’t have a home loan, you can consider using an investment bond such as those offered by Generation Life.
However, I prefer to develop an investment strategy that prioritises building wealth whilst, and at the same time accommodates school fees without needing to sell investments. Having a plan ensures that you can send your kids to a private school without compromising your own retirement.
Rewarding Property Decisions Podcast
Coincidentally, my colleague, Jarrod McCabe recorded a podcast about buying property in school zones a few days after I posted this blog. I recommend listening to it here.
