Academic Success A Financial Strain

The Age

Monday June 30, 2003

Michelle Innis

Tertiary students face higher fees from 2005, but there are ways to lighten the load, writes Michelle Innis.

THE Federal Government's plans to overhaul university funding are expected to make it more expensive to get a university education and intending students are bracing themselves for the bill.

Doug Webber, an associate director at Macquarie Bank, says many parents are already struggling with the burden of saving for private secondary schools, and could not stretch to higher university fees.

He says the Federal Government's proposal to increase uni fees from 2005, in some cases substantially, will be an added burden for many households.

``There's no smart way to fund this," Mr Webber says. ``If you're going to do it, then the best advice is to start saving early.

``(You might) invest in a managed fund with exposure to property or shares. (You could) use a savings plan, (to) make regular contributions. You should also look at gearing into an investment."

There are saving strategies for parents, wanting to pay for some - or all - of their children's university expenses.

Mr Webber, Paul Maddock, general manager, investment and technical services at MLC, and Maggie Callinan, the research manager at Tandem Financial Advice, all say that managed funds provide one of the best and simplest long-term strategies.

``There are a range of options," Mr Maddock says. ``There are friendly societies, insurance bonds and direct share investments. But with a managed fund, you get the benefit of investing (a small amount) in a large number of companies.

``Many managed funds have savings plans attached to them, which makes it very easy to make regular payments, and you can start with a very small amount, like $2000."

Mr Maddock says if you're investing for the long term (10 years or more), it's best to buy growth assets, which produce the best long-term returns.

Ms Callinan says it may be wise to invest in the name of the spouse with the lowest income to take advantage of lower tax rates.

But investing in the names of the children can be tricky. Anyone under 18 may be subjected to penalty tax rates on what's classified as ``non-employment" income.

No tax is payable on ``non-employment" income earned by a minor if it's within a range from zero to $416 a year. But from $417 to $1445, the tax rate is 66 per cent. From $1446 upwards, it is 47 per cent on the entire income. The tax was designed to stop people diverting income through trusts in the names of their children to avoid tax.

However, another tax-effective strategy involves paying down your home mortgage so that you either have excess cash to meet university fees or can borrow against the equity in your home. ``This means you are borrowing at a very low cost," Ms Callinan says. ``And the investment you are making - in your own home - is very low risk. You're reducing the non-tax-deductible interest cost of the mortgage."

The Brisbane-based investment adviser Noel Whittaker, of Whittaker Macnaught, who is also a Money Manager columnist, says repaying the mortgage early is a good idea.

``I tell people they should pay their mortgage off at a rate of $12 per $1000 borrowed each month," he says. ``Then you won't need to go back into debt to fund university fees."

Mr Whittaker says another option is to work out your investment time frame and invest in tax-paid friendly society bonds, which are tax-free to the investor after 10 years. ING's technical services manager, Andrew Lowe, says insurance bonds provide the same tax break for longer-term savers. Both are similar to managed funds, but have different tax treatment.

``The life company pays the tax at a maximum rate of 30 per cent per annum, before making distributions," he says.

Louise Clifton, the assistant adviser services manager at Count Wealth Accountants, warns that if you need the money within 10 years, you could end up paying the marginal tax rate on your investment income.

Mr Webber recommends borrowing to invest. ``I don't see it as particularly aggressive (and) I have seen it work for me in building savings," he says of gearing into a managed fund.

Instalment gearing products allow investors to start with a small investment of, say, $1000 or $2000. Regular savings-and-loan advances from a bank such as Macquarie or Colonial, are invested in one or more managed funds, where the underlying assets might be shares.

The investor has access to the dividends, franking credits and capital growth and the interest on the loan may be tax deductible.

Mr Webber says it is best to take a conservative approach and have a large margin between the value of the asset and the amount of the loan, to avoid margin calls.

``Gearing into a managed fund means more money is working for the investor," says Macquarie's margin lending head, Scott Young. ``You get a better spread of investments. On top of that, the loan interest costs are generally deductible."

But Mr Webber says those who gear need to be sure they understand the risks and the tax implications of gearing.

© 2003 The Age

Back to News Index | Back to Home