Costs to send your child to a private school are a significant expense for families, so ways to lower that cost are always appreciated. Whether you should pay in advance or only as the amounts become due usually falls down to two factors: the size of the discount and the alternative use of the money.
For instance, suppose your child’s school offers a discount of 4% if fees are paid at the start of the school year. Given that some banks are offering interest at 5% p.a. this discount may not feel sufficient to entice you to pay upfront.
However, tax will usually apply to interest earned in bank accounts. If, like most Australian workers, your taxable income falls in the range of $45k – $120k p.a. then your marginal rate of tax is 34.5% (including the Medicare levy). This means, you effectively retain only 65.5% of any earnings, including interest from bank accounts.
Thus, if this was your tax bracket and your bank account paid 5% interest then you would only be keeping 3.275% of the interest the bank paid. In which case a discount of 4% on school fees would be a better use of your money.
Especially since that fee discount rate applies to the whole fee immediately, whereas the money in the bank account will progressively diminish as you draw it down to pay fees periodically throughout the year, and so you won’t earn interest on the savings withdrawn.
If you are on a higher tax bracket – say 47% including the Medicare levy – then you get to keep even less of the interest earned in a bank account (only 53%), and that 4% fee discount becomes even more attractive.
The situation can change though if your alternative use of the money wasn’t to stash it in a savings account, but instead have it in a mortgage offset account. In that case, it would come down to the rate of interest paid on the mortgage.
If your interest rate was 6% then a discount on school fees of 4% wouldn’t be worthwhile. But if you are still on a fixed rate at say 3% as many Australians still are, then the school fee discount is a better deal.
It wouldn’t be wise to compare the fee discount with investments beyond cash such as a share portfolio, as just about any other asset class will have volatility. Money you expect to need within 2-3 years should be kept as cash, and so since school fees will ultimately be payable by the end of the year, you should really only compare the discount to what else you could do with the cash.
Always ensure you keep a healthy buffer of savings available to you (for most people this will be 3-6 months’ living expenses), and then look at whether any surplus funds should be securing you that school fee discount or not.
This is general independent financial advice current as at January 2024. Please get in touch if you would like personal advice tailored to your situation.
