The ‘opportunity’ cost of private education and an alternative to consider

Parents always want their children to have the best education. 

For some people, that means sending their kids to a private school.

Of course, private schooling can be expensive and can have a big impact on your cash flow.

But I’d like to suggest that the ‘cost’ is a lot more than the initial cash flow impact which parents should take into account.

My commentary is purely financial

I can only comment from a financial perspective.

However, I appreciate that schooling decisions are not made on financial considerations alone.

In fact, I appreciate that it might be so important to you that your kids attend a certain school that you will do it irrespective of the financial implications.

It is not my intention to cast judgement about whether private schooling is a good idea or not.

This blog merely considers the long term financial impact that private education can have on your personal wealth.

What is the true cost?

Let’s assume private school fees cost $25,000 per year. So, 6 years of tuition fees therefore add up to $150,000.

However, that is not the true impact because it doesn’t take into account the opportunity cost.

That is, if you hadn’t had sent your kids to private school, you could have done other things with that money.

You could have made extra repayments into your home loan

If your home loan balance was say $500,000 and you made additional repayments of $25,000 per year for 6 years, you would save a staggering $426,000 in interest (assuming a 7% interest rate) Therefore, it could be argued that the opportunity cost of 6 years of private education is $576,000 ($150k + $426k).

You could have purchased an investment property

You could have purchased an investment property for $550,000 and deposited the $25,000 in the offset account. 

Some of this money would be absorbed by the negative cash flow that the property will generate but not all of it.

In fact, after 6 years I project that you will have $95,000 accumulated in the offset – enough funds to look after the property’s cash flow from thereon in.

In 20 years’ time, I project that you’ll have over $1 million in equity in the property in today’s dollars.

Therefore, when considering the opportunity cost, the cost of 6 years of education could be over $1 million!

But double it

I have only considered the impact of 6 years of private school fees.

However, if you send your kids to private primary and secondary schooling, you will have to more than double the above opportunity cost.

I note that primary school fees are usually cheaper however the compounding impact of 12 years of fees (compared to 6) will more than offset this.

An alternative to consider

An alternative solution that is worth considering is moving into the school zone of a well-regarded public school.

Some things to consider with this strategy include:

• Transactional costs — the two major transactional costs are selling fees and stamp duty. Selling costs include legal, agent fees, advertising and any repairs/improvements you might need to do to get your home ready for sale. I suggest budgeting 2-3% for these costs. Then, when you buy your new home you will pay stamp duty which usually amounts to 5-6% of the purchase price.
• Capital growth differential — you need to consider what capital growth rate you can reasonably expect to enjoy if you stay in your current home versus the growth rate in the good school zone. The good news is that quality public schools tend to drive demand for property and therefore property prices — check out this recent article.
• Property value differential – what is the value of your existing home and what will you have to spend in the new location? If there’s a material jump in value, then this will result in a higher home loan. You will need to consider whether that is affordable now and in the future.
• How many kids you have — obviously, the more kids you have, the more you will save by moving into a good public-school zone.

If you are going to commit to private schooling, you need to invest more

If you have decided to send your kids to a private school, then arguably it’s even more important for you to invest — to offset some of the impact that private education will have on your financial position.

The best time to start to do this is before private school fees begin i.e. when your kids are young.

Financial planning and lifestyle decisions 

I think this blog demonstrates how interrelated lifestyle and financial decisions are.

Sometimes people miss this i.e. they don’t fully appreciate the financial implications of their decisions.

A lack of information is often the cause of financial mistakes.

My role as an independent advisor is to give my clients all the relevant information so they are able to make a fully informed decision.

If you think you could benefit from this assistance, don’t hesitate to reach out to us.

About Stuart Wemyss Stuart was a Chartered Accountant before establishing mortgage broking firm ProSolution Private Clients. He has authored two books and shares his experience with readers of Property Update. Visit www.prosolution.com.au