How does an Education Savings Plan (ESP) Work? 

Regardless of nationality and background, parents all over the world want their kids to have the best education possible. Many save for their children’s education as early as possible because in reality, school and university fees and expenses don’t come cheap. In fact, these can be one of the biggest expenses of the family. As early as possible, try to save money for your children’s education to ensure that you’ll have sufficient funds until they enter university.

In Australia, parents can look into the education savings plan (ESP). It’s a tax-free investment for your child’s education. With the ESP, you are saving for the tertiary education. The returns from the investments directly go to the nominated child, and are taxed as income for the student.

How much money do you need for your children’s education? Ask yourself: do you want your kids to study at public or private schools? Public schools are much cheaper, though you also need to consider other expenses such as textbooks and uniforms. Will they go to a college or a university? Will your child be eligible for HECS-HELP, a government loan designed for tertiary students? Your answers will help you determine the amount of money that you need.

Top Main Features of the ESP:

  • The education savings plan enables you to make regular ad-hoc contributions, with funds invested to grow your money for a particular period.
  • You may not be able to access education savings to pay for other expenses as these are separate from other savings or investments.
  • The earnings from the ESP are tax-effective. If these are used to cover education-related costs, the tax paid will be refunded to you. You can withdraw the earnings to cover costs that are not related to education but keep in mind that the tax refund may not be as favourable.
  • The ESP covers a wide range of costs. These include books, school fees, uniforms, as well as extra-curricular activities.
  • When you redeem your investment, there’s no need to pay any capital gains.
  • ESP is usually invested in property and fixed interest investments, as well as in shares. This is to allow your money to grow for a long time. This is invested in different products, so you may see fluctuations when there are changes in the market.
  • There are newer education savings plans that offer more flexibility in the sense that you can gain access to your money when necessary.

Do you have other ideas on education savings plan and children’s education? Share your insights in the comments section.

About the author  ⁄ Marxa Dillan

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