Education funds- are they worth it?

Cara Brett 18 August 2020

For many of my clients with children, a big part of their financial plan relates to how best to save and invest for private school education costs. If you haven’t ever investigated the cost of private school, check out our blog on “The cost of private school in Brisbane”.

There are a number of different ways to save and invest for children’s education and today I’ll talk about Education Funds (also known as Education Bonds, Education Savings Funds or Scholarship Plans).

In this article, I’ll explain:

  • What an Education Fund is
  • How an Education Fund is taxed
  • How an Education Fund works
  • What the benefits and disadvantages of an Education Fund are; and
  • Alternatives you might want to consider.


An Education Fund is essentially a type of investment-savings plan. In an Education Fund, you contribute a savings amount regularly and that money is invested on your behalf.

The reason Education Funds are well known however relates to how they are taxed.


Usually when you invest, any earnings on your investment are taxed at your ‘marginal rate’. For example, if you usually earn $100,000 from your salary, you are taxed at 39c for each $1 you earn in investment earnings.

An Education Fund however has different tax treatments which can mean you pay less tax (in some circumstances). Essentially, they are taxed at 30% for investment earnings and can have reduced tax payable if you use them for education purposes.

This gets pretty complex quickly, so I’ll explain below using a specific product as an example.


There are limited Education Funds available. The oldest one is the ‘Australian Scholarships Group’ (ASG) Education Funds. There are also other limited products on the market but they are all quite different in their approach. For today I am just going to focus on ASG’s offerings.

As with all financial products, the key document you should always look for is the Product Disclosure Statement (PDS). ASG have a couple of distinct products which are all accompanied by a PDS explaining the product. To save boring you, I will comment only on the Pathway Education Fund.


With the PEF, you can start either with a regular contribution, ad-hoc contributions or a combination of both. For people who wish to save for children’s education, it is usually good practice to set up a regular contribution.

How much you choose to put in is important because each year you can only add up to 125% of the previous year (“the 125% contribution rule”).

Your contributions are then invested in a diversified portfolio of investments, however you do not have a choice of how you wish to invest. Overall the investment is quite conservative and there are investments out there which may be better suited to your needs.

When you need to withdraw the funds, you will be subject to differing tax treatments based on a number of factors including:

  1. If you withdraw the money within 10 years
  2. How much of the withdrawal relates to a return of your saved amount and how much relates to investment returns
  3. Whether you are using the money for education purposes
  4. Whether the child you are using the money for is over or under 18

Scenario 1: You invest for 5 years and use the funds to pay for education for a child under 18

In this scenario, as you have invested for under 10 years, the rules of investment bonds will not apply. This means that:

  1. All of your contributions are able to be withdrawn tax free
  2. All of the investment earnings are taxed at the marginal rate of the child

Children under 18 are subject to special tax rates which effectively mean they pay a lot more tax (this is to stop people avoiding paying tax by putting things in the names of their children).

In this example, depending on how much is contributed and withdrawn, you may end up paying additional tax.

Scenario 2: You invest for 5 years and use the funds to pay for education for a child over 18

This scenario has similar tax treatment to the above except as the recipient is over 18, they are not subject to the special tax rates applicable to children.

This can be beneficial if the child doesn’t work and therefore has a large tax-free threshold. If the child is working however, you may again be subject to a tax disadvantage.

Scenario 3: You invest for 10 years and use the funds either for children’s education or other purposes

If you comply with the rules (including the 125% contribution rule mentioned above), you can withdraw the funds tax free (having paid 30% tax on the earnings in the fund) after 10 years for any purpose.

This type of investment is not unique however to an Education Fund and there are other types of investments known as ‘Investment Bonds’ which allow you to do this.


Although not the focus of this article, a good alternative for investing for education can be an Investment Bond. The criticism of an Investment Bond however is that you need to invest for 10 years before you receive the maximum tax benefit.

An Education Fund is essentially an Investment Bond but one that allows you to withdraw money within 10 years with favourable tax treatments. This tax treatment is only under very particular circumstances and if you get it wrong, you can actually end up paying more tax.

There are also far less providers of Education Funds and less options regarding how you choose to invest.

Whilst they can work in some circumstances, you may find yourself better suited to an Investment Bond or alternatively, an investment portfolio.

Potential tax advantages Complex product
Tax consequences if you get it wrong
High Fees
Lack of investment options
Lack of flexibility


When it comes to investing, tax is only one part of the equation. We also need to consider flexibility, investment returns and fees.

The lack of flexibility associated with an Education Fund makes it a difficult option, particularly when you are talking about something as long-term as investing.

For couples who are both high income earners, an Investment Bond may strike the balance between flexibility and tax savings.

If however one of the couple earns less than the other, a simple investment portfolio held in that spouse’s name may be the best bet. This can also work if your child is over 18 and you can assist them to invest in their name.

Like all things in finance, this can get complex fast. Make sure you seek financial advice before taking any steps. As always, please reach out if you have any questions.

This post is from our resident Financial Planner Cara Brett, check out her details in the About Us section.

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Posted in: Cara BrettInvestments

About the author: Cara Brett

Cara Brett proudly heads up Bounce Financial - founded in 2014 after a successful, decade-long career in the financial services industry. Cara’s experience encompasses both the financial product and financial advice sides. This gives her a comprehensive and holistic knowledge of all facets of financial planning.