Saving up for a child's education

By Bina Brown
For CNN

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(CNN) -- Children and grandchildren are a special part of society who deserve every chance for a happy and healthy life.

Nobody likes to think of the younger generation as being a drain on resources, but the reality is children and grandchildren do mean new and ongoing financial demands.

While there is no hard and fast way of working out how much it costs to raise and educate a child, the sorts of factors that come into consideration are health, food and school fees.

Different expenses occur as a child grows older, but according to some estimates, by the time a child turns 18 a family in one of the advanced economies will have spent about $150,000 on clothes and education. And that is before the costs of going to a private school and university where another $200,000 could easily be spent.

The sorts of costs that aren't readily taken into account include the cost of childcare, the cost of buying or renting a bigger house, school holiday activities, and family holidays.

An important consideration for many parents and grandparents is a child's education.

While government schools are usually cheaper than religious and other non-government schools, the costs can still be high for some families. Then there is college or university to consider.

Apart from the school fees themselves, adding to the strain on the family budget are the costs of books, uniforms, excursions and extra curricular activities such as music and sport.

One of the best ways to ensure that you can provide the best in education and other services for your child or grandchild is to prepare and start saving early -- it is the benefits of compound interest that can really make the difference.

There are a range of investment plans designed to encourage parents and grandparents to save for a child's education and other important events in a child's life.

The same savings rationale may apply to give a child an overseas holiday or a deposit on a house -- both of which can really help a young person.

Investment options

There are advantages and disadvantages with most investment options that will depend on a host of circumstances. Some of those options are:

Bank accounts -- A simple option is for a parent or grandparent to open a trust account or an account in a child's name. However, inflation may erode any interest that might be paid. In some countries, rules have been introduced to discourage high income earners directing income to children through the setting up of such bank accounts.

Managed Funds -- Because most managed funds don't allow investments to be held in a child's name an adult would need to act as trustee for the child. There are thousands of managed fund options available, depending on the time horizon, how much money is involved and how much risk a contributor is prepared to take.

Education funds -- Among the vast array of managed funds are a relative few which are designed and marketed specifically to assist with savings for education costs.

Most require a minimum investment and then regular contributions and charge a management fee. The attraction is the forced saving method. The downside is the funds must be used for education purposes to gain the tax advantages that go with them.

In the United States a popular method of financing education costs are the Section 529 Plans which offer tax advantages for those who use them. There are two types of 529s?the "Prepaid Tuition" plans and the "College Savings" plans.

Insurance bonds -- A child advancement policy is one type of insurance bond that has a child as the life insured and an adult as policy owner. Ownership of the policy is automatically transferred to the child at a nominated age, generally between 10 and 25.

Direct shareholdings -- Shares can be held on behalf of a child with the parent or grandparent as trustee. For tax purposes the ownership and control of the shares should be determined. Depending on how much money is invested, a portfolio of shares may not be diversified enough to give it the protection that may be required.

Accumulating savings through parent's name -- Rather than investing as a trustee, a parent could invest in his/her own name and be the beneficial owner of the investment. The parent would then declare the income or capital gains in his/her own tax return. Gearing is an additional consideration under this investment strategy.

Choosing the best investment vehicle depends on a number of factors. An important consideration is the impact of an investment vehicle on the social security benefits of the parent or grandparent. Holding an investment in trust for a child could impact on the entitlements of the parents or grandparents.

Other factors to consider include the investment horizon and risk profile of the funds, their suitability to the investor's circumstances, and what the tax implications may be for the child or the parent.

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