Many grandparents want to give their grandchildren a head start in life, and a common way to do so is to help by paying some (or all) of their school fees. This can, of course,simply be done by making a contribution at the time the fees are payable. However, it’s not unusual for grandparents to plan ahead by setting funds aside in a specific account. That is one option, but there might be a better one.

Plan A

Donna and Simon are a typical example. They decide to put $50,000 into a term deposit to help pay the school fees of their grand daughter Ellie when she starts secondary school in 10 years’ time. With an interest rate of 2.6% per annum (pa) and interest paid annually, their initial deposit will grow to $64,631 – a nice boost to Ellie’s future education.

But is there a better way to use that $50,000?

While it’s nice to have a specific account with its special status and easy to see growth, the important thing is the overall pool of money available to the family when the time comes to stump up the school fees.

Plan B

Ellie’s parents, Sara and Shane, are five years into paying off their mortgage. Their interest rate is 5% pa, the remaining balance is $530,000, and their monthly repayments are $3,500. If interest rates and payments remain steady, in 10 years’ time their mortgage balance will be down to around $329,427.

What if, instead of setting up the term deposit, Donna and Simon gift the $50,000 to Sara and Shane who then deposit it in their mortgage account? This sees them effectively servicing a smaller loan. Maintaining their usual monthly repayments will now reduce the amount they owe on their mortgage in 10 years to approximately $247,077,giving them more equity in their home to draw on for school fees.

Difference

Plan A turned $50,000 into $64,631, a net benefit of $14,631. But plan B more than doubled that benefit to $32,350!