Is private education worth it?

While the costs of private schools continue to rise, the jury is still out on whether the money is a worthwhile investment, writes David Potts.

When you're up for $150,000 in fees and extras for a child's private-school education, it'd be nice to know it's a good investment.  After all, a year 7 student starting next year will cost $215,000 by year 12 if school fees keep rising at an annual rate of 6 per cent.  Could that be better spent on tutors and extensive travel to other cultures to broaden a young mind?

Certainly it would be cheaper.  They might put a value on everything else but economists have a problem working out the worth of private schools, even though that's probably where many of them went.

Fortunately, the well-regarded - and, as it turns out aptly named - London School of Economics has had a shot at it.  Based on the "ample evidence" that private-school students will earn more "and are more likely to get top jobs", it calculated that "the average net return to investment in a private school education was 7 per cent for boarders and 13 per cent for day students".

That's 13 per cent a year, which you don't need me to remind you is a return that's a lot better than the sharemarket.

Despite its left-wing leaning, here is the London School of Economics waxing lyrical about private schools: "Above the fact that private school pupils were spending their school lives enjoying facilities normally far better than those available in state schools, these pupils benefited through improved pay in later life, and the financial return is broadly comparable (and probably higher) than returns on other capital."  That'll do me even though it wasn't looking at academic results but future income. Still, private school students are more likely to go on to uni.

The bad news is the study was done 30 years ago and covered the 1970s when real private school fees were lower.  But what about academic results?

Again, the only decent studies come from overseas and for every one that says private schools do better, another contradicts it.  But there's one landmark study - or two to be exact, one in 2005 and the other 2008 - by education professors Christopher and Sarah Lubienski of the University of Illinois that's telling.  It found public, yes public, schools produced better maths students than private ones. In fact, the gain after five years amounted to an extra half year of schooling. What gives the study cachet is that by only looking at the results for maths, it got around the problems of literacy being influenced by the home environment, other students, culture and even whether the school is in the city or the country.

Maths is the great leveler - and I speak as one who was levelled by it. But there's a snag.  It only covered primary school. Not all parents determined to send their children to a private school will start with kindergarten.  Even the Lubienskis eventually decided "whether the school is public or private doesn't seem to make that much difference".

The value of teachers

OK, let's try a 2007 study. The Center of Education Policy (CEP) in the US reported in Time magazine: "Contrary to popular belief, we can find no evidence that private schools actually increase student performance."  Then it added "instead, it appears that private schools simply have higher percentages of students who would perform well in any environment based on their previous performance and background". Great. When private schools do better, it has nothing to do with them. But here's something to hang your hat on. "It appears private schools do more to develop students' critical-thinking abilities," the CEP says.  What can also be said is that private school students are far more likely to stick it out to year 12, in which case their chances of going to uni are much better.

A study last year by the Australian Bureau of Statistics showed a bachelor's degree was worth an extra 15.3 per cent for men and 17.3 per cent for women over a career. And a paper commissioned by Melbourne University in 2000 said graduates were paid an average 65 per cent more.  All well and good, but the key here is making it to uni, not so much going to private schools.  Then again, since one-third of students drop out of uni in the first year, the fact that private schools are better at fostering analytical thinking must help.  No surprise here but good teachers make a difference. The best 10 per cent "can achieve in half a year" what the worst 10 per cent would take all year, says Deloitte Access Economics.  Parents I know choose a school for lots of different reasons, ranging from how much they value religious instruction to the size of classes and even future business contacts.  What they don't like to say too loudly is they don't want their kids mixing with the riff raff, preferring the educational equivalent of a gated community.

Don't be embarrassed, economists are on your side. In a submission to the Gonski inquiry into education funding, Deloitte Access Economics says the socio-economic background of the students is one of the most important influences on what it calls, yikes, "educational outcomes".  A high socio-economic background lifts all pupils, while a lower one drags everybody closer to the lowest common denominator.

The fees bubble

The trouble with any go at assessing the investment return on private schooling is that fees, having doubled over the past decade, are rising faster than inflation (37 per cent over that period) and outstripping the likely increase in salaries of private school-tertiary graduates.

Why is that anyway? Salaries get the blame but then, surely, a wage rise of 6 per cent every year would have sparked a stampede into the teaching profession.  Maybe they're all building new school halls. No, that can't be - the government is paying for them. Just as relevant to the economic return of a private school education is how you financed it. Paying down the mortgage and redrawing the money later for school fees saves on tax and has no risk.

"On an interest rate of 7.5 per cent and in the top tax rate, that equals a 14 per cent effective guaranteed rate of return. You'd be hard pressed to get that from any other investment," financial adviser Chris Morcom, a director at Hewison Private Wealth, says.  Or older parents - and grandparents who want to chip in - can draw down their super.

Never put savings in your child's name because the tax is prohibitive. Education bonds offered by friendly societies are another option. These are managed funds with a tax break but HLB Mann Judd adviser Jonathan Philpot says to be worthwhile "you've got to start contributing from the child's birth".

The downside of education funds is "if you change your mind or your kid doesn't go on [with schooling], you don't get the full investment earnings back," the head of technical services at Strategy Steps, Louise Biti, says.

But, she adds, if you pay down the mortgage "you have to keep reminding yourself it's not paying it off but paying for the kids". Other options would be saving in the name of a low-income earning spouse, grandparents using their super (though that could affect their Centrelink entitlements) or setting up a family trust for investments.

Morcom is so passionate about education he won't be sending his children to private schools. Instead he's going to use the money he'll save to take them on trips overseas, especially to Asian countries, and hire tutors if they need them.

"I don't think any one way is right," he says. "Whether private schooling is value for money is up to the parents. I'm from the public system and it hasn't hindered me. Some successful people didn't finish school."

Fund helped cover school fees

 

AUTHOR and former journalist Frank Walker is glad he sent his daughter Hannah to a private school but he found the fees were rising faster than the returns from his Australian Scholarships Group fund.

"You get back what you put in, plus the investment return, but I didn't get as much as we hoped," Frank, the author of The Tiger Man of Vietnam and Ghost Platoon, says.

He has a third book under way on the convict era for which he's been training to fire a musket.  "At the beginning the fund paid half the school fees but by year 12 it was between one-third and half. I was getting about $10,000 a year, so it helped enormously," Frank says.

He started contributing when Hannah was in primary school, paying $80 a month; by year 6, the final year of payment, it had risen to $300 a month.  Once Hannah started at St Catherine's, in Sydney's eastern suburbs, Frank received a cheque every six months.

"Sometimes the cheque didn't arrive until after the deadline but the school accepted that."

Some advisers criticise education bonds for high fees relative to the return.

But Frank says they weren't excessive and estimates he got 7 per cent a year tax free from 2002 to 2006. Although education bonds pay 30 per cent tax, this is refunded when spent on schooling.  Nor are they restricted to private-school students. Frank is a third-generation Newington boy — "I got through it; I liked the rugby" — and chose to send his daughter to St Catherine's because "Hannah could have been swamped in the rough and tumble of a high school. We thought it would bring the best out in her because she'd be treated as an individual."  He was right, although Hannah, who skipped year 9, has some different perspectives as well.

"I was the quiet kid in the corner reading a book," she says.

"The school was good for me. Skipping a year was a definite advantage."

She is now studying for a master's degree in English literature at the University of NSW.  But she wonders whether a high school would have been much different.  Hannah struck bullies both there and at her public primary school, which was "very strict about bullies — more so than the high school".  She's glad she had also gone to a co-ed public school. But there were some "horrible people" at her private school and a lot of snobbery.

Then there's the religious element. St Catherine's is an Anglican school, which suits some parents but not others.  Private schools are also regarded as better for discipline but this has its downside too.

"I hear they now have a uniform check where the girls have to kneel and the length of their dress is measured from the ground," Hannah says. Frank says that if he'd had a son, he's not sure he would have sent him to his alma mater.

"I went to the 40-year reunion recently and there was enormous wealth but they were still asking for money," he says.

And it wasn't unpaid school fees either.

Read more: http://www.theage.com.au/money/investing/school-daze-is-private-education-worth-it-20111015-1lq8g.html#ixzz1b0ltNAos