Education Bonds in Australia: A Smart Way to Secure Your Child’s Education

Education bonds are a type of investment bond designed with education savings in mind. Structurally, they combine the features of:

• Managed investments (your funds are invested in selected portfolios)
• Life insurance benefits (they include a nominated life insured and can bypass probate in estate planning)

Unlike a typical savings account, the bond invests your money in diversified assets, allowing it to grow over the long term. The unique advantage is in the way they are taxed and how withdrawals for education are treated.

• Contributions – You can start with a lump sum or make regular contributions. Many providers allow you to increase contributions by up to 125% of the previous year’s amount without resetting the 10-year tax clock.
• Investment Growth – The bond provider invests your contributions across chosen portfolios (ranging from conservative to high growth).
• Taxation Inside the Bond – Earnings within the bond are taxed at a maximum of 30%, paid by the provider. This can be significantly lower than the marginal tax rate of many parents and grandparents.
• Withdrawals
  • If withdrawn for education expenses, tax rebates apply, meaning for every $70 of net earnings, you can access $100 for education.
  • If held for 10 years or more, withdrawals are completely tax-free, regardless of how the funds are used.

1. Tax Efficiency

For high-income earners paying tax at 37% or 45%, the bond structure reduces the tax liability since all earnings inside the bond are capped at 30%. On top of that, education withdrawals benefit from tax rebates, effectively stretching your dollar further.

2. Flexibility of Contributions and Investments

Families can contribute gradually through regular payments or invest lump sums upfront. Providers offer a range of investment strategies, allowing you to tailor risk levels depending on how far away the education expense is.

3. Education-Specific Advantages

Unlike other savings vehicles, education bonds reward you for using the funds exactly as intended—on school fees, university costs, or vocational training. This makes them a disciplined way to save without the temptation of diverting funds elsewhere.

4. Estate Planning Benefits

Because bonds include a life insurance component, they can bypass the estate and be paid directly to nominated beneficiaries. This makes them especially appealing for grandparents wanting to leave a legacy without complications of probate or estate disputes.

5. Simplicity for Tax Returns

All tax obligations are handled by the bond provider. You don’t need to declare the earnings on your personal return, simplifying tax paperwork.

While education bonds can be powerful, there are important considerations:

• Fees: Providers typically charge management fees (around 0.7%–1.3% per year) plus investment management costs. Always compare fee structures before committing.
• The 125% Contribution Rule: If you exceed this annual limit, the 10-year tax-free clock resets. Careful planning is required to maintain tax benefits
• Tax for Minors: If withdrawals are made for beneficiaries under 18, different tax rules apply and could reduce the benefit. It’s generally more efficient once the child turns 18.
• Restricted Use: To claim tax rebates, withdrawals must be used for approved education purposes. Non-education withdrawals before 10 years may not be as tax effective.

From the 2026 financial year, the proposed Division 296 tax will impose an additional 15% tax on super balances above $3 million, including unrealised gains. For those with significant superannuation savings, this could substantially increase their tax burden.

Education bonds provide a valuable alternative because they operate outside the super system. Their value and earnings are excluded from Total Super Balance (TSB) calculations, meaning they are not affected by Division 296. This creates an opportunity for individuals to draw funds from super and redirect them into education bonds.

Key Benefits of Education Bonds in This Strategy

• Tax efficiency: Earnings are taxed at a maximum of 30%, often reduced through franking credits and offsets.
• No impact on personal tax returns: Investment growth compounds within the bond.
• Flexibility: Capital can be withdrawn tax-free at any time.
• Estate planning advantages: Bonds bypass probate, provide asset protection, and allow seamless tax-free transfers to beneficiaries.

John and Sarah each have $3.6 million in super and are concerned about exceeding the $3 million Division 296 threshold. They also want to help fund their grandchildren’s future education costs.

By withdrawing part of their super and investing in an education bond, they:

• Reduce their exposure to the new tax.
• Create a tax-effective pool of funds for their grandchildren’s education.
• Ensure flexibility, with the ability to access capital whenever needed.
• Simplify their estate planning, as the bonds can be passed on tax-free to chosen beneficiaries.

This strategy allows them to complement their superannuation, safeguard family wealth, and establish a multi-generational education fund.

Education bonds are especially useful for:

• High-income earners – Those taxed above 30% gain the most tax advantage.
• Grandparents – Many grandparents use bonds as a structured way to contribute to grandchildren’s education, with estate planning perks built in.
• Families with long-term education plans – If you know you’ll need funds for school or university in 5–15 years, bonds provide both growth and certainty.
• Those seeking simplicity – With tax managed inside the bond, it’s a “set and forget” strategy compared to juggling multiple investment accounts.

Education bonds are not for everyone. If your income is below the 30% tax threshold, the benefits may be less significant. Similarly, if you need short-term access to funds or flexibility in how the money is spent, other investment vehicles may be more appropriate.

However, for many Australians—particularly higher earners, disciplined savers, and families planning for the long term—education bonds offer a powerful, tax-efficient, and estate-friendly way to fund education.

1. Are education bonds safe?

Education bonds are generally considered safe because they are managed by licensed providers and invested in diversified portfolios. However, like any investment, they carry market risks, so your returns will depend on the chosen investment option.

2. Can I change the beneficiary of an education bond?

Yes. Most providers allow you to change the nominated beneficiary (for example, if one child doesn’t need the funds, you can redirect them to another). This makes education bonds highly flexible for families with multiple children or grandchildren.

3. What happens if the money isn’t used for education?

If the bond is held for at least 10 years, withdrawals are tax-free even if the funds aren’t used for education. However, if withdrawn earlier for non-educational purposes, you may miss out on certain tax rebates.

How Can Netgrowth Help?

At Netgrowth, we work closely with you to assess whether an education bond is the right fit for your financial and lifestyle goals. Our advisers can help structure your bond to maximise tax efficiency, navigate the 125% contribution rules, and plan withdrawals at the most strategic times. We also ensure your education bond is integrated into your overall financial strategy, aligning it with your investments, estate planning, and family priorities.

Every year you wait is a year of potential growth your education savings could be missing. By starting early, you’ll give yourself greater flexibility and more options when it comes time to cover tuition fees and other education expenses. Get in touch with Netgrowth today to arrange a personalised consultation—and take the first step towards a confident, well-structured plan to fund your family’s education future.