Helping the grandkids through school and uni: a grandparent's funding playbook

Many retired grandparents want to help fund their grandchildren's education, and the cost of doing so has climbed steadily — senior-year fees at independent schools in the big cities commonly run into the tens of thousands of dollars a year, and university tuition plus living-away-from-home costs, textbooks and amenities can easily exceed $25,000 a year, with postgraduate qualifications higher again. Working-age parents in their 40s and early 50s, juggling mortgages and the cost of raising children, often have limited capacity to fund a six-figure education bill alone, and grandparents with home equity, super or savings frequently want to help. The decision involves seven structural choices, each with different consequences, and the right one depends on the scale of the help, the time horizon, the grandparent's Age Pension position, and the family dynamics.

This article walks through the seven options — direct payment, investment bonds, scholarship plans, family trust distributions, gifts to the parent, formal loans, and paying off student debt — and the framework for choosing between them, including the awkward question of helping one grandchild more than another. It is general information only, not personal advice.

What is option one — direct payment of fees?

Paying the school or university directly (or giving the parent or grandchild the money specifically for fees) is the simplest path and works well for modest amounts. For Centrelink it counts as a gift: within the gifting free area of $10,000 in a financial year and $30,000 over five years (no more than $10,000 in any one year), there's no effect on the grandparent's Age Pension, but anything above the free area becomes a deprived asset, counted under the assets test and deemed for income for five years (Services Australia, https://www.servicesaustralia.gov.au/how-much-you-can-gift). There's no tax event — Australia has no gift tax, and no deduction is available. Paying the school directly rather than via the parent ensures the money reaches the fees and adds transparency, though some families prefer the parent be the channel for authority reasons. This option fits modest annual amounts within the gifting limits, where the grandparent isn't heavily asset-tested or accepts the deprivation cost.

What is option two — investment or insurance bond?

For long-horizon planning, an investment bond (also called an insurance bond) is structurally elegant. The grandparent owns the bond, names the grandchild as beneficiary, and the money is invested in a managed portfolio inside the bond. All earnings inside the bond are taxed at the corporate rate of 30%, paid by the bond issuer, and if no withdrawals are made in the first ten years no further personal tax is payable on the proceeds — which makes the structure tax-effective for anyone whose own marginal rate is above 30% (MoneySmart, https://moneysmart.gov.au/how-to-invest/investing-and-tax). Most bonds also let you add to the investment each year — commonly up to 125% of the previous year's contribution — without restarting the ten-year clock. For Centrelink the bond is an assessable investment asset of the grandparent, deemed during the holding period, but with no deprivation consequence since the funds stay in the grandparent's name. This fits substantial multi-year funding with a long horizon — set up when a grandchild is young, funded periodically, and maturing around the time university begins — and lends itself neatly to one bond per grandchild.

What is option three — scholarship or education bond?

A scholarship plan is a managed investment specifically structured to fund a child's education: contributions accumulate, the plan invests, and on the child reaching tertiary study the plan releases funds for tuition, accommodation and education costs, sometimes with specific tax concessions when the money is used by a student. The catch is fees — scholarship plans typically charge more than standard investment products, through administration, entry or exit, and ongoing management costs, and some providers have drawn criticism over the years for fee structures. There are also restrictions: funds can usually only be released for education (or returned to the contributor, sometimes with tax consequences), and if the child doesn't go on to study the money may pass to a sibling. The fee structure should be compared honestly against a properly structured investment bond or a low-cost managed fund before defaulting to this option. It fits a long horizon with high certainty the child will study and a contributor who values the discipline the structure imposes.

What is option four — family discretionary trust distributions?

Where the family already has a discretionary trust, distributions can fund education — but the timing matters enormously because of how minors are taxed. A child under 18's unearned income (which a trust distribution is) is taxed at penalty rates above a small threshold: nil up to $416, then a high rate on the slice from $417 to $1,445, and the top marginal rate of 45% (effectively 47% with the Medicare levy) on the whole amount once it exceeds $1,445 (ATO, https://www.ato.gov.au/individuals-and-families/income-deductions-offsets-and-records/income-you-must-declare/your-income-if-you-are-under-18-years-old). That makes a trust a poor tool for school fees during a grandchild's minority. Once the grandchild turns 18, distributions are taxed at ordinary adult marginal rates with the tax-free threshold and offsets, and a trust becomes highly tax-effective for funding undergraduate costs. So a family trust is rarely right for school fees but can work very well for a university-aged grandchild.

What is option five — gift to the parent who funds the education?

Here the grandparent gifts the money to the parent, who pays the education costs, with the same Centrelink and tax treatment as a direct payment. The difference is family dynamics: it respects the parent's authority over the child's education and supports their role as the decision-maker. Some families strongly prefer this and don't want grandparents bypassing them, while others find it less transparent. It fits families with good intergenerational trust where the parents are the natural decision-makers.

What is option six — formal loan to the grandchild?

A documented loan to a grandchild aged 18 or over — for university living costs or specific expenses, repayable over a defined period, often once they start working — is another route. For Centrelink the loan is an assessable asset of the grandparent at face value rather than a deprived asset, because it's repayable; any interest charged is assessable income, and deeming may apply if it's interest-free. The structure can teach budgeting and financial discipline, and the loan can later be informally forgiven or formally written off in the will, though loans can strain relationships if expectations aren't aligned. It fits a grandchild at university needing living-cost support in a family that values teaching financial responsibility.

What is option seven — paying off student (HELP) debt?

This is the option that sounds best and is usually the worst. Australian university tuition is generally funded through the HELP loan scheme (the system that includes HECS-HELP): students don't pay upfront, the debt is indexed each year, and it's repaid through the tax system once income passes a threshold. The scheme was substantially reformed in 2025, and the new settings make it cheaper still. From the 2026-27 income year the minimum repayment threshold is $69,528, and compulsory repayments are now calculated on a marginal basis — only on the income above that threshold, not as a percentage of total income — so repayments are smaller and only kick in once the graduate can afford them (ATO, https://www.ato.gov.au/tax-rates-and-codes/study-and-training-support-loans-rates-and-repayment-thresholds). Indexation is now the lower of the Consumer Price Index and the Wage Price Index rather than CPI alone, and a one-off 20% reduction was applied to all student and training support debts that existed on 1 June 2025 (ATO, https://www.ato.gov.au/individuals-and-families/study-and-training-support-loans/study-and-training-loans-what-s-new). The emotional appeal of "I want my grandchild to graduate debt-free" is real, but the financial reality is that HELP is one of the cheapest loans in Australia, indexed gently and repaid only when income allows. Paying it off is rarely the highest-value use of a gift: investing the equivalent amount for the grandchild usually generates far more over time. It fits only narrow cases — a grandchild who values being debt-free for peace of mind, or one with very high expected income where repayments would be large soon. For most, redirecting the money into invested capital does more good.

How do you equalise across multiple grandchildren?

Helping one grandchild more than another — because their parents need less help, because their education costs more, or simply because the eldest reached university while the youngest are still small — can breed resentment later. The cleaner approaches are equal contributions across all grandchildren (adjusted for inflation if the help is spread over many years, so the youngest may receive more nominal dollars but equivalent real value), transparent documentation of the rationale, adjustments in the will to balance any unequal lifetime giving, and frank family conversations. Per-grandchild investment bonds funded equally are a neat structural equaliser — each grandchild has their own bond of equal value.

What does the choice look like in practice?

These two cases show the choice in practice. They are illustrative only, not personal advice, and specific tax and Centrelink positions need professional confirmation.

Mavis and Quentin, both 68, have three grandchildren aged 6, 8 and 11, are comfortable financially ($1.2 million in super, a paid-off home, and no current reliance on the Age Pension), and can commit $20,000 a year toward university for all three. On these facts a per-grandchild investment bond is the clean structural fit. They could set up three bonds — one naming each grandchild as beneficiary — splitting the annual funds across them and growing contributions over time within the 125%-of-prior-year feature that keeps the ten-year clock intact. Because all earnings are taxed at 30% inside the bond and proceeds are free of further personal tax after ten years (MoneySmart, https://moneysmart.gov.au/how-to-invest/investing-and-tax), and the couple's own marginal rates are higher than 30%, the structure is tax-effective for them. The eldest grandchild's bond is well positioned for tuition and living costs by the time she turns 18, while the younger two keep accumulating, and each bond's ten-year mark arrives near the start of that grandchild's studies. Centrelink is irrelevant for them now, and if they later qualify for the Age Pension the bonds are assessable investments with no deprivation issue. On these facts it is generally rational to run equal per-grandchild bonds — natural equalisation, no ongoing decisions, and maturity timed to each grandchild's university start — with a conversation to their adult children so the plan is understood.

Tobias, 71, widowed, has one grandson, Linus, 22, who has just finished an economics degree, carries a HELP debt, and has been offered a graduate consultancy role on $90,000 a year. Tobias wants to "help him start fresh" by paying off the debt. On these facts the instinct is usually the wrong move, and the 2025 reforms make that even clearer. Linus's debt was already cut by the one-off 20% reduction applied to debts existing on 1 June 2025 — so a $48,000 balance dropped to around $38,000, and after the further 1 June 2026 indexation of 2.8% it now sits at around $39,000 (ATO, https://www.ato.gov.au/individuals-and-families/study-and-training-support-loans/study-and-training-loans-what-s-new) — and his compulsory repayments are now calculated only on the income above the $69,528 threshold, so on $90,000 he repays against roughly $20,500 of income, gently and through the tax system without really feeling it (ATO, https://www.ato.gov.au/tax-rates-and-codes/study-and-training-support-loans-rates-and-repayment-thresholds). With indexation now the lower of CPI or the Wage Price Index, the real cost of carrying the debt is modest. On these facts it is generally rational for Tobias to invest the roughly $39,000 for Linus instead — in a managed investment or an investment bond he can access later — rather than clear a cheap, gently indexed debt. Over the decade or so it would otherwise take Linus to repay, that sum compounding in a diversified portfolio could grow well beyond the debt it would have retired. The main task is the conversation, since most graduates instinctively want the debt gone; the explanation is simply the maths.

For grandparents wanting to help with education, the right structure depends on the scale of the goal, the time horizon (short favours direct payment, long favours an investment bond), the Centrelink position (asset-tested pensioners should watch the gifting limits and prefer structures that don't trigger deprivation), the family dynamics, the need to equalise across grandchildren, and the specific funding need. The work is to quantify the goal, match the structure to the horizon and the grandparent's position, resist defaulting to scholarship plans without a fee comparison, resist paying off cheap HELP debt when investing the equivalent does more, address equalisation structurally where possible, coordinate sensitively with the parents, and — always — keep the grandparent's own retirement security first before taking on multi-year commitments. The reassuring headline is that helping with education is genuinely valuable, the structures are flexible, and a few hours of structural thinking can materially improve the value the help delivers. The figures move with policy and indexation, so verify the current gifting limits, bond rules, HELP thresholds and minor tax rates before relying on them — but the shape of the decision is durable.

Sources

• Services Australia — How much you can gift
• ATO — Study and training support loans rates and repayment thresholds
• ATO — Study and training loans: what's new
• ATO — Your income if you are under 18 years old
• MoneySmart — Investing and tax