For thousands of parents the start of the school year brings a bout of anxiety. Having already stretched their bank accounts to breaking point at Christmas, they have to deal with the rapidly rising cost of their children's education.

Getting some schooling does not come cheap. Even a no-frills education at a public school can cost about $4,500 a year if the expense of books, uniforms, lunches and travel is included.

Parents who opt to send their teenage children to private schools can expect to spend between $5,000 and $15,000 on school fees alone this year. When uniforms, books and extracurricular activities are factored in, they could easily be looking at an outlay of $20,000.

Unfortunately, with private school fees rising ahead of inflation, the story could be far worse for future generations of parents. According to the Australian Scholarships Group (ASG), by the time millennium babies reach high school age, the cost of a secondary education at a private or independent school could easily top $200,000.

And the drain on family finances does not always end at high school graduation. Parents often end up playing banker as children struggle with the cost of Higher Education Contribution Scheme (HECS) fees, textbooks, union subscriptions, rent and food during their university years. The University of Sydney Student Centre advises students and their parents to allow about $305 a week on top of HECS fees to cover living costs and up to $1,000 a year to cover compulsory union fees and textbooks.

Naturally, the best way of meeting such expenses is to start planning as soon as possible. Putting aside $100 a month into a high-growth fund for 10 to 15 years may be all the preparation you need.

But what if your children have already reached high school age and time is no longer on your side?

Borrow the money?

One option is to borrow. Schools often offer discounts or protection from further rises for prompt payment of fees. Tertiary students who pay their HECS charge up-front are entitled to a 25 per cent discount.

Taking out a personal loan, or using the mortgage to draw on equity in your home, will allow you to take advantage of discounts and has the bonus of spreading expenses across the school year. But financial advisers are wary of this route.

Louise Biti, technical manager at RetireInvest Financial Planning, says: "Borrowing is a very undesirable way of [paying for your child's education] because you pay interest on the amount borrowed and it is not tax-deductible."

Anyone thinking about going into debt should weigh the cost of interest payments and loan fees against the potential discount before going ahead.

Salary packaging

A more sensible way of using debt is for parents to take advantage of any interest-free loans offered by their employer. This has all the advantages of normal borrowing without the downside of interest charges or set-up costs. Repayments can be spread throughout the year and are deducted from the employee's pay.

Because fringe benefits tax (FBT) is payable by the employer if the loan is extended for longer than six months, the employer will try to encourage repayment within that time frame. But any FBT payable is not generally passed on to the employee if the loan is paid off over a year.

Michael Lyons, human capital consultant at Mercer Cullen Egan Dell, says the main drawback of interest-free loans occurs if the employee decides to leave the company. At that point he or she will generally be expected to pay any outstanding loan in a lump sum.

Outright payment of school fees by employers is also a possibility but, because it means an FBT liability for employers, it tends to be restricted to a favoured few. Senior executives can sometimes negotiate the payment of school fees up to a certain amount - say $10,000 - as part of their package and in this case the employer normally covers the FBT liability. The cost of FBT may, however, be passed onto the employee.

Workers in the voluntary sector may benefit from a tax concession that makes it tax-effective for employers to package some private expenses.

Public benevolence institutions are exempt from FBT, while other not-for-profit organisations such as unions receive a rebate of 48 per cent on any FBT payable, effectively making it tax-free. But short of setting aside a bonus payment to help fund a child's education, there is little that many parents can do to package their salaries more effectively.

Better budgeting

The only other alternative is to try to put your money to better use. This can be as simple as reviewing your banking habits to make sure you are not paying for excess withdrawals or using competitors' ATMs.

"Putting all your bills and expenses on your credit card and making one withdrawal each month from your bank account can help as long as you have the discipline to pay off your credit card in full each month," Biti says.

Analyse your expenditure over the course of a month to identify sacrifices and make sure any spare money is not left to languish in a low-interest account.

You may also need to rethink your priorities. Consider whether you really need to send your child to a private school. Students from government and selective schools regularly turn up on lists of top HSC results and the cost of "voluntary fees" is minimal.

Likewise, check whether you are overextending yourself by trying to be the benevolent parent.

Jenny Brookhouse, technical manager at ING Financial Planning, suggests taking a pragmatic approach. "If your children are building up a HECS debt, let them repay it when they start working," she says. "Although it rises in line with [the] CPI, it doesn't have a specific rate of interest attached to it."

If you are really struggling to meet education expenses, take advantage of second-hand outlets to pick up textbooks and equipment and remember there is no obligation to pay fees at government schools.

Planning ahead

If you do have time and money up your sleeve, be sure they are working effectively for you by putting regular amounts into high-yielding investments.

Parents with 10 years or more before their child begins secondary education will have plenty of scope to take advantage of long-term share and property-backed investments such as insurance bonds, friendly society bonds and endowment warrants.

Until now, insurance bonds have been a popular long-term savings vehicle because they have combined simplicity with tax-effectiveness. Provided no withdrawals were made before the 10-year maturity date, insurance bond payouts triggered no further tax for the holder. This was because the tax was paid internally at the life company rate (now 34 per cent).

The tax treatment of insurance bonds is about to be overhauled, however, which is likely to reduce their attractiveness to investors. First, the rate at which tax is paid internally is being lowered to 30 per cent from July 1. At the same time, proposed changes could see the tax exemption for bonuses on life insurance policies held for more than 10 years abolished.

Although legislation has yet to be finalised, the new tax treatment would introduce a system of imputation credits similar to franking credits on dividends.

Investors choosing to include bonuses as part of their assessable income on an annual basis would obtain a refundable tax credit. They must state they will do so when they take out the policy, however, otherwise the bonuses will be taxed on surrender or maturity.

In addition, unlike unit trusts, insurance bondholders will not get the benefit of a 50 per cent capital gains tax reduction. This means bondholders will pay tax on any gain at a rate of 30 per cent rather than the maximum 24.25 per cent paid by an investor.

But the good news is that anyone who buys an insurance bond before July 1 will be able to do so under the existing tax rules and there may still be a last-minute reprieve in the final legislation, Biti says.

The Australian Scholarships Group offers an alternative to insurance bonds. Like insurance bonds, the returns from these plans are now tax-exempt for the investor, but money is not accessible in the short term. (These programs may become less attractive in the coming months. Like insurance bonds, they are facing possible tax changes including the taxation of investment earnings at 30 per cent.)

Children must be enrolled before their seventh birthday for secondary school plans and before their 10th birthday for tertiary plans.

The tertiary plan returns contributions to the parents when the child starts university and pays the earnings to the child in the form of a bursary for living expenses. There is one big drawback, however. If the child dies or decides not to go to university, parents do not receive any returns from their investment.

Returns have also tended to be low when compared with share-based investments - 5 per cent last year - because regulations meant the group was restricted to fixed-interest investments. But as a result of deregulation, from next month the group will be able to put investors' money into shares, giving the hope of higher returns.

For those with at least five years before their child enters secondary school, unit trusts may be a better bet. They have the advantage of increased flexibility, allowing withdrawals at any time and, provided units are held at least a year, investors receive a 50 per cent discount on any capital gains tax liability when they sell. The downside is earnings are taxed at the investor's normal marginal rate and must be included on tax returns each year.

Peter O'Toole, head of financial planning at Deutsche Bank Financial Planning, says to make unit trusts more tax-effective the investment can be held in the name of the parent paying tax at a lower rate.

Those who are long on time but short on cash could borrow to invest in high-growth unit trusts. But planners warn that it can be a high-risk strategy if the value of the investment falls. They also steer clients away from investing directly in shares to save for a child's education.

Even if you have less than five years until the money is needed, there are still some options. Seek out top interest rates by putting money into term deposits or a cash management trust.

"Even if you've only got a couple of years, there is still some benefit in starting," O'Toole says.

HECS fees - why it pays to be upfront

With the start of the academic year, thousands of new and continuing university students will face the dilemma of whether to pay their Higher Education Contribution Scheme (HECS) charges up-front.

This year the charges, which are increased annually, will range from $3,521 for an arts degree to $5,870 for law, medicine or dentistry.

Students who are able to pay the charge before the census dates of March 30 and August 31 will earn a 25 per cent discount from the Government. Over the course of a year this can reduce the cost of an arts degree by $880 and law, medicine or dentistry degrees by $1,467.50.

On the other hand, those who cannot afford to pay up-front are likely to leave university saddled with a debt of more than $10,000. Although there is no interest charge levied on HECS, the outstanding debt does rise each year in line with inflation.

Compulsory repayments are made each year through the tax system, starting when the student reaches a certain income threshold - set at $22,346 in 2000-01. The higher a student's income, the higher the repayments.

But the good news is there is some middle ground. Students or graduates who make a partial up-front payment are still entitled to a 25 per cent discount on the amount paid. For instance, someone who pays $1,000 up-front will be recorded as paying $1,333. The remaining charge is then deferred and paid back through the tax system.

Likewise, students or graduates who choose to make a voluntary payment of at least $500 can earn a 15 per cent bonus. This means someone with a debt of $4,500 who makes a voluntary repayment of $1,500 would reduce his or her debt by $1,725.

Even if the remaining HECS debt is between $436 and $499, graduates can still earn the bonus if they pay off their debt in full ($435 is worth $500.25 after the 15 per cent discount is factored in).

Source: Department of Education, Training and Youth Affairs