[Insight & Opinion] Growing Burden of Children's Education Expenses... Korea Needs Its Own Junior ISA

Even without looking up statistics or figures, there is likely no household that does not feel the burden of education expenses for their children. Despite the declining school-age population, the strong performance of private education companies listed on the stock market indirectly indicates that per capita education expenses are increasing. Due to parents seeking good school districts, housing prices in top-tier school zones are significantly higher compared to other areas. The situation seems similar in the United States. Elizabeth Warren, a U.S. Democratic Senator, pointed out education expenses as one of the reasons why seemingly stable middle-class dual-income couples are driven to bankruptcy in her book "The Two-Income Trap," which she wrote while a professor at Harvard Law School.

Countries like the U.S., the U.K., and Japan operate tax benefit systems to alleviate the burden of education expenses for children. The most famous is the U.S. '529 Plan,' introduced in 1996. It is a type of education savings account that offers tax-free benefits on investment earnings. The system varies slightly by state, with some states providing income tax deductions. Grandparents and relatives can also contribute. The funds must be used specifically for education-related expenses such as college tuition and dormitory fees. Using the funds for other purposes results in losing tax benefits and incurring penalties.

The U.K. operated the 'Child Trust Fund' from 2002 to 2011 to support financial education and future generations' education expenses. The government provided ?250 at the child's birth and again at age seven, allowing parents to invest additional amounts. Earnings were tax-free, and withdrawals were not allowed until the child turned 18. This fund has since been merged into the 'Junior ISA' (Individual Savings Account). Although the system has changed, tax-free benefits remain, and withdrawals are still restricted until age 18.

Japan benchmarked the U.K.'s ISA system and offered tax benefits for Junior NISA accounts from 2016 to 2023. This product was available only to minors aged 0-19 residing in Japan. While Japan has discontinued Junior NISA, it extended the tax benefit period of the adult NISA accounts to a lifetime and increased contribution limits, thereby expanding the overall scope of tax benefits. In Asia, not only Japan but also Singapore has introduced similar systems and operates them successfully.

There are two main reasons why developed countries compete to create education savings accounts in their children's names. One is the practical relief of education expenses. By starting long-term installment investments as early as birth, children can accumulate a substantial sum by adulthood. The funds deposited in these accounts are primarily invested in investment products rather than savings products. This also aims to activate investment culture by channeling long-term funds into capital markets. The other reason is financial education. Countries like the U.K. have introduced financial mathematics into regular school curricula to strengthen financial education during adolescence. Equipping young people with proper financial knowledge can reduce critical mistakes in adulthood. Financial education is deemed essential to prevent situations where a single mistake leads to bad credit or economic hardship due to reckless investments.

Currently, South Korea lacks tax-advantaged products that can be opened in a child's name. Considering that tax benefits are the strongest incentive to encourage investment, it is advisable to introduce long-term tax-advantaged products to reduce education expenses even now.

Lee Sang-geon, Head of Mirae Asset Investment and Pension Center