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06 October 2014

University promises to open doors to a world of learning and future opportunities, but the reality of the cost of higher education has left students and their families in need of realistic guidance and advice.

Freshers’ week and the start of the new academic term have come and gone, and, with an autumn chill in the air, Britain’s 2.5 million university student population prepares itself for study and play – and another round of borrowing and debt. But, what might seem like a worthwhile financial commitment now could, over the coming decades, translate into a serious burden on an individual’s ability to grow their future long-term wealth. It is a financial undertaking that for many could take most of their working lifetime to service and, for a majority, without fully settling the debt.

The picture of how much each student can borrow towards tuition fees and living costs depends, of course, on family income, which part of the UK they come from, and the location of their university or institution. But the cost of an education is creeping up for the majority of British students. While Scottish students pay no fees in Scotland, there are fees in the rest of the UK. Students in England are the worst off and face borrowing of up to £9,000 a year to cover tuition fees and up to £5,555 to cover living costs away from home (students in London can borrow up to £7,751). 

This is the third year of £9,000 tuition fees and, while the government had hoped that competition would keep fees below the £9,000 cap, in practice the average fee last year was £8,499. A three-year course could leave a graduate with a debt before inflation of more than £40,000 (and a student in London saddled with a £50,000 debt that amounts to more than double the median graduate starting salary).  

But the cost of an education only starts at university. Once the course is completed or the student leaves college, the borrowing ends and the potentially long process of repayment begins. This year’s student intake does not start to repay until April 2016 and earnings exceed £21,000 a year. The headline sums for loan repayments are relatively straightforward, even for non-mathematicians. Repayments are at the rate of 9% on the excess above the £21,000 watershed, so a graduate with an initial salary of, say, £25,000 would pay £360 a year (or 9% of £25,000 minus £21,000).

Although the repayment sums may not seem too onerous on the surface, the 9% rate of repayment will come out of income that has already suffered 20% income tax and, probably, 12% national insurance contributions. So, for each extra £1 earned, only 59p is retained. What is often overlooked in calculations of the true cost of higher education is that student loans are not interest-free, but carry inflation-linked interest that varies between the retail prices index (RPI) and RPI + 3%. So, the £360 of our example may do no more than slow the pace at which the debt grows.

The Institute for Fiscal Studies (IFS), the respected independent UK economic think-tank, has examined the repayment pattern for students in England and come to the sobering estimate – for students and their families alike – that, in 2014 prices, the average graduate will start working life with a debt of more than £40,000. If the scale of the debt that new graduates will face is daunting, the IFS offers further stark news for Britain’s expanded university sector: 30 years on from graduation, nearly three quarters of all graduates might not have repaid their debt – and at this point their outstanding debt will be written off. The average write off for a typical graduate would be in their early 50s for about £30,000.

University and tertiary education costs are a major financial undertaking that require planning, forethought and an assessment of the career and lifetime gains offered by any course of study against the cost not just in the present but over the good part of a working lifetime. Those with children or grandchildren at university or planning to go should give serious pause for thought. Student debt will be a major factor for at least the first half their working lives, reducing their net income and potentially limiting the amount of mortgage they can raise.

If you want to help out a student or graduate financially, then the obvious courses of action – supplying funds to replace loans or paying off part or all of the debt – may not make sense; either could simply save the government money on debt it would otherwise eventually forgive. Those who want to offer financial assistance to students and graduate need to think beyond loan repayment. One approach is to focus more on a flexible build-up of capital for your graduate child or grandchild, so that their student debt becomes less of a deadweight on their life plans. And as with so much else involving children, the sooner you start planning, the better.

The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and
may fall as well as rise. You may get back less than the amount invested.

All details sourced from Taxbriefs, September 2014


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