As thousands head off to university this month, families up and down the land will be thinking about how to fund the costs.
It is often said that a good education is priceless. Nevertheless, we know roughly what it costs to attend university. Scottish students get free university tuition in Scotland, but anyone studying in England and Wales can expect to pay tuition fees of around £27,500 for a three-year degree course.1 When other costs, such as accommodation and living expenses are factored in, the total bill can rise steeply.
Indeed, the average debt a university student starting their course in September will incur over the course of their studies is around £50,000, according to data from the Institute for Fiscal Studies.2
Parents will be justifiably concerned, given that putting children through university is just one of several financial struggles they are likely to face. Nevertheless, while the numbers can seem intimidating, the key to affording a child’s education is to commit to a savings plan early on.
Many experts agree that tax-advantaged wrappers, such as ISAs and Junior ISAs, are among the most sensible ways for parents and grandparents to save for a child’s future. What’s more, putting the right plans in place can reduce the amount of Inheritance Tax (IHT) that needs to be paid out of an estate.
For instance, everyone can give away up to £3,000 a year that is not subject to IHT when they die. If this full £3,000 gifting allowance is put into a Junior Stocks & Shares ISA every year from a child’s birth, a tax-free sum of £87,664 could be available to the child by the time they hit 18, assuming a 5% annual growth rate.
Of course, returns cannot be guaranteed and it would depend on the performance of the underlying investments and charges. However, making an early start with Junior ISA savings means that money could be locked away for a decade or more, so investing it with a long-term view should help build up a more significant sum. Careful thought should be given to the most appropriate investment strategy and this is where professional financial advice will really add value.
Better off a loan?
Then there's the question of whether your child should apply for a tuition fee loan and/or maintenance loan to cover the costs. Nobody really wants their children or grandchildren to start their working life in debt, but in some cases it can make financial sense. This is because the system is more like a tax – and one that favours low earners over high earners.
Your child will never have to repay a student loan if they never earn more than the repayment threshold (currently £25,000 a year, £2,083 a month or £480 a week for English or Welsh students who started their course on or after 1 September 2012). When the child earns more than this, they will have to repay 9% of their income above the threshold each month via PAYE or Self Assessment. Any remaining debt is wiped out after 30 years, so low earners can expect to have their loans written off after they have paid a relatively small amount of interest.
On the flip side, if your child gets a job with a significantly higher salary and sees this rise considerably each year, they will end up paying back considerably more than they borrowed. In this case, paying off the fees upfront could beat taking out a loan.
Short of employing a crystal ball, it’s very difficult to work out what your child’s future earnings will be. That’s why you may wish to put savings aside until after they have graduated. At that point, you’ll have a better idea of their earning potential, and whether you should pay off the loans there and then.
Bear in mind that the maintenance loan is means-tested. If your household income is more than £65,000, your child can only get the minimum loan of £4,054 per year. This is nowhere near enough to cover the cost of accommodation, food, books, travel, and other expenses. Even the maximum loan of £8,700 per year (household income below £25,000) may be a struggle for students who are living away from home in one of the more expensive areas of the UK.
If you are willing to pick up the shortfall, it’s important to consider how your family would cope if you lost your job, or worse. If the unthinkable was to happen – a debilitating illness, an accident, or even death – the education of your children could be thrown into doubt.
As such, it may be sensible to establish some form of financial protection. Income protection insurance is one such option: it replaces part of your income if you become too ill to work. It pays out until you can start working again; or until you retire, or the policy term expires.
You can also take out term insurance to tie in with a commitment that has a specific duration, such as university education. If you survive until the end of the policy, then there’ll be no pay-out or return of premiums – the policy simply ends.
Ultimately, the key is to plan ahead. Only by creating the most tax-efficient solution and seeking professional financial advice, will you have a choice of how best to provide financial assistance and security for your family.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and the value may fall as well as rise. You may get back less than the amount invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.
1 https://www.ucas.com/finance/undergraduate-tuition-fees-and-student-loans, 2018
2 Institute for Fiscal Studies, Higher Education finance reform: Raising the repayment threshold to £25,000 and freezing the fee cap at £9,250, 2017