The cost of a degree education has been steadily climbing in recent years, with much confusion and worry caused about student loan repayments. There are, however, ways you can plan investments to help your children and grandchildren manage finances through university…
On average, according to Which? students leave university with between £35,000-£40,000 of debt (outside London). Whether they choose to utilise student loans, plan ahead to save and invest before starting college, or decide to work part-time to help fund course fees is a major decision.
A number of money advice websites regularly highlight the fact that student loans taken during study do not have to be repaid until you earn a salary of at least £21,000 (rising to £25,000 this year). That’s fine, but who likes having a large amount of debt hanging around their neck? It can cause stress and worry for years.
There are other factors to consider. It’s true that interest rates associated with student loans are relatively low. But after graduation and you start earning a decent salary, the interest rate rises.
For example, if you earn over £41,000 (easily achievable for many degree holders) you will pay RPI (Retail Price Index, which is currently around 3%) plus another 3%.
The more you earn means that you will be in a stronger position repay. This doesn’t deflect from the fact that you will start work knowing that you have a considerable amount of debt. Thankfully, student loans do not affect your credit rating.
Top money worries for students
Tuition fees are amongst the top concerns for students in England. The cost of living doesn’t help matters either. Getting a degree in any subject is certainly a lot more expensive than it was before universities began charging for tuition in 1998.
Back then it was up to £1000, slowly rising over the years. However, in 2010, following the Browne Review, the cap was pushed up to £9000 annually. And guess what? Most universities decided to charge the full amount. In England, from the 2016/17 academic year fees rose to £9,250 a year for UK and EU students.
A recent survey by the Save the Student website found that students spend an average of £131 on rent each week. London accommodation can be upwards of £200 per week, depending on location! Worryingly, 44% of students struggle to pay their rent.
Some parents consider buying a property near to the university. It’s a great idea but not a realistic option in some cities due to astronomical property valuations.
In fact, according to the survey, only 1% of students live in their own property. Moreover, 8% choose a course locally and remain living with their parents to save costs.
Whichever way you look at it, it’s a costly business being a student. That’s a daunting thought.
A junior ISA to fund university
So, what is the best way to save for your children to help with their time at university? Whatever route you choose, ideally you’ll start early if you want to ease the financial pressures on your children when they do attend college. That means choosing a savings plan.
Due to the tax freedom involved, a Junior ISA (JISA) is a great way for parents to save towards future anticipated financial needs, such as tuition fees and living costs associated with university.
Parents (also grandparents and other relatives) can save up to £4,260 in a JISA from the 2018-19 tax year, and the same each year thereafter. Start early enough, when the children are young, and this will build up nicely in time for the start of college.
This investment is also flexible. Junior ISAs can be held in cash, or stocks and shares. As you are saving towards university costs, up to eighteen years away if you start when the child is born, you could take more risks with stocks in the early years.
Later, reduce the risk by switching to cash as you approach the likely withdrawal date.
Control of the money in a Junior ISA passes to the nominated child when they reach 16 years of age, but no withdrawals can be made until their 18th birthday. At this point, the ISA converts into a basic adult ISA. That’s perfect timing for university.
As an example, let’s say you decide to start saving when your child is five years old. If the current maximum £4,260 is invested in a JISA each year for the next 13 years then, assuming growth at a modest 3% net per annum, this will produce a tax-free fund of around £74,000 – plenty towards the future cost of a three-year university degree course and living expenses.
There are other ISA options available, so depending upon your circumstances and how much you have available to invest each year will help you to make that decision.
Of course we are always here. Straightforward, honest advice about savings and investment. Wise words from the Logic Wealth Planning team.
Whatever you decide, creating a savings pot that will help your children through university without having to take on additional debt will make their study time much less stressful.
Beyond that, when your children have secured their degree qualifications, they can start careers and direct a larger proportion of their earnings towards the next set of goals – such as getting on the property ladder and buying their first homes.
For advice about ISA products call our friendly team on 0808 1234 321.