Many parents choose to save towards the costs of a university education for their child, or children, so they can assist with living costs and tuition fees. According to the National Union of Students, financial difficulty is the "number one reason that students drop out of education", and costs are rising year on year. We look at the key factors to consider when saving for university costs, and some of the different options available.
How old is your child?
The age of your child will usually have a big impact on your investment approach. If you have young children you may wish to accept a higher degree of risk to maximise the potential returns, as you’re investing on a long-term basis. As your children move into their teenage years, you may wish to take a more cautious approach to safeguard your accrued savings. Generally speaking, you can afford to take more risk when investing for the longer-term, although you should ensure that you’re comfortable with any level of risk that you accept, and able to withstand the potential for capital loss.
How much does a university education cost?
Student living costs typically range from £8,556 to £12,641 for a 9 month period if your child is studying outside London. Living costs in London tend to be higher. Tuition fees currently range from £6,000 to £9,000 a year, depending on course and academic institution.
What do you want to achieve?
You may want to assist with the total costs of a university education, or be looking to make a regular contribution towards living costs. As a rough guide, saving £150 a month for 18 years would give you a savings pot of over £42,000, assuming a 3% return, net of all charges. Saving the same amount for the same period but achieving an overall rate of 6% would give you over £58,000, net of all charges.
When saving it is typically sensible to take advantage of tax-efficient options like cash ISAs or stocks and shares ISAs. This tax year runs from 6th April 2015 to 5th April 2016, and you can save up to £15,240 in an ISA during this period. Some providers will offer you a stocks and shares ISA plus a general investment account on top so you can see your complete portfolio in one place.
You also need to consider the effects of inflation upon your savings. Inflation risk is a hidden threat to any investment and the rising cost of living means £100 will buy you less in ten years’ time than it does today. So, for your investments to grow in real terms you need to make sure they are earning more than the rate of inflation.
Do you want your child to take financial responsibility?
You can invest up to £4,080 in a junior ISA this tax year, which is also tax-free. This is locked away until a child’s 18th birthday, when it is passed to them and converted into an adult ISA. Investing the maximum amount each year from birth would accumulate more than enough capital to pay for university costs, but you need to be sure that you’re comfortable with your son or daughter having this level of financial responsibility and capital at the age of 18.
What financial assistance is available for students?
Most English full time students can apply to Student Finance UK for a loan to pay their tuition fees, which will be paid direct to the university.
Students can also apply for assistance with maintenance. Most full time students are eligible to apply for a maintenance loan, which has 2 elements:
The guaranteed element
Up to 65% of the maximum living cost loan is available to everyone, regardless of parental income.
The means-tested element
The amount you can borrow is means-tested and depends on parental residual income; this is based on pre-tax income minus pension contributions. If household income is above a certain level then parents are expected to contribute towards living costs.
- A loan of up to £5,740 will be available if you live away from home and study outside London.
- A larger loan of up to £8,009 will be available if you live away from home and study in London.
- A loan of up to £4,565 will be available if you live with your parents.
In addition, students from households with a residual income below £42,620 will get some form of maintenance grant, although this will affect the amount they can borrow. In 2015/16 full-time students with a household residual income under £25,000 will get a grant of £3,387. From 2016/2017 academic year, maintenance grants will be replaced by loans for new students.
Even if a student takes out the maximum maintenance loan, there is likely to be a significant funding gap. A student living away from home and studying outside London can receive £5,740 in the 2015/2016 academic year. Taking the typical student living costs as a guide, this reveals a shortfall of between £2,816 and £6,901 per year.
Should you pay tuition fees up front?
Tuition fees currently range from £6,000 to £9,000 a year, depending on course and academic institution. Either you can pay the fees direct, or your child can take out a tuition loan.
A tuition fee loan is subject to interest, but there is always the option of taking out the loan and then paying it off once your child has completed their degree and commenced employment. If your child is not employed, they do not have to pay the loan back, so if they are looking to do voluntary work long-term you might want to consider this.
If your child repays the loan themself, they will need to start making repayments once they earn £21,000 or more. They will need to pay 9% of income earned above the £21,000 level. For someone earning £50,000 a year that would mean a monthly deduction of £217, whereas someone earning £30,000 would pay £67 a month.
How do I find out more?
You can view more details about stocks and shares ISAs on the GOV.UK website or you could consult a financial adviser. To view more details on junior ISAs please click here. We have a comprehensive set of Investment FAQs at Lucas Fettes Online that you may find helpful too.
This article is intended as an overview, and does not constitute financial advice. The value of investments may fall as well as rise, and the income from investments may fluctuate and is not guaranteed. Lucas Fettes & Partners offers a stocks & shares ISA, and does not offer a cash ISA.