How to help your would-be graduates cut their debts
Applications to university are down, but higher fees should not put off students.
Sunday 05 February 2012
The idea of student debt mushrooming from September onwards has whipped everyone into a funding frenzy. There's no denying that bumper tuition fees, up to a maximum of £9,000 a year, looks overwhelming compared to the £3,375 that students are currently paying. On the other hand, it doesn't mean everyone should dodge universities as if they're run by loan sharks.
Figures published by Ucas, the universities admission service, show that the number of UK applicants fell by 8.7 per cent in January compared with last year, with the number of 18-year-old hopefuls – the largest single group – dropping by 3.6 per cent.
Concerns that a lack of understanding about the new funding rules are dampening ambitions to apply for a degree course are still valid, so it's important to dispel the myths.
First, the Student Loans Company, working on behalf of the Government, is not a payday lender and student debt is still relatively cheap. Plus, if you can't afford repayments, you won't be asked to stump up any money. No other lender is quite so flexible.
Students don't have to pay fees upfront and everyone, regardless of what their parents earn, will have access to funding. A tuition fee loan will cover precisely that and you can get either a maintenance grant or loan on top to cover living expenses. This will vary depending on whether you are a full-time or part-time student, and additional scholarships and bursaries may be available depending on your course and financial position.
Second, no repayments have to be made until you are earning £21,000. If the graduate's earnings fall below this threshold, or stop altogether, no payments have to be made. When you do earn enough money, repayments are automatically deducted from wages, equal to 9 per cent of whatever you earn over the £21,000 threshold. So, if you earn £25,000 a year – you will pay back £30 a month. After 30 years your student debt is wiped, even if you haven't repaid in full.
Parents and grandparents might still wish for their child to avoid a loan completely or at least want to pay for other outlays, such as rent, food, travel and textbooks. How this is managed will largely depend on the age of your potential student.
Parents would need to save around £82 a month from the moment their child is born to cover the full cost of tuition fees for a three-year course, according to Family Investments. This is not even accounting for inflation or future price increases.
Ben Yearsley, an investment manager at financial services company Hargreaves Lansdown, recommends planning early, saving early and taking advantage of Junior Isas, in which you can save up to £3,600 a year tax-free. "The more time you have got, the better chance you will have of saving enough to support your children or grandchildren through university," he says.
Once they leave university, students are likely to face a debt of between £45,000 and £50,000. Add inflation and this figure could rise to around £85,000 in 18 years' time.
Topping up a Junior Isa by the full tax-free allowance each year and a good annual growth rate could mean a pot of over £100,000 after 18 years. This would mean taking on a bit of risk and investing in a stocks and shares Isa, but the returns could prove worth it, says Mr Yearsley. "You might take an equity risk but with cash interest rates so low it seems sensible, particularly if you have 18 years to invest."
"Cash accounts aren't going to match inflation; you've got to try and beat it and invest over the long term."
If your child is slightly older, it's never too late to put some money away; even a small sum can make a world of difference to a cash-strapped student. Saving £100 a month for eight years could still add up to around £12,000 according to calculations by Hargreaves Lansdown.
Grandparents eager to invest can also top up the loan. You are allowed to give away £3,000 a year from your estate as a one-off gift without incurring inheritance tax. You can also give a small regular sum from your post-tax income as long as it doesn't diminish your own standard of living.
If time is not on your side and you're trying to subsidise a child applying now, checking that your finances are in good health might unlock a bit of money from somewhere.
Diane Weitz, the director of Ashlea Financial Planning, an independent financial advisory practice, reminds families to check their finances are as tax-efficient as possible. For example if you have lost your job and are living on a much smaller household income, you might be entitled to claim working tax credit.
"Make the most of any benefits available to you," she says. "Many households are unaware that they're eligible to claim working tax credits."
You should also make the most of any cash Isas you have, pushing your balance to the limit if you can. As you have less time for funds to grow, focus on cash Isas in which you can save up to a maximum £5,340 (increasing to £5,640 from April).
"Parents need to think about whether they're trying to help their child avoid a loan altogether or just help out," adds Ms Weitz. "If you have a good portfolio of equities it might be best to leave it alone, as you won't get much from moving it to cash."
Ultimately, most students will need to turn to the Government for a loan to afford a degree, but there are other ways parents can contribute without having to empty a savings account.
Adrian Lowcock, a senior investment adviser at Bestinvest, says that on top of a Junior Isa parents should talk about money with their child. "Considering the total cost of university it is essential you discuss the impact with your children," he advises. Create a budget plan and identify the best ways you can help. "Financial support might not be the best solution – but providing accommodation will help reduce costs," Mr Lowcock adds.
Students can start applying for finance online now, without waiting for a confirmed university place – you can choose the course you're likely to start in September and update it later.
Expert view: Simon Hartshorn, Family Investments
"Both stocks and shares and cash accounts can be suitable options for parents. While the former have historically performed better over the long-term, either option should provide a decent sum if parents invest early and frequently. The Junior ISA provides flexibility for other family members to contribute, and with its simple tax treatment and lock-in until the child reaches 18 it is the natural home for children's savings."
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