It's never too early to start saving for university

Putting aside £50 a month can build a fund of £15,000 in 18 years, says Edmund Tirbutt

Aspiring students who still cannot decide what to read at university could do worse than consider a course in debt management. Even before this week's controversial House of Commons vote on top-up fees added a further £3,000 a year from 2006, the average three-year degree course was already costing about £20,000. That will swell to at least £29,000, without taking account of price rises in the next 30 months.

Students can take steps at university to prevent debts from spiralling out of control, such as working during vacations or even during the term, and using attractive loan facilities.

The Student Loans Company, applications to which should be made through local education authorities, can lend a proportion of living expenses at a rate of interest equivalent to the inflation rate, as measured by the retail prices index. The loan limit is to increase significantly in the next three years. At present it varies from £3,165 a year for a student living at home to £4,930 for one who lives away from home in London.

And many banks will grant students interest-free overdrafts up to modest limits. Royal Bank of Scotland will lend up to £1,600 for students in their third year and up to £2,000 for the first year after graduation. Those who leave university with the lowest levels of debt are most likely to have received a helping hand from their families.

James Dalby, head of investment strategy at the national independent financial adviser Bates, says: "Funding for higher education costs has always been an issue for parents and, although the recent increases make the amount needed far higher still, they might also help to focus the mind a bit more.

"Don't be put off by the frightening amounts involved, because every little contribution helps and if you do nothing you are digging an even bigger hole.

"For parents who start saving 10 or 20 years ahead it makes sense to use equity funds. Many investors may have been put off because the stock market has performed poorly in three of the past four years, but if history can be relied on, equities will perform better than other asset classes in the long term."

There are no tax breaks available for educational funding but the one message reiterated by all financial planning experts is that the earlier you begin the better. Even if you can afford to pay only £50 a month into a unit trust this can make a sizeable inroad into the student debt mountain. If your contributions grow at 6 per cent you will accumulate £7,078 after 10 years and £15,153 after 18 years.

Most broadly based equity funds could be considered adequate, but a couple of packaged products are particularly worth looking at. The Childrens' Portfolio, from Children's Mutual, is unusual in allowing multiple contributions from parents and grandparents to be put towards the same investment.

It offers a combination of equity funds and lower-risk with-profits savings schemes, maximising tax-efficient allowances available from individual savings accounts (Isas) and baby bonds, which offer tax-free saving on up to £25 a month.

Fidelity Investments' WealthBuilder Target Funds also offer advantages to those who wish to invest in equities towards specific goals. They consist of three funds catering for different target dates - 2010, 2015 and 2020 - that roughly coincide with when money will be needed.

All have been structured as funds of funds, with the ability to invest in Fidelity's 90-strong fund range. They initially invest mainly in equities, but become increasingly conservative over time, switching to less risky asset classes to safeguard against poor stock-market performance during the run-in to the target date.

An investor with more than six years to go before their target date could expect to be invested primarily in equities, and one with less than three years to go would be heavily invested in a mixture of bonds and cash.

FACT FILE TOP-UP FEES

* With effect from 2006, most students will have to pay up to £3,000 a year as well as living costs;

* 30 per cent of the poorest full-time students will get at least £3,000 a year;

* Fees and loans to The Student Loans Company will be repayable after graduates start earning £15,000 a year;

* Fees will not have to be repaid until after students have graduated;

* The Government estimates the average student is expected to repay their loan in about 13 years.

CONTACTS

* Fidelity Investments 0800 414171 www.fidelity.co.uk

* Student Loans Company 0800 405010 www.slc.co.uk