Canny ways to cut the burden of mounting university tuition fees
Parents keen to help their student offspring avoid crippling debt have several options, explains Chiara Cavaglieri
Saturday 17 August 2013
A-level results are in and school leavers up and down the country are celebrating getting the grades for a university place. But even in among the congratulations – and invariably commiserations – is the niggling awareness that tuition fees can now reach as much as £9,000 a year.
While many parents are determined to give their children a helping hand, new research into university debt suggests they might be in for a shock when it comes to the true cost of a degree.
Students who started university last year could end up owing a colossal £53,000 once living costs, books and inflation are taking into account, yet parents expect their children to leave university with average debts of only £18,333, according to the Association of Investment Companies (AIC).
Parents may be hoping their children will make their own sacrifices and cost-savings, but the AIC study found that only 7 per cent of students plan to work part time, and although nearly half (45 per cent) of parents expect their children to live at home, only 18 per cent of students say they are likely to do so.
Either way, parents who want to help fund their offspring through university are going to have to dig deeper than ever. But what are the best savings and investment options for those keen to ease the burden?
It's always worth taking advantage of any tax-free benefits available. Adults can put up to £5,760 in a cash Isa (individual savings account) but realistically, with the dire savings rates currently on offer and news that base rate will be held at half a per cent until 2015, life is very difficult for cash savers.
"As with all savings goals, the earlier you start, the more likely you are to hit your target," says Kate Moore of Family Investments. "Parents with young children who save little and often can build up a significant sum over 18 years. For example, £82 per month invested from the day your child is born could become £27,000 – the sum they currently need to meet three years' worth of £9,000 tuition – by the time they turn 18.
"If a parent starts saving at age 10, however, then they would need to save £235 per month to reach the same target."
With a period of five years or less, advisers tend to recommend that you stick to cash-based savings because there isn't enough time to smooth out the volatility of the stock market. Fixed-rates are usually the most generous – the current best buy is 2.91 per cent with Secure Trust Bank's five-year fix – but an offset mortgage is another way to combat paltry savings accounts.
The trick here is to link your savings to your mortgage. Rather than earning interest on your savings, your money is offset against your mortgage. For example, if you have a £150,000 mortgage and £20,000 in savings, you only pay interest on £130,000. Monthly repayments are still based on the full mortgage so you effectively overpay each month. You're not earning any interest on your savings so there is no tax to pay and because mortgage rates are higher than typical savings rates, your money is working much harder. Many offset providers also allow you to link your current account and even your cash Isa if you really want to take full advantage of the benefit.
If you have time on your side, history shows that equities perform better than cash. Small but regular investment in the stock market can build an impressive pot – the AIC calculated that £50 per month in the average investment company over 18 years to the end of June 2013 would have grown to £24,835, while a lump-sum investment of £1,000 over the same time frame would be worth just £4,180.
"Whilst it's never going to be easy to build up the huge sums of money that a university education can now entail, a little forward planning could definitely remove a good deal of the burden," says Annabel Brodie-Smith of the AIC.
"Investment companies can be a useful way to tap into the long-term potential of the stock market by investing in a range of companies on your behalf, and they cover a variety of sectors and risk profiles."
Equity funds, as opposed to holding direct shares in one company, are one way to avoid putting all your eggs in one basket as these include shares from different companies.
Passive funds are cheap and straightforward, tracking a stock market index such as the FTSE 100, the UK's largest 100 companies, but if you're willing to pay more (typically 1.5 per cent a year) you can also invest in an active fund and see if the fund manager can buy and sell stock in an attempt to beat the stock market.
Growth will largely depend on which sector you invest in – some are more of a risk than others but potentially come with higher rewards. For longer-term investment of towards 10 years, investors could look into the growth opportunities offered by smaller companies, Europe, or emerging markets, but you must be willing to accept the additional volatility.
Diversification is critical so keep in mind that you aren't over exposed to any given asset class and seek independent financial advice when putting your portfolio together.
Danny Cox of fund supermarket Hargreaves Lansdown suggests that UK equity income is a good starting point and popular funds include Artemis Income Class R, Threadneedle UK Equity Alpha Income and Invesco Perpetual Income.
"Fund managers seek companies paying a healthy level of dividend income and their portfolios often consist of established companies with the ability to grow revenue and profits," he said, adding that parents can elect to have their dividends reinvested, compounding returns until the time comes to actually pay university fees.
Most funds can be sheltered in an Isa wrapper and don't forget that children have their own annual junior Isa (Jisa) allowance of £3,720. As with their adult equivalent, there is no income or capital gains tax to pay and Hargreaves Lansdown calculates that saving £310 per month could be worth £118,000 at age 18, assuming a 6 per cent growth.
Children can hold one cash and one stocks and shares Jisa at the same time, but 16-year-olds can also open an adult Isa, so 16 to 18-year-olds can make the most of a bigger tax-free savings allowance.
The money can't be touched until they turn 18, but as a parent, you may prefer to use your own allowance if you want to guarantee the money is spent on further education and not a holiday to Ibiza.
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