Should you pay your child’s university fees from your ISA?

Students received their A-level results today, finding out whether they have secured that first choice university place. 

For parents, it’s time to start counting the cost. For those who have built a little wealth, there is a consideration.

1. Should you pay living costs for your child?
2. Should you even offer to pay the fees?

For some, tough love is the instinct: pay your way! Others may feel inclined to do more, particularly those from a luckier generation when fees were paid and grants were common.

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Most of us know how the system works. University fees are capped at £9,250 a year in England on most courses (different rules apply in Scotland and Wales).

From there, it gets wildly complicated with different ‘plans’ over the years, each with its own system of rates and repayment.

Let’s focus on this year, which works under ‘Plan 5’, the system in force since 2023. This is how it works:

• You borrow from the government’s Student Loans Company and don’t need to start repaying until you earn £25,000.
• Repayments at 9% of your income is taken from your wages, hence the perception of a ‘graduate tax’, when you reach the threshold (repayments will be due for graduates with unearned income of more than £2,000 a month).  
• Interest rates are set on 1 September each year, using the Retail Prices Index (RPI) of the previous March. It should be confirmed as 3.2% for this year, down from 4.3% last year. Note that higher rates apply for 'Plans 1-4'.
• The loans cover the capped £9,250 fees but there’s also the option to borrow for living costs - up to £10,544 a year, or £13,762 in London.
• Debts are wiped clean after 40 years (the timespan has risen steadily from 25 years for ‘Plan 1’).

Given the numbers, a large debt could accumulate alarmingly quickly. A London student could accrue nearly £70,000 of debt in three years, plus interest payments, and that’s before considering that fees, and certainly living costs, may rise over the course of a degree.

So would it better to pay the fees, perhaps from investments or other savings? Or could you borrow more money on your mortgage to cover the cost?

Let’s start with the mortgage option. Yes, mortgage costs are falling after cuts in the Bank of England base rate. But with the best five-year mortgage rates around 3.9% and two-year rates at 3.75%, the cost is more than the likely starting rate of interest for students this year.

Perhaps you could use some of the ISA investments to pay the fees, or to go towards living costs? The wisdom of this depends on the returns you might get if you left the money invested versus the interest rate on the debt. But both future returns and future rates are impossible to predict.

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What we do know is that the interest rate will be linked to the broad level of inflation in the economy. And even though past performance is no guide to the future, it is also our only reference point. As such, the UK stock market has returned an average of 4.9% a year over and above inflation since 1900, according to JP Morgan’s Guide to the Markets. Returns have been more modest this century at 1.2% a year.

If stock markets were to keep beating inflation in this way, then it would be better to stay invested rather than to pay the student costs upfront. And perhaps getting your child ahead in other ways may be more beneficial…

Better to help with a deposit?

The biggest challenge facing 20- and 30-somethings is establishing a toehold on the property ladder. So perhaps rather than support with students costs today it is better to prioritise a deposit for tomorrow.

Imagine you had £10,000 available to help your student child. You could hand this over, so they didn’t need to take the living cost loan in their first year. Alternatively, you could invest the money.

For illustration purposes, let’s make some assumptions. Let’s say the rate of inflation remains at a reasonably high 3.2% for five years. In that scenario, the debt would have grown to £11,732.

If you invested it for the five years and the returns were 1.2% above inflation, as per the average of the last 25 years, your investment would have grown to £12,455 before costs. Bump the return up to the 4.9% return (achieved since 1900) and the number is £14,973.

The wisdom of crowds

Another good reason to take the graduate loans is the safety of the crowd. While there appears to be political commitment to the system today, who knows what might happen in the future. A few years ago, the US wiped out student debts for those who still owed money after 20 years.

Even without that one-off debt wipeout, there’s the possibility that your child’s career is not lucrative; that they remain under the threshold and any remaining debt is cleared after 40 years. However, it’s worth noting that the £25,000 salary repayment threshold is not that far above the annual minimum wage of £22,220 for a 35-hour week and is lower than the £25,396 for 40 hours.

The tax consideration

There is also inheritance tax to consider. There are fiddly ways to give money to your children such as gifting a total of £3,000 a year, or you can gift more from excess income and keep detailed records. For other gifts, the tax liability falls away after seven years from when it was made. But payments for university fees, accommodation and living costs from parents for full-time students is exempt from inheritance tax.

• Read: Inheritance tax changes - what we know so far

That is a consideration for some, especially with the inclusions of pension assets for inheritance tax from April 2027. Many more people will face potential liabilities and will be looking for ways to safely hand money down. That is worth considering when saving up money for a deposit for you child, for example. You may want to drip the money to them annually so they can save in their own ISA or Lifetime ISA, which has more restrictions but benefits from a government top-up.

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How will you help?

It seems that students are destined to leave university with debts unimaginable to the generation before. I am grateful that I left college with modest debts. I was the first student intake to take a living costs loan back in 1991 - a mere £830 in London and with a rate of 2.3%. And I had top-ups from my parents, and support when I needed to live from home to save money.

My generation - today’s parents - want the same: to be able to help their children in the most powerful and cost-effective way. Investing in ISAs and drip feeding gifts to help with a deposit ticks those boxes, in my view.

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Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Eligibility to invest in an ISA and tax treatment depends on personal circumstances and all tax rules may change in the future. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.