Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
IT’S the start of the new academic year and the time of year when Freshers Week events are in full swing at universities up and down the country. It’s a rite of passage for first-year students, giving them a chance to meet new people and get fully involved in their new student life.
Of course, being a fresher during a pandemic is very different to normal times, but fortunately for this year’s cohort, it is largely back to normal and for many, who have turned 18 during the pandemic, this will be their first real taste of freedom since Covid restrictions were lifted.
As a parent or grandparent, the thought of that may or may not set your heart aflutter in quite the same way it does your fully-fledged ‘fresher’. While the biggest issue for them right now is probably how to fit all these celebrations into one week, the thorny issue for you is more likely to be how to, or even whether you should, pay their university fees for them.
What is the cost of university today?
There’s no denying that university is fast-becoming a ‘luxury’ choice, with overall costs for a three-year degree course, including living costs, coming in at an eye-watering £56,0001 on average.
And when there are other, far more cost-effective - and some might argue vastly more valuable - ways to learn, develop skills and lay the foundations for a successful career, like apprenticeships, then that ‘luxury’ three-year stint at uni starts to raise even more questions.
If it is on the educational agenda though, the cost of university is something that cannot be ignored or avoided. It has to be paid, one way or another; either by a parent or grandparent (or some other generous benefactor) or else via the student loan scheme.
How much does it cost to get a degree?
There’s no getting away from the fact that £56,000 is a huge sum of money. Annual tuition fees, at up to £9,250 a year, make up the bulk of the costs. Then there are the costs of living, which, depending on where they go to uni, can add up to £28,000 for a three-year course if they study outside London; or even more if they study in the capital.
How the student loan system works
For many students the only way to meet these costs is with a student loan. Eligible students can get a tuition fee loan of up to £9,250 per academic year, plus a maintenance loan to cover living costs. These vary widely depending on where you study, where you live while at uni and your family’s income, and max out at between £7,987 and £12,382 a year.
Interest on the money loaned starts accruing straight away and currently at a rate of 4.2%. It changes every April as it is based on the Retail Price Index (RPI), plus up to 3%.
They usually start repaying the student loan from the April after they finish their course, and at predetermined rates. So, currently graduates eligible to repay do so only if their income comes to more than £524 a week, £2,274 a month or £27,295 a year (before tax and other deductions). How much they repay and how quickly they may clear the debt, if at all, depends on how much they earn. The rules vary widely, so do take a look at student finance on the government website.
With inflation also rising and student loans linked to the RPI measure2, you might also want to consider the implications of how this may affect their take home pay once their income reaches the amount required to trigger the start of repayments.
Should I pay my kids university fees?
If you have the means to help out financially, the issue of whether it’s better to pay their uni costs for them, or not, is a tricky one. Many parents and grandparents who can afford to, might feel that they should. Otherwise they leave their child or grandchild setting out on adult life with a debt that will just keep growing until they finish their course, start working and start earning enough to start paying it off.
But, while being in a fortunate enough position financially-speaking to step in and pay their way may seem the obvious solution, it might not be the best. A lot of that hinges on how quickly they are likely to clear the debt, if at all.
Student loans are actually written off 30 years after the April you were first due to repay. Gone, as though they never existed.
Two factors to consider when it comes to your decision to pay, or not, need to be:
1. The chance that they won’t have earned enough within the 30 years after they graduate to repay the loan in full.
2. Whether that money you would use to pay their fees could grow at a rate that far exceeds the student loan interest rate.
How to pay for your child’s or grandchild’s university costs
If all that is too much of an unknown and you would rather pay it off as they go through university life than saddle them with a debt that could last for the first few decades of their working life, then the good news is that with a little pre-planning you can.
This might be one for new parents or grandparents, but the fact is that by investing £175 into a Junior ISA each month, parents and grandparents could generate enough to help children cover their university costs by the time they reach 183.
A Junior ISA can provide a tax-efficient way to save money on behalf of a child, without being charged income tax or capital gains tax on any returns. In an illustrative scenario4, Fidelity demonstrates how choosing to invest £175 a month into a Junior ISA from the moment a child is born could hypothetically generate a pot worth more than £56,000 by the time they are 18 - enough to cover today’s university costs.
This assumes a steady 5% growth rate, no platform service fees on Fidelity Personal Investing Junior ISA products, and minus a typical annual management fund charge of 0.75% per annum.
For those with less to invest, a monthly saving of £100 could generate returns of £32,000 - more than three-years’ worth of tuition fees, while saving £50 a month could generate returns of £16,000.
Whether they end up going to university, or not, and instead start a business or travel the world, knowing that you have provided them with a nest egg with which to achieve their dreams will give you peace of mind.
3 Fidelity International, July 2021. Calculations are based upon investing into a Junior ISA for 18 years (216 months) with a 5% growth per annum, minus a 0.75% annual management charge (net 4.25%).
4 The projections are illustrative examples based on certain assumptions, and the returns shown are therefore not guaranteed. We have assumed a steady 5% growth rate in the examples minus a typical annual management fund charge of 0.75% per annum. Fidelity does not charge a platform service fee on Junior ISAs. We have not taken inflation into account which reduces the real value of the projected sums.
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment depends on individual circumstances and all tax rules may change in the future. Junior ISAs are long term tax-efficient savings accounts for children. Withdrawals will not be possible until the child reaches age 18. A Junior ISA is only available to children under the age of 18 who are resident in the UK. It is not possible to hold both a Junior ISA and a Child Trust Fund (CTF). If your child was born between 1 September 2002 and 2 January 2011 the Government would have automatically opened a CTF on your child’s behalf. If your child holds a CTF they can transfer the investment into a Junior ISA. Please note that Fidelity does not allow for CTF transfers into a Junior ISA. Parents or guardians can open the Junior ISA and manage the account but the money belongs to the child and the investment is locked away until the child reaches 18 years old. 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 a Fidelity adviser or an authorised financial adviser of your choice.
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