How to save for university costs — in just 10 years

The cost of higher education has soared over the past 15 years, with today’s generation of students paying far more than their parents to go to university and study for a degree.

For those starting courses this September, tuition fees will be £9,535 a year in England and Wales and £4,855 in Northern Ireland (tuition fees are not charged to Scottish students, provided their degree course is at a Scottish university). On top of this, living costs for those moving away from home can add a further £12,000-plus a year to the bill. Government loans are available, but many parents want to help their children to reduce the debts they will graduate with.

The good news is that it is possible to build a sizeable savings fund to meet some or all of these costs, providing you start early, plan smartly and save regularly.

Some parents start savings when their child is first born. But if you didn’t have the spare cash, or the headspace to weigh up the pros and cons of different tax-saving vehicles and investment plans, don’t worry - you haven’t left it too late.

Below is our smart plan for building a university savings fund over a 10-year period. This should be sufficient time to build a decent savings fund, and saving over this longer timeframe allows parents to invest in growth assets, such as equities, which may be more volatile but have the potential to deliver higher returns.

• See our current offers to help make your money go further
• Get expert insights straight to your inbox with our free investor emails 

Commit to monthly savings

It can help to have a future savings goal in mind when it comes to setting a monthly target. If you are looking at tuition fees of £9,545 and living costs of £12,000 a year, the typical three-year degree will cost almost £65,000. Of course, this is the cost today. For those with primary-school-aged children, inflation is likely to push up prices, and given the current funding crisis in higher education, there is no guarantee that tuition fees won’t increase in future.

For parents with more than one child, these can seem like daunting figures.

But saving regularly over a decade can help you accumulate a sizeable sum. Fidelity’s online Stocks and Shares ISA calculator allows parents to see what they might end up with, with a combination of regular savings, one-off contributions and investment growth.

For example, saving £450 a month with ‘modest’ investment growth of 5% each year could produce a pot of £65,000 after 10 years.¹ But don’t be put off by thinking you can’t afford to save enough to cover the full amount so it’s not worth saving at all. Even small amounts put aside each month can help you build a decent saving fund that will make a real financial difference to your children later on — and take the strain off your own finances when they start their course.

Putting aside £100 a month, for example could produce a savings fund of almost £15,000,² which will go a long way to giving your kids a head-start when it comes to university costs.

• Go to the Stocks and Shares ISA Calculator

Choose the right savings vehicle

Tax-efficient ISAs can help parents save for future education costs. All adults have an annual £20,000 limit, which can be saved into either a stocks and shares or cash ISA. Stocks or shares can be more volatile, as recent market events have demonstrated, but over a 10-year period equities have historically produced higher returns than cash, and as such are better placed to ensure savings keep pace with inflation.

There is no capital gains tax to be paid on any investment gains within ISAs. In addition, there’s no further income tax to pay on withdrawals, or on any dividends or interest earned.

Junior ISAs are also available. Parents can save a maximum of £9,000 into these plans a year for each child, on top of their normal ISA allowance. But the potential downside of these accounts is that your child gets control of the money on their 18th birthday and may have different ideas at that point on the best way to spend it.

Regular ISAs give parents control of how the money is both invested and spent. And if your child decides higher education isn’t for them, you keep control of these assets, to help them at a later date, or redeploy some for your own retirement.

Select your investments

When opening an ISA, you need to choose where your money is invested. On the Fidelity platform, for example, there are hundreds of different funds to choose from, covering a range of assets, geographic markets and investment styles.

The Select 50 is a curated list of 50 funds chosen by investment experts, designed to narrow this choice and make investors’ lives easier. This is a high-quality list of funds, which are selected based on dedicated research and performance metrics. The list covers both active and passive funds, as well as investment trusts and exchange traded funds (ETFs). These funds cover different geographic regions and all major asset classes, such as equities, bonds, mixed-asset funds and even a cash option, allowing parents to tailor their choice to their own particular risk tolerance and savings goals.

Automate and adjust

To help stick to the savings habit, set up monthly direct debits into your chosen account (or accounts). Review contribution levels regularly, and when you get a pay rise, boost how much you pay in.

It also makes sense to review how these investments perform on a regular basis and rebalance when necessary. As these savings grow, you may want to diversify holdings further. When your children are in the last few years of secondary school you might think about moving a portion of these savings into more stable and lower-risk assets, such as bonds and cash, to protect against sudden stock market movements.

Get the family involved

University savings don’t have to come solely from parents. Grandparents, godparents or wider family and friends may also contribute, and you may want to suggest investments into a fund, rather than expensive Christmas or birthday presents. Even small amounts can build up if made on a regular basis. In addition, some wealthier grandparents might benefit by utilising annual gift allowances to reduce future inheritance tax (IHT) bills.

• Read: 5 tax hacks: how to make financial gifts without a big tax bill

This can also be a useful way to start a conversation with your children as they get older, about money and future savings goals. Many will have to grapple with the realities of bills, budgeting and debt when they start university. This can be a good way to help them understand personal finance, investments and making smart spending choices.

Understand how student finance works

Student finance has evolved, and is likely to be very different to the loans and grants that were available back when today’s parents were enjoying Freshers’ Week.

Student loans operate differently to other forms of commercial debt, such as bank loans or credit cards. Repayments depend on income, with graduates paying a fixed portion of their salary each month, rather than a portion of the debt. This means that two graduates on the same salary will see the same monthly deduction from their wages, regardless of whether one owes £65,000 and the other has £10,000 outstanding.

It’s also important to remember that if student loans are not cleared after 40 years, they are cancelled.

However, the most recent changes to the way repayments are calculated mean graduates start repaying at a lower salary and will make these repayments for an extra 10 years — with loans lasting 40 years in total, not 30. As a result, reducing the amount your children need to borrow at the outset can make a significant difference to their finances later in life, even if you can’t cover all costs in full.

If you’ve got a burning question you want to ask, why not drop us a line. Ask us your question. 

• More on Saving for university: building a fund for your child
• More on How to pay for a wedding in 10 years
• Open a Stocks and Shares ISA

Source:

^1,2 Fidelity Stocks and Shares ISA Calculator, based on a growth rate of 5% each year.

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 or Junior ISA and tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a Junior ISA will not be possible until the child reaches age 18. Select 50 is not a personal recommendation to buy funds. 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.