Parents start saving for university before their kids are even born

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Congratulations. You got the grades. Or nearly got the grades and managed to blag it. Or your kids got the grades.

That will be £51,000.

That’s the average debt a university student starting their course in September should expect to incur over the course of their studies according to data from the Institute for Fiscal Studies. The staggering total includes tuition fees coming in at almost £30,000 as well as accommodation, utilities, food, travel, studying materials and other costs.

In fact, with the rate of interest on student loans rising to 6.1 per cent next month despite the current Bank of England base rate stuck fast at the all-time low of 0.25 per cent, because of the way and point in time that interest is tied to the rate of inflation.

Kicking in as soon as scholars begin their first term, they’ll have already accrued £5,800 worth of interest charges by the time they graduate.

Even before this hike, total student debt has already hit £100bn. That’s higher than the nation’s total credit card debt.

“In a rising inflationary environment, student loans which have traditionally been seen as ‘good debt’ are all of a sudden sliding into what could be described as ‘bad debt’,” says Liz Alley, Head of Financial Planning Operations, at Brewin Dolphin. “To start adulthood with a higher education debt of a possible £56,000, with a punitive 6.1 per cent interest rate, will have a negative knock-on effect for a generation of graduates. Even if they don’t repay it in full, the repayments will burden graduates with a 9 per cent drag on their earnings for the next 30 years.”

She warns that students should apply only for what they need – just to cover fees or to cover the cost of living too.

The reality is that three quarters of those with student loans won’t end up paying back everything they owe despite making repayments into their 50s, before the government writes off the debt after 30 years.

But unsurprisingly, the number of pupils expecting to go on to higher education has dropped to an 8 year low.

Then there are the parents. Setting aside the fundamental question of who should be paying for all this, an astonishing 40 per cent of parents whose children have yet to be born are already saving for their university experience.

Most expect to have saved £900 by the time the baby arrives and a fifth will have set aside £2,000 or more, according to new data from comparethemarket.com.

The problem is, the two thirds of parents who are very generously willing to help fund higher education are largely doing so by setting aside cash in bog standard savings accounts. And with interest rates at rock bottom, that’s just not going to cut it.

So what should you do to have a snowball’s chance of having enough to achieve those degree dreams one day? The costs aren’t insurmountable.

Junior ISA – cash

You can currently save up to £4,128 a year into a Junior ISA, which your child can then access when they are 18 years old. “At the moment, the best interest rate on the market is 3.25 per cent,” says Colin Haywood, Wealth Planning Director at Sanlam UK. “Assuming you save for 10 years, achieving that rate of interest, you will have saved £49,427 – enough to cover the fees, and more at today’s rates. The obvious benefit of an ISA over any other form of savings, is that it’s tax free.

Junior ISA – stocks and shares

But you can open a cash Junior ISA and a stocks and shares in any one year, as long as you stick to that allowance, and while you know where you are with cash, the risks, and potential rewards are higher when you invest. “Cash savings accounts are still king when it comes to the main way parents saved specifically to help towards their child’s future, but it’s worth considering the benefits of investing in an investment company,” suggests Annabel Brodie-Smith of the Association of Investment Companies (AIC).

“An investment company gives investors access to the long-term potential of the stock market and, by investing in a range of companies on your behalf, they spread your risk and offer professional fund management. If you had regularly invested £25 per month in the average investment company over the last 18 years, this would have grown to over £16,000, a third of the cost required to clear the average student’s debt and £50 per month would have grown to over £32,000.

For those parents who are fortunate to be able to save £100 a month over 18 years this would have grown to more than £65,000, enough to currently clear their child’s student debt and have some money left over.”

Danny Cox, Chartered Financial Planner for Hargreaves Lansdown adds: “The principles of portfolio picking for a Junior ISA are the same as for an adult ISA: spread your investment across the markets and sectors where you believe there are decent prospects for the long term and then choose good quality managers to work for you.”

The longer the “investment horizon”, the more scope there is for parents and grandparents to be adventurous with their Junior ISA investments. In which case, Cox suggests funds including Stewart Investors Asia Pacific Leaders, River & Mercantile UK Dynamic Equity, Standard Life Inv Global Smaller Companies and Lindsell Train Global Equity.

For those preferring more moderate risk, he points to the CF Woodford Equity Income fund, Pyrford Global Total Return, Newton Real Return, and River & Mercantile UK Dynamic Equity.

Pension lump sum

For parents particularly committed to funding their offspring through higher education, but without thousands lying around, there’s always the pension fund to consider.

“It makes a great deal of sense to maximise your pension savings now, with the view to potentially using some of it to fund tuition fees in the future,” suggests Haywood. “Not only is it a tax-efficient way to save, you currently have the freedom to access those savings when you turn 55 years old, and you’re entitled to take the first 25 per cent of those savings tax free.

“You would need a pension pot of at least £200,000 to give you a tax-free lump sum of £50,000, although that doesn’t account for how much you will need to live on in retirement, and you should seek advice to ensure you don’t run out of money.”

Grandparents

Then there’s the other source of family cash. “The UK’s over 65s are sitting on an estimated housing wealth of around £1.3 trillion, with many having cash savings as well,” notes Alley. “Many grandparents may be looking to help grandchildren in their will. However, if they are able to access capital now, they could both benefit from seeing their grandchildren enjoy their living legacy, as well as help them reduce their inheritance tax liability.”

Grandparents can gift up to £3,000 each a year without incurring inheritance tax, or make a larger contribution, though if they die within seven years from the date of the gift it may fall into the IHT net at (40 per cent). Or they could use a trust to gift money, which could both reduce their IHT bill and allow them to control the use of the money.

None of these are straightforward solutions though, and advice from an independent financial adviser is a must, preferably many years before results day dawns.