As 18-year olds across the UK prepare to receive their A-level results tomorrow, the high cost of university will be weighing heavy on their minds – and those of their parents.
For many, university life will come at a hefty cost with a growing burden of student debt to contend with; currently the tuition fee cap stands at £9,250 a year. Living costs, of course, need to be added to this number, with some students estimated to end up saddled with starting debts of over £57,000.
To compound matters, students will face an eye watering interest rate of 6.1 percent on their loans as soon as they take it out – a 33 percent hike from the previous year. Interest charged on student loans is linked to the RPI measure of inflation from March each year (for March 2017 RPI stood at 3.1 percent) plus a maximum of 3 percent, depending on how much a student earns.
Many parents will understandably be uneasy at the thought of their children being burdened with such a large, long-term debt and may be tempted to help cover the cost upfront. According to Maike Currie, investment director for Personal Investing at Fidelity International, this is achievable with a bit of forward planning.
“By investing £185 a month into a junior stocks and shares ISA as soon as your child is born, coupled with investment growth, could give them over £57,000 by the time they turn 18″, she advises.
But before parents rush to pay for the cost of a degree in advance, it is worth understanding how the student loan system works and weighing up whether to pay now or take out a student loan.
“It’s worth remembering that student loans are different from other types of borrowing. A sensible way of viewing a student loan is to think of it as a ‘graduate tax’. Just as higher earners pay a higher rate of income tax, so too now do graduates who pay a higher level of interest”, Currie said.
Graduates only begin paying their loan off when they start earning £21,000 per annum or more, at which point they pay interest and/or repay capital at 9 percent of their income above this threshold. However, the crucial difference between a student loan and any other debt is that what remains unpaid 30 years after you become eligible to start repayments will be written off. With student debt expected to exceed £57,000, it’s likely that a significant proportion of students won’t re-pay their loan in full.
To all parents worrying over the cost, Currie advises that its best to Be prepared to supplement the student loan.
” If you are in a position to do so, you may want to provide your child with some support, such as helping with living expenses. Depending on where they go to university, reasonable living costs may be higher than the total amount your child is able to borrow”, she said.
There is also the option of a JISA. “While it may be too late to reduce the burden of student debt for those about to start their university degree, it’s never too early for parents of younger children to think about putting something away. Also, if your child chooses to take out the loan instead, you can earmark the accumulated pot for the down-payment on a property after they have graduated. Remember though that when your child turns 18, the JISA becomes their ISA and they assume full control, so it’s important to educate your child about how to use this money wisely”, Currie said.
A third tip is to ask for help. Currie advises talk to grandparents if possible:
“Parenthood can be expensive and, with household incomes under pressure, many parents may simply not be able to afford to contribute to higher education costs. If this is the case, the solution could be to call upon the bank of Grandma and Grandad. By gifting money to their grandchildren, they could even reduce their inheritance tax bill.”