After another record-breaking set of A-level results, more students than ever are set to head off to university this autumn.
Admissions body UCAS says that there were 682,010 applicants as of 30 June 2021, up by 4% on 2020.
If you have a child or grandchild planning to study a university course either this year or in the future, it can help to have a good grasp of the financial implications. So, read on for details of the cost of university, what debt students can expect to graduate with, and how you might be able to build up a fund for your budding undergraduate.
How much will a university course cost?
In 2021/22, the maximum tuition fee for UK universities is £9,250 a year. As most institutions charge this amount, a student loan for a three-year degree would be £27,750.
In addition to this, students have access to maintenance loans that are designed to cover living costs. These are means tested based on household income.
In 2021/22, if your household has an income of more than £70,000 a year, the maintenance loan available will be £3,516 a year if the student lives at home, or £4,422 if they live away from home. If they study in London the loan is £6,166 a year.
Considering both types of loan, a child or grandchild on a three-year course living away from home could easily graduate with a debt of more than £40,000.
Interestingly, a recent study found that both students and parents underestimate the debt that a student will typically have when they graduate.
The study by the Association of Investment Companies (AIC) found that:
- Students planning to go to university expect they will finish their course with average debt of £37,803
- The average parent expects their children to leave university with debt of £24,852.
Both these estimates fall short of official figures, which indicate the average debt of a student who finished their course in 2020 is £45,000.
Investing rather than saving could be a good way to meet university costs
If you have a child or grandchild planning to go to university then you may have considered putting money aside to build up a fund to help them through their degree.
One of the most common ways to save for a youngster is through a Junior ISA (JISA). In the 2021/22 tax year you can contribute up to £9,000 to a JISA and benefit from tax-free returns.
Despite the fact that saving for a child is often a long-term strategy – if you save a university fund from birth you could have the best part of two decades to build up a fund – most people are still saving for children in cash.
According to the latest government figures, £974 million was subscribed to Junior ISA accounts in 2018/19, around 57% of which was in cash.
Given that the stock market has tended to outperform cash over long periods of time, those parents and grandparents saving in cash will likely have built up a lower pot than those taking advantage of stock market returns.
According to Morningstar data, over the 18 years to 30 June 2021, the FTSE 100 and MSCI World Index are up 240% and 487% respectively. Compare this to a 43.5% return for cash over the same period (represented by ICE LIBOR three-month GBP).
Research by interactive investor in 2021 found that the value of the average junior ISA portfolio of a 17-year-old on their platform is £19,366. Of this, only 9% (£1,700 on average) was held in cash and the remaining 91% (£17,683 on average) was tied up in investments.
While this amount may not be sufficient to pay for a three-year degree, it’s clear that building up money in a tax-free wrapper for a child can grow into a decent sum – particularly if you invest rather than save that money.
Bear in mind that, while Junior ISAs can be a fantastic way of building up a lump sum, there are some drawbacks. For example, at age 18 the child takes over control over the ISA and you, as parents, no longer have any say over the proceeds.
There are other tax-efficient ways to save for university fees which allows you to keep control of the funds and to distribute the capital when appropriate. As always, speaking with a financial planner can help to identify the most appropriate approach for your family.
A cautionary word about paying student debt
If you decide to accumulate a significant sum – perhaps in a Junior ISA – for your child or grandchild, you may immediately assume that this should be put towards paying off their student loans.
However, there may be better ways for you to provide a financial boost other than paying off their debt.
Graduates only begin to pay back their loans when they earn a certain threshold income (this is typically £27,295 in the 2021/22 tax year).
For example, if your child or grandchild graduates this year and gets a job paying £25,000 a year, they won’t pay anything towards their debt.
If they earn £30,000 a year, they will normally only have to repay 9% of their income above the £27,295 threshold (equivalent to £2,705) each year. This is around £243 a year.
Assuming the graduate earned this sale salary for 30 years, and that the threshold didn’t change, they would only have repaid around £7,300 of their debt at the end of 30 years. At this time the government would write off the outstanding loan, which could be £30,000.
As students only pay back the loans when they earn a certain income, it may be beneficial to use the JISA pot for other purposes – perhaps as a house deposit or as a capital injection to help your child or grandchild to set up a business.
Get in touch
If you’re interested in saving for a child or grandchild, we can help. Get in touch by email email@example.com or call us on 01189 876655.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.