How to help your child through university
26 September 2012
Financial journalist for Standard Life
A new survey by Standard Life - ‘Generation Expense’ shows that 37% of parents expect to help with university tuition fees and just under a third are paying their child's accommodation and living expenses. We look at tax-efficient ways of saving to ease the burden in years to come.
Parents are having to dig deeper than ever this September as tuition fees for new undergraduates rise to as much as £9,000(1) a year in England and Wales, almost three times as much as the previous academic year. In Wales, the Welsh government will cover this increase for Welsh resident students while more fortunate Scottish students studying in Scotland won't pay for their tuition.
However, it's not just the fees that have to be met somehow. There are other big cash drains that go hand-in-hand with uni life including the cost of having somewhere to live during term-time. The National Union of Students (NUS) estimates the average cost of rent alone nationally at just over £4,500 (£5,069 in London)(2). With the maximum student maintenance loan standing at just £5,500 in England (£3,465 in Wales; £5,570 in Scotland), this year's intake are facing a financial shortfall.
Inevitably many children are getting help from the Bank of Mum and Dad. While the fee increase means many parents won't be able to cover the cost of their child's education, just putting a little aside as early on as possible in a child's life could make a big difference.
The key is to choose the right savings vehicle and start now: "Parents need to make sure their money works as hard for them as they are working for their children. That means being efficient with their savings and making the most of tax breaks offered by products such as ISAs," says Julie Russell, Head of Customer Relationships at Standard Life.
With an ISA, interest is paid gross so your savings grow faster. You can save a lump sum or a regular amount monthly - or do both. You can save up to £5,640 in 2012/13 in a Cash ISA, which is effectively a tax-free savings account.
If you have time on your side and are willing to take some investment risk for potentially higher returns, consider a stocks and shares ISA. You can save up to £11,280 in 2011/13, so couples can tax-efficiently invest over £20,000 a year.
Cash ISAs are relatively low risk but offer potentially lower returns. Stocks and shares ISAs allow you to invest your money to match your attitude to risk for potentially higher returns.
Figures from Moneyfacts suggest that, £11,280 saved in a stocks and shares ISA every year could be worth £66,025 in five years’ time. In eighteen years, this figure would have grown to £343,613 (assuming 7% growth and a 1.59% provider charge)(3). Ideally, you need to leave your money invested for at least five years to smooth out stockmarket fluctuations. Compare this the average cost now of £58,821, for a three-year degree including tuition fees and living expenses at a university outside London, as estimated by the National Union of Students (NUS).
Most parents will hate the idea of their child being saddled with debt, but it's worth remembering that parents shouldn't overstretch themselves. Students can borrow more cheaply than parents and only have to start paying back their maintenance loans (through income tax) once earning more than £21,000 in England and Wales (£15,575 in Scotland).
There may also be others ways to fund university: your child may also be eligible for a bursary or scholarship scheme. Or he or she could opt for a part-time degree and work at the same time.
The challenge for parents is how give their kids the best start while safeguarding their own savings: "The only way to achieve this is through careful financial planning," says Julie Russell.
If you're looking to start regular saving now to help fund your children through university, there’s a lot to consider and many decisions to be made. Here are five top tips to help:
- Be realistic about how much your child’s time at university is going to cost. Then decide whether it makes more sense to save for the entire cost, or to save a partial sum to help pay for an isolated cost such as living expenses.
- Think about the benefits of your child taking a student loan. These have a low rate of interest and repayments don’t have to start until your child starts earning over the new annual income threshold.
- Seeking the right financial advice on funding options is vital. A financial adviser can add real value in determining the level of savings required and helping to ensure those financial goals remain on track. They can also advise you on the best savings vehicle for you, such as an ISA, ensuring it is the most tax efficient option for you.
- Bear in mind that grandparents will often want to give their grandchildren the best possible start to help them achieve their educational ambitions too. And their support can be mutually beneficial. A grandparent who has built up investments may have concerns over inheritance tax (IHT). Anything in their estate over their available nil-rate band of £325,000 in 2012/13 could be subject to tax at 40 per cent. Helping fund their grandchildren’s education could also ease their own IHT concerns. If in any doubt, it's sensible to take financial advice around inheritance tax planning.
- If grandparents do want to contribute towards their grandchild’s education, then making a gift to a trust will allow them to retain an element of control as to how and when benefits are paid. This could remove any fears they may have over 'too much too soon', where outright gifts are made to a particular grandchild.
As with any investment the value of your fund can go up or down and may be worth less than what was paid in. Laws and tax rules may change in the future. The information here is based on our understanding in September 2012. Your personal circumstances also have an impact on tax treatment.
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