Interactive Investor

Spend or invest Junior ISA funds at university?

27th July 2023 09:02

by Myron Jobson from interactive investor

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A balance between short-term support amid ballooning costs with an eye on long-term financial goals is crucial.

  • The average value of a stocks and shares Junior ISA portfolio held by 17-year-olds on interactive investor is £21,775 on average.
  • The figure rises to an average of £22,932 among 18-year-old account holders who have graduated on to an adult stocks and shares ISA from a Junior ISA.

At a time when the value of some university degrees has sadly been brought into question and high inflation has pushed up the cost of a degree, life isn’t getting any less stressful ahead of A-level results day.

And it’s more stressful for some than others. Some fortunate teenagers are set to receive a significant financial leg-up in the form of a Junior ISA, which is theirs to access for the first time and spend how they see fit when they turn 18.

On interactive investor, the average value of Junior ISA accounts held by 17-year-olds is £21,775, rising to £22,932 among 18-year-olds who have graduated on to an adult ISA.

Building these sums of money over the long term can take discipline and process. For example, using a scenario, which is never guaranteed, £50 per month invested over 18 years generating 5% per year (also not guaranteed) would leave you with a pot of £17,533.

Many young adults are set to receive a healthy cash pot, but should those who are university-bound use the funds?

Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “Since Junior ISAs are designed to provide financial support for a child’s future, they can be used to cover the ballooning cost of university education or saved and/or invested to foot costs or hit financial goals further down the line. It could be invested over the long term to help your child take their first step on the property ladder for example.

“Inflation has driven up the cost of being a student, with price rises in food, energy and rents, as well as student basics such as books, dwarfing the rise in the maximum student maintenance loan. Put simply, student loans do not stretch far enough to cover the heightened cost of living. This will force many students to make stark sacrifices to maintain financial buoyancy, which could lessen their quality of life at university. Some students will take on paid work during term time to support their studies.

“Many students fortunate enough to have a cash cushion in the form of a Junior ISA will be forced to raid it to help ease the financial burden of higher education and meet day-to-day living costs.

“A substantial cash pot can help put children on a strong financial footing when they reach adulthood, but once it gets moved into their name when they turn 18, the child can spend the money as they see fit. That could be used for university, but the point of ISAs is that it’s in your name to do whatever you wish with. Some parents might find this uncomfortable, but it’s all a learning process and it’s why conversations about money from a young age are a good idea."

Would overpaying your student loan make a difference?

“The next generation of students in England face even more challenging prospects after graduation because of subtle tweaks to the student finance regime, which will have a massive impact on loan repayment requirements. The reduction in the student loan repayment threshold from £27,295 to £25,000 and the extension of the repayment term from 30 years to 40 years, means that some will repay a lot more of their loans compared with earlier graduates.

“The government expected that around 20% of full-time undergraduates starting university in 2021-22 would repay them in full. They forecast that after this it would increase to 55% among new students from 2023-24 owing to the new reforms.

“In some instances, overpaying will barely scratch the surface of what’s really needed to significantly reduce the size of the loan, and therefore, pay less back in interest. Bear in mind, however, that student debt is wiped after 40 years for the new crop of students starting in September.

“It is worth remembering that overpaying your student loan won’t make a difference to your monthly repayments because they are solely linked to your earnings.

“While you might not have any debts or financial commitments when you are young, it is possible that in future you will need the money for a mortgage, to buy a car, or even to start a business. Using money to overpay your student loan now could mean that you’d have to borrow it back elsewhere in future at a higher rate of interest.

“While it involves a bit of crystal-ball gazing, it is worth gauging the potential future earnings of your chosen profession. Those who are confident about securing a big wage packet might benefit from making overpayments to save on the cost of interest. But this should be taken in the context of your broader financial position.

“The opposite is true if you foresee a significant fall in your income, or if you have a modest wage. In this case, you might benefit from not making any overpayments. Bear in mind that 40 years is an awfully long time to wait before the loan is written off.”

You could be better off by prioritising investments

“You could achieve a rate of return from investing that trumps the interest rate you’d be paying on your student loan. But there are no guarantees with investing. Investing comes with inevitable risk, but taking a long-term view means you can smooth out some of the highs and lows while benefiting from the long-term potential that comes with this approach. Even if you can afford to invest only a small amount, time will do all the heavy lifting for you.

“It may make sense to do both – investing in your future while also paying down your debt.”

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

Please remember, investment value can go up or down and you could get back less than you invest. If you’re in any doubt about the suitability of a stocks & shares ISA, you should seek independent financial advice. The tax treatment of this product depends on your individual circumstances and may change in future. If you are uncertain about the tax treatment of the product you should contact HMRC or seek independent tax advice.

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