Alice Guy examines how to invest for university costs, how much you need to save, how student finance works and whether you should help your kids pay off student loans.
With exam season in full swing, many students will soon be heading off to university: it’s a hugely exciting milestone. But, for many parents, it’s also time to take a deep breath and begin to raid the savings account.
It’s a key moment for the Bank of Mum and Dad. Those who have been investing for university costs will hopefully be in a better position than most. They will be able to dip into their funds, without impacting too much on their disposable income.
Thankfully, there’s some help available in the form of student loans. Students won’t have to pay them off for a while, but they do attract some punishing interest, possibly rising to 12% in September.
Here we take a look at how much university costs, how student finance works and offer three tips to help you invest.
How much does university cost?
University costs vary significantly across the country.
In England, universities can charge fees of up to £9,250 per year; in Wales the limit is £9,000, while in Northern Ireland the maximum is £4,160. Meanwhile, Scottish students currently have the best deal with no fees to pay.
On top of the fees, student finance website savethestudent reveals that average student living costs are around £810 per month, or £187 per week, although it varies hugely by area. It all mounts up and the average student spends between £9,800 to £11,000 per year on living costs including rent, food, transport and clothes.
In England, students spend a grand total of around £19,500 per year on both fees and living costs: £58,500 over the length of a three-year course.
How does student finance work?
Student finance is complicated and usually based on parental income.
All UK students can apply for a loan to cover their fees and a maintenance loan for their living costs.
If English students are living away from home outside of London, they can currently borrow a maximum maintenance loan of £9,706. Students based in London have a slightly higher loan limit of £12,667.
But the maintenance loans slide away as parental income increases. Students outside London with total household income of £50,000 will receive £6,234 maintenance loan, while those whose parents earn over £70,000 will only receive £4,524.
The figures are slightly different if you’re based in Wales, Scotland or Northern Ireland.
The government expects parents to top up their child’s budget. So, a higher earning couple need to give their child around £5,500 per year to help cover living costs. And even students from low-income families may still have a shortfall, depending where they live.
In total, higher earning parents might need to save £16,500 to help their kids out with a three-year course, £22,000 for a four-year course and £33,000 to £44,000 for two kids going to university.
How much do students repay?
So, how much do students need to repay once they’ve finished their course?
Interest rates on student loans varies between 1.5% and 4.5% (RPI plus 3%), depending on earnings, and the highest rate may rise to an enormous 12% in September (the government is currently considering capping this rise). The highest interest is only charged to earners on at least £49,130 per year.
However, the figures aren’t all they seem. Many students will never have to pay off their loans as repayments are based on their income and they only start making repayments if their income is over £27,295 per year. Repayments are 9% of income over the repayment threshold.
The balance is currently wiped after 30 years and a large proportion of students never end up repaying their student loans.
In fact, the student loan works more like an extra graduate tax: a graduate earning £50,000 would have to pay an extra £2,043 per year compared to a non-graduate.
The rules are slightly different for Scottish students.
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Three tips for to invest for university costs
Here are three tips for parents, planning to help out with university costs.
1) Crunch the numbers
It’s hard to be exact, but if you have two kids, then you’ll be able to work out a rough idea of likely university costs.
Thankfully, if you’ve got two kids, the costs are spread out over six or eight years, so you won’t need to find all the money in one go. And you may not need to save the whole amount as you’ll hopefully keep earning and contributing once they’re at university.
And if the saving for the total bill looks unrealistic, then remember that students may be able take on a part time job during university or even take a year out to help towards the costs.
2) Think about your investment time horizon
If you’re planning to invest for university costs then the best vehicle will depend on how long you’ve got to save.
If your children are small, then you have a long time to save and it may be worth considering a long-term investment option such as a Stocks and Shares ISA. Stocks market returns are currently in the doldrums but they tend to outstrip inflation in the long run.
If you’re not sure what to pick, then take a look at our rated Super 60 funds. UK FTSE 100 companies, in particular, tend to pay regular dividends, so you’ll be able to benefit from dividend income as well as capital growth. You’ll have time to ride out stock market volatility and hopefully build a decent nest egg.
Older parents could also consider using their pension pot to help them invest. You’ll get tax relief on pension contributions and could withdraw 25% of your pension pot tax free when you turn 55 (rising to 57 in 2028). Watch out though because the pension rules change once you start to withdraw money and you’ll only be able to contribute £4,000 per year.
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Medium-term savers could consider a mixed-asset fund that focuses on large blue-chip companies and short-term bonds. Bonds tend to be less volatile than stocks, while beating cash returns over time. Possible options that are rated on ii’s Super 60 funds list include the ever-popular Vanguard LifeStrategy funds and Capital Gearing (LSE:CGT) investment trust.
If your kids are off to university in the next couple of years, then you may decide to stick with a high interest savings account and hope that interest rates continue to increase. In the short term, stock market volatility might be too big a risk.
3) Think carefully before paying off student loans
If you’ve been investing for university costs for years, then you might have enough to help your kids pay off their student loans. But is it a good idea?
For many parents with money to spare, paying off student debt might not be worth it.
If your kids turn out to be lower earners then, chances are, they might never have to repay the full student loan as it’s wiped after 30 years. On the other hand, if they end up being the next Bill Gates then they can pay off their student loans in no time and interest rates aren’t too much of an issue.
It’s actually the middle earners that are potentially the worst off. It will take them a long time to pay off their loan and they may well have to pay it all back in the end.
But still, it may not be worth paying off those student loans. Young people are likely to have other priorities in their 20s, like saving up for a house deposit. And helping them get on the housing ladder could save them far more in potential rent than they pay in student loan repayments.
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