University costs: how parents and grandparents can help
With university fees set to rise to £9,000 a year in the 2012/13 academic year, here's how parents and other relatives can help future students.
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The Office for Fair Access (OFFA), an independent public body that promotes fair access to higher education, has now confirmed that the average English university tuition fees for 2012/13 will be £8,393. This puts a big financial burden on future students and their families.
And, of course, tuition fees aren't the only debts students face. There's accommodation, daily living costs, course materials and much more. The maximum maintenance loan in 2011/12 is £6,928 for students living away from home and studying in London. Outside London, this falls to £4,950, or £3,838 for students living in their family home.
So, at the highest-charging universities, the total cost of a three-year degree could amount to £45,000 or more. Most students borrow this money from the Student Loans Company (SLC), a public sector organisation which provides loans and grants to more than a million students each year across the UK. The SLC also collects loan repayments from three million people who've finished or dropped out of their course.
How can relatives help?
One acknowledged problem with the current system of university funding is that it 'normalises' debt and forces young adults to begin their working lives weighed down by huge financial burdens.
Hence, many parents, grandparents and other relatives want to lessen this load by providing financial support for students. Obviously, the best way to do this is to start saving as early as possible - the shrewdest parents do this as soon as babies are born, or even before!
But what are the best ways to support a student from being an undergraduate to graduating and entering work? The answer depends on your timescale, your personal financial situation and your attitude to risk. Here are five options to consider.
1. Get them to stand on their own two feet
In common with many students, I worked my way through university, earning about £100 a week for 20 hours of office work. Many parents believe that working part-time while studying is good for students, as it provides an introduction to working life, as well as cash earnings.
There are sneaky ways that parents can nudge their student offspring into work. Here's an idea from Danny Cox, head of advice at financial services company Hargreaves Lansdown: "My son starts his degree course this September, but I don't want to give him something for nothing. To encourage him to work his way through university, I have offered to match his wages pound for pound. Therefore, if he earns £40 a week doing, say, bar work, then I'll cough up another £40. It's better for him and me this way."
Parents can also offer financial incentives for academic success. For example, achieving a first might trigger the repayment of, say, 40% of a student's loan debt by proud parents. This enticement to study hard could be on a sliding scale: 30% for a 2:1 degree, 20% for a 2:2 and 10% for a third. No prizes for just passing or dropping out, though.
2. Savings: safe and secure
Then again, what if you do want to provide more upfront financial support to an undergraduate? If you have less than five years before sending a child off to university, or are risk-averse and don't want to invest in shares, then a savings account is a good place to start. Alas, with savings rates hovering around record lows, it's hard to earn more than 3% a year on spare cash.
By locking away cash in a fixed-rate bond, you can boost your rate. For example, five-year savings bonds pay between 4% and 5% a year to patient savers.
However, this interest is taxable, so you may be better off earning tax-free interest inside a cash ISA. The maximum contribution to a cash ISA is £5,340 in the 2011/12 tax year, so two parents could put up to £10,680 a year into cash ISAs to help fund a child's further education.
3. Investing: higher risk, potentially higher returns
If your child is at least five years from university, and you are willing to take a ride on the stock market rollercoaster, then you could invest in company shares.
By far the best tax shelter for this is a stocks and shares ISA. If you haven't opened a cash ISA this tax year, then you can invest up to £10,680 into one. This money can be used to buy individual shares, low-cost index-tracking funds, managed unit trusts or other equity investments. Also, you could invest in corporate bonds or bond funds paying a yearly income of, say, 6% or more.
All of the capital gains (selling profits) and income earned inside ISAs are tax free, so you don't need to declare these gains on your tax return.
A less risky option would be to invest in employee share schemes operated by your employer. The most popular, Save As You Earn (SAYE), allows you to save anything from £5 to £250 a month for three, five or seven years. When your SAYE plan matures, you can use this lump sum to buy discounted shares in your employer. However, if this share price is unattractive, then you simply take your tax-free cash and walk away.
Share Incentive Plans (SIPs) are another popular employee scheme. These allow you to buy up to £1,500 a year of shares free of income tax and national insurance contributions. In addition, some SIPs offer 'buy one, get one free' shares, or even completely free shares. Over time, these can build into tidy sums which you can use to help your child through his/her degree.
If you're aged over 55, another option would be to withdraw some of the 25% tax-free cash you are entitled to take from your pension. For example, if your pension pot is worth £160,000, you could withdraw up to £40,000 in tax-free cash, some of which could go towards university fees. Then again, don't impoverish yourself in retirement purely to give your child or grandchild an easier ride.
4. Tax havens for children
Child Trust Funds (CTFs) were launched in April 2005 to encourage parents and other relatives to save for children. Sadly, spending cuts meant that CTFs were scrapped in January 2011.
However, if your child already has a CTF, then parents, grandparents, other relatives and friends can continue to contribute to this tax haven until the child reaches 18. You can pay in a maximum of £1,200 a year into a CTF, either as a lump sum or via monthly contributions. This can be saved in cash or used to invest in shares, funds, bonds, etc.
The proposed replacement for CTFs, dubbed the 'Junior ISA', is expected to be launched on 1 November. These are expected to allow relatives to save up to £3,000 a year on behalf of a child, with the pot going to the child when he or she reaches 18.
Another simple tax haven is the bare trust. This legal instrument allows adults to gift money and other assets to children, while still retaining control of these assets. Any income or capital gains are the child's and, therefore, are unlikely to be taxed (unless they exceed the individual tax allowance). This tax break makes bare trusts especially useful for grandparents.
Be warned: a child takes total control of a bare trust on his/her 18th birthday, so it could be splurged on a gap year holiday...
You could choose to borrow against your home to raise money for further education. One option is to remortgage your house with a larger loan, releasing cash for later use. Another option is 'equity release' - selling part of your home to an insurance company in return for a lump sum or income.
One thing you need to bear in mind with equity release and similar schemes is that they charge higher interest rates than mainstream mortgages. You could also consider offset mortgages, which allow homeowners to set off their savings against their mortgage debt and pay interest only on the difference.
For instance, a £150,000 mortgage and offset savings of £50,000 would charge interest only on the £100,000 gap between the two. In effect, offset savings 'earn' tax-free interest at the mortgage rate, making them particularly attractive to those in the 40% and 50% tax bands.
Homeowners can withdraw money from their offset savings when needed for university costs, making this a cheap way to borrow.
Finally, if you're thinking of borrowing to fund a child's university education, you might want to think again.
After all, the SLC interest rate is set at the annual Retail Prices Index (RPI) measure of inflation each March. In March 2011, this was 5.3%, which will be the interest rate for loans in 2011/12. If you can't borrow cheaper than this, then let the SLC take the strain.
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Please note that articles on MSN Money do not constitute regulated financial advice, which recommends a course of action based upon the specifics of your personal circumstances. The articles are intended to provide general personal financial information. We urge you to consult an Independent Financial Adviser (IFA) before making any important decisions about your finances. You can search for an IFA in your local area. Any statement regarding financial services products and tax liability is based on legislation and tax practices as at 6 April 2011, which is, of course, subject to change. The value of any tax benefits or reliefs depends upon the individual circumstances of the investor. When investment performance is mentioned you should remember that past performance is no guarantee of future performance. Where products have an underlying investment content, in many cases the value of the investment can fall as well as rise. For with-profit based investments, there is no guarantee as to the level of bonuses that will be declared, if any. Where mortgages or secured loans are explained do remember that your home is at risk if you do not keep up repayments on a mortgage or other loan secured on it. All mortgages are subject to underwriting, status and are not available to people under the age of 18.
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- Yes - from my savings
- Yes - I could put it on credit
- Yes - I could borrow from family or friends
- No - raising that kind of money in a month would be impossible