The cost of a university education is soaring and parents often foot the bill. It's important to begin planning for this as early as possible, says Emma Lunn.
New parents knee-deep in nappies may feel that the moment they pack their offspring off to university is a long way off but now's the time to start thinking about the cost. Today's students have it tougher than ever before. Tuition fees, accommodation and living expenses mount up considerably over the course of a three- or four-year degree and leave young people starting working life with significant debts.
This autumn, the upper limit English universities can charge for tuition will increase to £9,250 a year. This means a standard three-year undergraduate course can cost up to £27,750 in tuition fees alone. However, that's just the beginning. Maintenance grants have now been scrapped for new students meaning that young people without adequate financial support will also need to take out maintenance loans to pay for accommodation, food and living expenses. Alternatively, they will have to consider getting a job, which may have an impact on their ability to study.
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Taking into account the interest rates on loan repayments, the Intergenerational Foundation (IF), a think tank, has calculated that graduates could end up repaying £54,000 in total. However, it's worth noting that only a fraction of workers will end up repaying this kind of money, since graduates only start repaying student debts when they're earning £21,000 a year or more. Any remaining debt is written off 30 years after graduation.
Of course, these are just the figures for now. If you're the parent of a young child, student finance may be completely different by the time they're old enough to go to university one of the reasons why this area is such a financial-planning headache.
Start planning as early as possible
Rather than see their children graduate and start their working lives saddled with huge debts, many parents prefer to contribute to their university costs. This might be by paying tuition fees upfront or helping their child reduce what they owe when they finish their degree. However, only a few will be able to afford to do this out of their normal income, so most parents will need to start planning for this as early as possible.
"You should start by getting an understanding of how much money you will want to contribute and when. This will allow you to plan more effectively and to understand whether you are on target," says Patrick Connolly, certified financial planner at Chase De Vere. "You should review likely costs regularly and also take account of changing circumstances whether that is changes to university fee levels or in your circumstances, such as if you have more children who in the future may want to go to university as well."
Still, even working out a target figure to amass by the time your child leaves school isn't completely straightforward and there are many difficult questions to take into account. How much will costs have risen by the time your child is ready to go to university? How much can you afford to save and for how long? What will you do if certain unwelcome life events such as redundancy, divorce or illness happen along the way?
Many of these events are impossible to predict, so the best you may be able to do is to steadily put aside a reasonable amount earmarked for education fees many experts suggest parents start saving or investing when their child is born. If they don't go to university the money can be spent on a house deposit or something else, or simply stashed away. But where should they invest the money?
"There is no one investment strategy or product that does the job for everyone it depends on each family's circumstances," says Connolly. "If you are saving over a short period or want to avoid investment risk then you should stick with cash savings, searching around for competitive rates and using tax-free cash Isa wrappers. However, over the longer term, stocks and shares are likely to give a better return than cash."
The power of pound-cost averaging
The most manageable way of building up a large fund is to drip-feed money into the market over time. Drip feeding an investment means you benefit from "pound-cost averaging"; regardless of whether markets are going up and down, you buy a consistent amount (in pound terms) of shares and this helps smooths out volatility over time.
"Time is your friend when it comes to saving for a goal, as it gives you the chance to save more and for that money to grow for longer, with the power of compounded returns boosting the total amount saved," says Martin Bamford, chartered financial planner at Informed Choice. "The length of time between the arrival of a baby and their start at university means parents can afford to take more investment risk, with the potential for higher returns than cash."
For example, if you could have spared £50 a month over the past 18 years (a total of £10,800) and invested it in the average investment trust you'd now have more than £27,000, according to the Association of Investment Companies (AIC). If you had drip-fed double that amount (£100 a month) into the average investment company over 18 years, and assumed average investment company returns, you'd have amassed a pot of £51,660. That would be more than enough to help your child repay their graduate debt.
However, it is also worth noting that markets today look relatively expensive by historical standards, which implies that it's likely that long-term returns will be lower over the next decade or two than they have historically been. This suggests that you may need to set aside more money than calculations based on past returns would suggest.
If your children are already teenagers and you haven't started saving for their further education, it's not too late to start. However, if you are saving for a child who starts education relatively soon in the future perhaps five years or less it makes sense to stock with cash and try to get the best return you can on this (see page 20). That's because the shorter the time you have before you need the money, the less time you'll have to ride out a potential stockmarket crash. While stocks have tended to beat cash and bonds over the long term, they have also been much more volatile.
Make the most of your tax breaks
To maximise long-term gains, most investors will want to use a tax-efficient wrapper. Parents or grandparents can either save in their own individual savings account (Isa) for their children's university costs, or open a Junior Isa on their behalf.Anyone aged over 18 can save up to £20,000 (the limit for the 2017-18 tax year) each year in an Isa with the returns paid tax-free. You can split your Isa allowance between a stocks and shares Isa, a lifetime Isa (for 18 to 39-year-olds), a cash Isa and an innovative finance Isa.
Parents can also save up to £4,128 (for the 2017-18 tax year) a year per child in a junior Isa. Savers have the option to choose between a cash or equity Isa for their child, or split their allowance between the two types. However, there is of course one major downside to Junior Isas: it's legally the child's money and control of the account passes to the child once they reach the age of 18.
"We find our clients tend to steer clear of junior Isas as a savings vehicle, fearing a loss of control of the money when the child reaches their 18th birthday," says Bamford. "There's a small, but very real, risk that the hard-earned money could be blown on a motorbike, parties or similar excesses rather than used for its intended purpose."
Finally, whatever approach you take, make sure you actively incorporate education in your financial planning. "Some parents don't plan, thinking that their children can simply get student loans or they will meet any costs out of their disposable income or their own savings and investments when they are required," says Connolly. "This can sometimes work out but could impact on the parent's own long-term financial goals if they are eating into their own assets or spending their disposable income at a time when they should be heavily focused on their own retirement planning."
