The average student in England will graduate with a debt of £50,000, according to the Institute for Fiscal Studies – an overwhelming figure for the many families who want to help their younger generations through university.
The concept of seeking student finance or loans to assist with tuition fees and living costs will be familiar to most people who have been to university, but most students need all the assistance they can get in 2018/19.
There are a number of ways you can help save for your child or grandchild’s education and the sooner you start the better.
Long-term planning: savings and gifts
Many will begin saving for university costs as soon as their child or grandchild is born, perhaps even earlier.
The savings you accumulate may not cover the entire cost of tuition and living at university but beginning to put money away as early as possible can reduce the burden down the line.
Savings accounts for children
By opening a savings account for your child or grandchild, you can also help them learn to save for themselves. This will be a useful place to build up savings for later in their life.
Typically, these accounts are cash accounts and can be set up on behalf of a child under 18. Easy-access options are available which allow flexibility, but these tend not to offer the highest interest rates.
A regular savings account could be better suited to long-term saving for education costs. For example, if you were to open an account with an interest rate of 2.5% as soon as your child is born, you could reach a target of £50,000 by the time they turn 18 by saving £185 every month.
The £100 rule
If you are contributing to your child’s savings account, you will need to watch out for a tax rule that applies to the interest.
If your child earns more than £100 in interest from money you have given them, it will count as part of your income, and the whole amount will be taxed at your rate of income tax providing that you have used your personal savings allowance.
This rule does not apply to money given by grandparents, other relatives or friends.
In order to assist with the cost of higher education, you can use your own ISA allowance, worth up to £20,000 in 2018/19, while there is also the option to open a Junior ISA (JISA) for a child under 18.
Through using a JISA, you are able to save up to £4,260 free of tax in 2018/19. Exemption from the £100 rule on children’s savings is also available.
The account will change into a standard adult ISA once your child or grandchild turns 18. After this the money will be theirs to withdraw and spend as they choose.
There are two types of JISAs, these are: cash and stocks and shares.
Like a normal savings account, the return you get on savings in a cash JISA is based on your interest rate. You will not have to pay any tax on the interest you earn.
However, with interest rates currently low, your savings are unlikely to see a lot of growth in this type of account.
Stocks and shares
A stocks and shares account will enable you to invest in funds, stocks and shares. The return you get is based on the performance of your investments, while any profits you make are tax-free.
As a long-term savings strategy this type of account can often provide a higher profit than cash accounts. This could make a big difference towards meeting your savings goal for university costs.
But like any investment the value in this account can go down as well as up in value, so it may be worth considering expert financial advice and to understand your attitude for risk before investing.
A trust can be set up by parents and grandparents for a child under the age of 18.
Depending on the type of trust you set up, this can be a way to keep savings locked away until the child turns 18, and sometimes to maintain control over the way the money is used.
In addition to parents, grandparents may want to provide some support towards these education costs.
In some cases, they may need to consider whether the money they give will be affected by inheritance tax (IHT). Grandparents can make gifts of up to £3,000 a year without the risk of it being liable for IHT. Gifts worth more than this remain potentially liable to IHT for seven years.
Short-term planning: student loans
If your child or grandchild is planning to start university at some point in the next few years, you will have more immediate costs to consider.
With tuition fees as high as £9,250 a year as well as living costs to cover, most students will need to take out a loan for university.
They can apply for a loan through Student Finance in England, Wales and Northern Ireland, or through the Student Awards Agency for Scotland.
What kinds of loans are available?
Student loans are split into two types: tuition and maintenance.
Tuition loans cover the fee for the course itself. The money is paid directly to the university or college each year.
Maintenance loans are paid to the student each term to cover the other costs of student life, such as food, rent, books and travel. The amount you get depends on your location and household income.
How are student loans repaid?
Once they have finished their course, students will not have to make any repayments until they are earning over a certain threshold.
For English and Welsh students, this threshold is currently £25,000 a year for students who started their course on or after September 2012.
For Scottish and Northern Irish students, the threshold is £18,330 a year.
Beyond these thresholds, 9% will be deducted from their salary to go towards paying off the debt.
The repayments are always based on earnings; therefore, they will not have to continue making them if they lose their job or if their income drops below the thresholds.
Interest on the fees is also worth considering. Based on an assumed 3% interest rate, a graduate who has accumulate £50,000 worth of debt could end up owing £67,000 after 10 years.
Any remaining debt will be written off completely a certain number of years after they graduate. This limit is 30 years in England and Wales, 35 in Scotland and 25 in Northern Ireland.
Different rules apply to those who started university earlier than 2012.
Can I pay upfront instead?
Understandably, most families do not want their children to be burdened with a high level of debt early in their adulthood.
You may wish to pay for the costs of university yourself rather than have your child or grandchild take out a loan.
It is possible to do so, but you should give careful thought to this decision.
As many graduates will not repay the entire sum before it is written off, you might end up spending money that they would not have needed to pay in the first place.
On the other hand, if they go on to become a high earner and repay their debt, interest will be applied which could mean they will pay significantly more than the original fees.
In short, whether it is worth covering the costs yourself mostly depends on your child or grandchild’s future earnings.
You may also need to consider whether your savings could be put to better use elsewhere, such as paying off existing debts or helping towards a deposit for your child or grandchild’s first home.
If you are not sure which option to take, it is best to consult an expert. We can help you make financial plans for your family’s future.
The way in which tax charges (or tax relief, as appropriate) are applied depends on individual circumstances and may be subject to future change. ISA eligibility also depends on individual circumstances
This document is solely for information purposes and nothing in it is intended to constitute advice or a recommendation. You should not make any investment decisions based on its content.
While considerable care has been taken to ensure the information in this document is accurate and up-to-date, no warranty is given as to the accuracy or completeness of any information.