Saving for university

How you can help your child to make the savings grade

With almost half of all school leavers going on to university, more families than ever will face the issue of funding education costs. The recent review of higher education funding means that from September 2012, annual tuition costs could increase to as much as £9,000 from the current level of £3,290.

Ministers have decided that the standard level will be £6,000, but many universities have declared that they will charge the maximum fee for some or all courses. Obviously, no one can predict what the situation will be like in the future, but the general view is that tuition fees are here to stay.

It’s no surprise, then, that research from Mintel has found that university is the number one reason parents save.

How much will it cost?

Let’s assume that tuition fees will be set at the current maximum – £9,000. That means most students will have to stump up £27,000 for an average three year course.

There are accommodation and living costs to be taken into account, too, and these, according to the NUS, currently add up to around £10,500 a year. This means that students could be paying out around £60,000 over three years.

Means-tested grants will help students with lower household incomes, and there are student loans available with competitive interest rates, but the average student might still end up with considerable debt.

Account manager Claire Rowan has two daughters aged four and five. She pays £50 a month from her child benefit allowance into each of their accounts to put towards education costs.

“I’ll cut corners somewhere else so we can continue to save it,” says Claire. “I don’t want them to leave university with that level of debt – how would they ever find the deposit for a house?”

Research from last year (the Association of Investment Companies’ annual research into student debt) found that 49 per cent of students believe it will take more than 10 years to pay their debt off, while eight per cent think it will take more than 20 years. It’s all a far cry from the heady years of student grants, when most graduates could pay off their debts within a year or two. And it’s not a situation any parent wants to see their child in. So what can you do?

Start saving early

The Association of Graduate Recruiters has advised parents to start putting money aside for tuition fees from birth. Indeed, the obvious answer is to start saving as soon as you can; the earlier you start the better. But however many years you have until freshers’ week starts, don’t panic – with sensible planning and by being proactive, you’ll be able to help your children minimise their debt. Farzhana Khan, NatWest Financial Planning Manager based in Glasgow, has plenty of experience in helping customers save for longer-term goals. “The first and foremost area to look at is tax efficiency, followed by the term of investment – in this case, the child’s age and how long you’ve got until they start university,” she advises. “Following a review, we might recommend a stocks and shares ISA (Individual Savings Account) if you are able to save for five or more years – not only are they exempt from income and capital gains tax, but they historically show a better return than deposit accounts and cash ISAs.”

The maximum investment into a stocks and shares ISA for the 2011/2012 tax year is £10,680. Up to £5,340 of this can be deposited into a cash ISA.

A Junior ISA, with a £3,000 a year limit, will be launched later this year to replace the government’s now defunct Child Trust Fund. These will be similar to cash ISAs, so although the interest is tax-free, it is usually only slightly higher than that of traditional savings accounts. Stocks and shares ISAs could be the best route if you want to build up a significant fund.

Over long periods of time, even small sums saved can create a substantial fund that will go some way towards meeting costs. If you put away £50 a month from birth, for example, it could build up a sum of £16,200 by the time your child is 18 (see ‘Saving by degrees’ above). However, don’t forget that with stocks and shares ISAs, while there’s the potential for higher long-term growth than cash savings, the flip side is that it’s riskier and you may not get back your original investment.

Smart saving

For parents who have had children in their late thirties or beyond, putting extra money away in a pension offers another way to build up a lump sum. “Money invested in pensions attracts tax relief – and you can draw down a tax-free lump sum from the age of 55 – so it’s a very tax-efficient way to save if that matches the time your children will be going to university,” explains Khan.

Upcoming pension reforms mean it’s likely that company pensions, which will become compulsory in 2012, will include a contribution from employers – making them even more efficient. So your pension could perform two functions, as long as you pay enough into it.

Of course, the current climate makes it harder to put aside money to save. But in some cases grandparents are keen to help out and, depending on your circumstances, it may be worth approaching them – particularly if they already put money aside in a savings account for their grandchildren. These payments may also result in inheritance tax savings for grandparents.

“My parents wanted to open a savings account for my son, Sam,” recalls catering manager Marcus Hawkins.

“But we agreed that it would make more sense if they added that money to our stocks and shares ISA for Sam’s education. We put aside £150 a month, they contribute £100 and my wife’s parents contribute £50, so between us we’re building up a good fund.” You can’t start saving too early. When the sums involved are as substantial as higher education fees, it’s easy to think that you will never be able to build up enough money. But start in good time and you’ll be able to make a real difference. After all, there are enough things to worry about when your child leaves home without money being one of them.

Cover every eventuality

Whatever their situation, most parents know that they’ll work out a way to help their child through university – but what if something happens to you and you’re not around to make sure they’re OK? Yoga teacher Liz Clay took out life insurance soon after her son Mikey was born. “My husband and I have both taken out policies over 24 years, so we know he will be covered through higher education in case anything happens to us. I hate to think of him not being able to study, or not being able to afford a house, because I wasn’t prepared.”

Warning:
The value of stocks and shares and any income from them can fall as well as rise and you may not get back the full amount of your original investment. Favourable tax treatment of ISAs may change.

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