Above page content

    Site map  Cookie policy

Personal Finance

How to fund your child’s university education

With educational costs increasing, planning for the ballooning cost of university is getting ever-more vital. Anne McClean takes a look at ways to help your children and grandchildren.

by
Anne McClean

in Personal Finance

18.10.2018

One conversation that I often have with clients is what to do about university fees and there tends to be some common worries. Most parents (and often grandparents if involved in the conversation) don’t want their children to graduate saddled with debt, but this often goes with the wish that the child understands the value of money.

There is an opportunity to learn some valuable life lessons for a student taking responsibility for their own finances. Ideally, these conversations need to start early so affordability can be assessed, who wants to be involved needs to be decided and the most efficient way of paying for it worked out.

What is the cost?

There are three main costs associated with studying:

• Tuition Fees
• Accommodation
• Living costs

Most universities charge the full rate allowable for tuition, so the majority of undergraduate degrees cost £9,250 for the academic year.

Accommodation in the first year will usually be in halls and, like most accommodation, will vary depending on location, type, facilities available and decor. This figure will be specific to the area in which your child studies, but expect somewhere between £5,000 and £7,000 although it may come in at more or less. For example, a room in Corpus Christi College at Cambridge University costs about £6,240 for the academic year.

Living costs are likely to be in the region of £115 per week, or £4,400 for the academic year. So, with other factors such as entertainment, clothing and books considered, a reasonable starting point for a budget would be £20,000 for the academic year, which will need finessing dependent on the final choice of university.

How to pay for it?

• Student Finance

• Meeting the cost yourself

The most cost effective method of financing would be paying from family assets, whether in trust or held directly, because there is no interest cost involved. However, for many, student finance is necessary.

Student Finance

The main types of finance are:

Tuition fee loan: A non-means tested (not dependent on household income) loan, available for UK or EU full-and part- time students.

Maintenance loan: A means-tested loan for full-time UK students to help cover living costs, such as rent, food, books, travel etc.

Where are you living and studying? Maximum maintainance loan
Living with parents Up to £7,324
Living away form home outside London Up to £8,700
Living away from home in London  Up to £11,354

Where parents are earning more than £25,000 a year, there is an expectation they will pay towards the costs. As a result, the amount of maintenance grant begins to taper away until household earnings reach £62,187 per annum e.g. the maximum loan becomes £4,054 for those living away from home outside London.

Loans now accrue interest at a rate of RPI +3% from day one. There is, however, an argument that over the long term you may never have to repay the loan. Any remaining debt will be written off after 30 years if you have not earned enough. There could also be a change of government policy in the future which will make the repayment null and void. Nevertheless, loans don’t need to be paid back until you start to earn more than £25,000 and then you pay 9% of your salary over that amount collected directly through payroll. The tipping point for paying back everything you borrowed at some cost would be earnings in the region of £40,000. This would be a consideration in terms of the likely career path and earning trajectory the child may follow.

Tax-efficient steps

There are a variety of options for meeting the cost dependent on the family circumstances such as income levels, assets available and affordability. Best practice would be to provisionally agree a strategy for meeting the cost earlier on and ideally in conjunction with grandparents and siblings. These will be entirely dependent on each family situation.

It may be that you can afford to pay for all the costs out of your income but it might mean a trade-off. Many professional people pay for education costs, while trying not to think about how they are going to pay for retirement when the big income stops and the assets will not be enough. This is a goodtime to consider and assess wider family wealth and how it might help. For example, widow Daphne, is receiving also the beneficiary of a trust set up by her late husband’s will. It’s decided that the trust can be used to help to provide funds as well.

Once you have decided on what level of cost you are going to meet, the next step would be to consider what assets are available. In another example, Mark is thinking of reducing his pension contribution to help pay the university costs for his daughter Emily. However, it might be preferable to use capital instead from his stocks and shares ISA. Mark also took out a bond a number of years ago and he may not have considered that a proportion of this bond can be transferred to Emily to provide her with a lump sum. This is a very tax efficient step to take for the family.

These are, in effect, gifts, given on the understanding that they will not be paid back. Another option is to make payments as loans. There is an opportunity cost to the lender in that they will be missing out on income and/or capital growth potentially but it will be less burdensome for the borrower in terms of interest payments.

Financial literacy Entering this phase of life is a brilliant opportunity to build upon or start teaching concepts needed for adult life. Budgeting is a simple place to start. This is important a large final salary pension income which is building up in a bank account as its not being spent. The income is more than enough to cover any eventuality should circumstances change. Gifting some of this income to her two grandsons is not only a benefit for the boys in terms of meeting the education costs, but also helpful in terms of reducing her inheritance tax position.

Daphne can make a gift from savings of £1,500 to each grandson to make use of her IHT exemption for 18/19 tax year. Daphne is because your payments arrive at the beginning of term and, for an eighteen year old, this could look like a large sum of money. However, should the student fail to budget properly, they could be living on a baked potato alone by the end of the term as they try to make ends meet. Research last year reported some students had actually spent their maintenance grants on nonessentials including plastic surgery. Sitting down and discussing how this money breaks down on a weekly basis and what this means is a valuable conversation to have. Handing over the reins on paying for mobile phone contracts, car insurance and clothes at the same time will perhaps help in terms of teaching your young adult to decide priorities and what is actually valuable.

At the other end of the spectrum some students manage to use the loans to save and invest and, ultimately, make a better return. Although not viable for all, this could be another teaching opportunity.

This article does not constitute advice. To find out more about using family wealth to help children in the longer term, talk to a Charles Stanley Financial Planner. Tax treatment depends on individual circumstances and may be subject to change in the future.

Get in touch

Find out more

Our focus on clients has endured since the foundation of Charles Stanley in 1792 and has helped make us one of the UK's leading wealth management firms. Your interests give shape to everything we do.

Please call us to talk about your circumstances or complete the enquiry form.

020 3797 1783

Make an enquiry

Local Office

Your local office

Your local Charles Stanley office can help advise you on a wide range of investment management services.

Select an office

Share

Newsletter banner signup