Parents and students are vastly underestimating student debt, according to recent research from the Association of Investment Companies.
The average parent expects their child to leave university with a debt of £24,852 with students expecting a debt of £36,943 but the AIC’s research suggests the actual figure, for a student who finished their course in 2020, is £45,000.
The AIC data also found that two-thirds of parents plan to help their children with university costs.
However, parents are more likely to use cash savings accounts for their children’s future than invest in the stock market, with 59 per cent of parents using cash savings, compared to 16 per cent who have used investment companies and 15 per cent investing in shares.
This necessitates professional financial advice when it comes to wealth planning for parents wanting to help their children through university.
Damian O’Connor, managing director of Roxburgh Financial Management, said: “At current interest rates, cash is a relatively ineffective way to save for higher education fees, especially as inflation is increasingly eroding the value of that cash, so investing in equities or fixed income, depending on your risk profile and time horizons, is usually preferable.
“The perception gap between anticipated and actual debt also suggests an increased need for financial protection for parents. If they are saving for their child’s future, they need to ensure that investment isn’t interrupted if they cannot earn a salary.”
With the steady rise in student debt, many advisers have been considering how intergenerational wealth planning will help parents and grandparents cover additional university and college costs.
Tim Morris, IFA at Russell & Co Financial Advisers LLP, said: “I have several clients who will invest in a fund designated for their children’s education. As alluded to in the [AIC] report, even investing a small amount over the long term can go a long way towards covering the costs.’’
"The example of £100 over 18 years providing £75,000 should be sufficient to cover university costs at that time in the future.
"This shows the importance of starting early and benefiting from the power of compounding. Cash won’t provide that, at least not at current interest rates.’’
Annabel Brodie-Smith, communications director for AIC, echoed this, adding that advisers have the opportunity to help parents by encouraging them to invest in the stock market.
"Investment companies are a good option for saving for children”, she said.
"They have strong long-term performance and their closed-ended structure is particularly suitable for harder-to-sell investments, such as smaller emerging markets and unquoted companies”, Brodie-Smith added.
The AIC research also revealed that an increasing number of young people are planning to not go to university because of the pandemic; 25 per cent of young people aged 16 to 24, up from 18 per cent last year.