It is often a proud and emotional moment when parents wave off their child as they start their undergraduate studies.
But the prospect of their child ending up with £50,000 or more of student debt can be hard to swallow.
Clients will need to do their homework about what financial help is available for them and their children as they prepare to pack them off to university.
For many parents, they feel the best thing to do for their child is to pay for the cost of university themselves. But is this the right way to go about it?
Adrian Lowcock, head of personal investing at Willis Owen, explains: “The cost of going to university is currently up to £27,000 in fees, with additional living and maintenance costs driving the overall costs up to just over £50,000 for a three-year course.
“This is likely to change depending on where your child studies, and some of it does not need to be paid upfront as there are loans available to your children."
Complicated system
He suggests: “There are several options to think about before you start investing and saving to pay for your child’s university education – understanding how the loan system works is the most important factor in deciding the best way to support your child in higher education.
“The student loan system is fairly complicated so take time to understand it.”
Advisers can help take their clients through the student loan system but there are also online resources which will help parents find out how much in loans or maintenance their child is eligible for.
Mr Lowcock sets out the two types of loans available:
- Tuition fee loans – “These pay for the course and are paid directly to the university. The child doesn’t have to pay them back until after the course and only then after they have started earning a certain amount,” he says.
- Maintenance loans – “These are applied for at the same time as tuition fee loans and lent to provide support for paying rent and living costs. Part of the loan (35 per cent) is means tested so depends on how much household income is, where you live and where you study,” Mr Lowcock notes.
Rachel Springall, finance expert at Moneyfacts.co.uk, suggests: “Maintenance loans are likely to be the preferred choice, because they are designed to cover both the course fees and the cost of living.
“However, parents need to drum in the importance of budgeting and saving so that their children don’t overspend and have no cash to fall back on in times of need.”
Graduate tax?
Many people view student debt as an altogether different type of debt from that owed to other lenders, such as banks.
Parents should not pay university fees in advance, according to Kay Ingram, director of public policy at LEBC Group.
She reasons: “To do so may simply mean subsidising other taxpayers. Instead, they should encourage their children to take out the maximum loan possible for both fees and maintenance.
“The important thing for parents and graduates to realise about student loans is that they are not really a loan, they are a graduate tax.”
So how does this graduate tax work then?
Ms Ingram explains: “For courses starting from 2012 onwards the amount loaned does not have to be paid back until the graduate has an income of £25,000. After then, 9 per cent of their earnings above this figure are deducted under PAYE or self-assessment for the self-employed.
“The £25,000 threshold is index-linked so should increase every year. After 30 years, any loan not paid back through the tax system are written off.”
She reveals the Institute for Fiscal Studies estimates 70 per cent of student debt will not be repaid.
“As a result, some take the view it is not how much debt you leave university with but how much you are likely to have to repay that matters,” Mr Lowcock adds.
Ms Ingram admits the language around student debt and finance is confusing for parents, pointing out that while “the interest rate applied of RPI plus 3 per cent also looks high compared to many mortgage rates, in practice student debt is cheap for most graduates”.
She continues: “Paying off early will not alter the monthly deductions paid by the graduate until they have extinguished the whole loan, as the payment rate is based on 9 per cent of earnings in excess of the threshold, not what you owe.”
Creating a plan
But Mr Lowcock thinks the debt will often still weigh on parents’ and graduates’ minds.
“Discuss the options with your children so they understand the costs of getting into debt and the effect it could have on them,” he says.
“If you plan to support them during the university years, then discuss this with them and create a plan together.”
If parents do decide they want to save up for the cost of sending their child to university, they do at least have time on their side.
Henrietta Grimston, relationship manager at Seven Investment Management, suggests when the child reaches the age of 15, it might be a good time to “actively review” the value of any investment portfolio which has been set up to pay for university.
“If the capital matches the liability, advisers might find that their clients don’t want to take any further stock market risk if they have already reached their goal,” she adds.
eleanor.duncan@ft.com
