As students head back to university, a recent report from the Association of Investment Companies (AIC) has confirmed that both children and parents are underestimating the potential size of student debt.
While students at the start of their course estimate debt of around £38,000, parents anticipate a figure of just £24,852.
Official figures from the House of Commons have confirmed, meanwhile, that students who finished their studies last year did so with an average debt of £45,000. That’s £20,000 more than the average parent estimate.
If you’re planning to help your child with the cost of higher education, how could this shortfall affect their plans and your finances?
Keep reading to find out.
How will your child’s debt be made up?
Tuition fees
Tuition fees for undergraduate courses in the UK starting in 2021 are capped at £9,250 a year. This equates to £27,750 after a three-year course.
While you might have planned to help your child cover the cost of tuition fees, underestimating the size of their potential debt might mean this is no longer possible, or that you need to take money from a pot not intended for the purpose.
Alternatively, your child can apply to the Student Loans Company for a loan to cover tuition fees and in many cases, this might be the better option.
Not only is the interest rate relatively low on a student loan, but your child will also only start to repay the debt once they’re earning above a threshold amount. For those starting university in 2021, that threshold is £27,295.
Repayments are calculated as a percentage of the earnings above this amount and after 30 years any remaining debt is wiped clean.
Accommodation
Average student rent last year came to £547 a month (£6,564 a year) according to Times Higher Education, meaning that the average cost for a three-year course is around £14,700.
While maintenance loans are available for accommodation and living costs, the loans are partly means-tested. If eligible, your child could receive between £3,410 and £12,010.
If you have been saving for your child’s future, possibly through a Junior ISA (JISA) or similar savings product, you might use this money to help support your child with accommodation costs.
Interactive Investor confirms that the average size of a JISA pot at age 17 is just over £19,000. This could be perfect for covering these additional expenses. If you had hoped the JISA would allow your child to be debt-free, however, an underestimation of their debt could be costly.
Supporting your child financially
You can begin saving for your child’s future the moment they are born, but it is never too late to start.
1. A Stocks and Shares JISA
You can open a JISA when your child is born, and they are available to anyone under the age of 18. They can provide a great way to start saving for your child’s future and to encourage good financial practices.
When your child reaches age 18 the money can be withdrawn – possibly to help fund their higher education – or remain invested and convert to an adult ISA.
Contributions to a JISA in a tax year cannot exceed £9,000, but the annual limit for an adult ISA is £20,000. Gains made on both a Stocks and Shares JISA and a Stocks and Shares ISA are free of Income Tax and Capital Gains Tax (CGT).
With interest rates at historic lows and inflation rising, wealth held in a Cash ISA could be effectively losing value, but a Stocks and Shares ISA has the chance of beating inflation, and even making significant returns.
2. A pension
While funds saved into a pension won’t be available to help your child through higher education, they could be a foundation for financial stability in later life.
The minimum retirement age – and therefore the first age at which pension funds can be accessed – is currently 55, but this will rise to 57 in 2028.
The Annual Allowance is the amount you can contribute to a pension each year and still receive tax relief. It is capped at £40,000 but based on earnings, so for most children, you will be able to pay £3,600 a year. Tax relief means that this contribution would cost a basic-rate taxpayer just £2,880.
Once your child starts working and making contributions themselves the amount they can contribute rises significantly. An investment over such a long-term has the potential to make significant gains, combining the general upward trend of the markets with the effects of compounding.
Get in touch
If you would like to discuss saving for a loved one, get in touch by emailing hello@fingerprintfp.co.uk or call 03452 100 100.
Please note
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
