INVESTING FOR THE FUTURE

How can I financially support my child through university?

  • 14 September 2021
  • 15 mins
  • UK University Education can cost over £50,000 today, according to The Student

  • Even if your child takes out Student Finance, it often falls short of covering the full cost of the university experience and Bank of Mum and Dad is often called upon to fill the gap says MoneySavingExpert

  • However you choose to support your child through university, it’s best to plan ahead

All parents want the best start in life for their children, and for many this may include a university education. In fact a university education is increasing in popularity, with the number of students enrolled in higher education having risen by almost 11% in the last five years to 2.5 million students enrolled in 2019/20 according to HESA.

However, alongside popularity, the costs associated with going to university have also been rising. Which brings the question to many parents’ attention, how can I best financially support my child through university?

Whilst there is not a one-size fits all answer, here are some options you may want to consider.

How much does a university education cost?

Before getting lost in the labyrinth of how to support your child through university, it is important to understand how much a university education could cost in the UK today. The total cost is predominantly made up from three components;

1. Tuition Fees

Tuition fees can vary throughout the UK. In England and Wales, UCAS state for 2021 universities can charge up to £9,250 per year for UK students completing an undergraduate degree. In Scotland, tuition is free if you are from Scotland or up to £9,250 if you are from England, Wales or Northern Ireland. In Northern Ireland tuition costs up to £4,395 if it is your home region, or up to £9,250 if you are from England, Wales or Scotland. The exact cost of tuition fees for a university course can be found on each university’s website.

2. Accommodation

If your child chooses to live away from home for university, the next cost to consider is accommodation. Whilst rent prices vary depending on where in the country your child goes to study, Save the Student found the average student’s rent in 2020 was £418 a month, or just over £5,000 a year.

3. Living costs

The third key cost to consider is that of living costs. From transport and groceries to textbooks and going out, there is an underestimated cost associated. Whilst this will be dictated by your child’s lifestyle choices, Save the Student found that the average student living costs in 2020 totalled £377 a month, or £4,524 a year.

Therefore it is within reason to estimate the cost of a university education could cost around £19,000 each year.

What help is available?

Student Finance

Your child may be able to borrow money to help pay for the cost of university through Student Finance – a loan service funded by the government. The Student Finance package includes two main loans:

Tuition Fee Loan

A non-means tested loan available to all UK and EU students to cover the cost of university tuition fees. The loan is paid directly to the university.

If your child is studying an accelerated degree, they could get up to £11,100.

Maintenance Loan

A means tested loan available to all UK students to cover the cost of accommodation and living at university. It is paid directly into students’ bank accounts at the start of each term.

However as the Maintenance Loan is means tested, there is an expectation set that where parental income exceeds £25,000, they will pay towards the costs. Therefore, the Maintenance Loan begins to taper, as household income increases, to £4,422 when household income exceeds £62,286 in the 2021/21 academic year (based on the student living away from home, outside London).

However if you do choose for your child to take out a maintenance loan, there is a clear gap between what the loan provides and what accommodation and living costs at university equate to. As mentioned above, the average accommodation and living costs could equate to over £9,500 a year.

Paying back Student Loans and Interest Accrual

  • Both the Tuition Fee Loan and Maintenance Loan have to be paid back, but they are not treated in the same way a standard Bank Loan would be.

  • Your child will begin paying back their Student Loan the April following finishing or leaving university, at a rate of 9% of the amount they earn over the threshold level. The current threshold is £27,288.

  • They do not pay anything back if their annual income is below the threshold level.

  • Interest begins accruing from the moment each loan is taken out at Retail Price Index (RPI) + 3% until the 5 April after your child finishes or leaves university. After that, interest rates depend on their income in the current tax year.

  • Student Loan debt gets written off 30 years after the April your child was first due to repay or when they turn 65 – whatever comes first.

Meeting the cost yourself

Student Finance can be considered more of a ‘Graduate Tax’ and may never be paid off in full before being written off. However, some parents, where they can afford to do so, would still prefer to support their child financially through university to prevent them entering the working world in some cases with excess of £50,000 debt. Repaying this debt may also hinder their ability to save and get onto the property ladder.

If you do wish to support your child financially throughout university, or even partially to cover the living expenses gap between the maintenance loan available and the actual cost of living, there are a number of ways which could allow you to do so.

You could consider opening a Junior Individual Savings Account (JISA) for your child, which essentially is a long-term, tax efficient savings account. They allow parents to put money aside for their children’s futures until they reach the age of 18 when they are able to decide what they want to do with the savings for themselves. Friends and family can also contribute to a child’s JISA account. The 21/22 tax year savings limit for JISAs is £9,000 and there are two types of JISAs– Cash JISAs and Stocks and Shares JISAs and which one is right for you will depend on your individual circumstances.

A Cash JISA works in the same way as putting money into a bank or building society. The account earns interest on the money you or your loved ones pay in but without any tax deductions. The interest rate will differ depending on the provider and is likely to vary over time, although you might be able to get a fixed rate for leaving the money in one place for a period of time.

By investing in a Stocks and Shares JISA you are investing in the stock market, this can provide a greater potential long-term return than a Cash JISA. However, this can come with more risk.

For example, if you are in a position to save £200 a month for 10 years up until your child goes to university in a Stocks and Shares JISA with a 5% return rate, it could be worth over £31,00 by the time your child goes to university – equating potentially to £7,000 in compound interest. Please note this is an example only and investors should remember this is not guaranteed.

Compound interest is like growth on growth, through reinvesting interest rather than paying it out. Although as with all investments there are risks so this is not guaranteed.

It is also worth understanding what happens when your child is aged between 16 and 17. Currently, they get two ISA allowances; £9,000 for a Junior ISA and £20,000 for an Adult Cash ISA. This occurs because you are allowed to open an Adult Cash ISA from the age of 16 and you can still have a JISA, and contribute to it, until the age of 18 when it turns into an Adult Cash ISA. Which means you could save up to £29,000 into your child’s ISAs when they are 16 and again at 17. But we should also be aware that contributing this much could trigger potential inheritance tax liabilities due to exceeding the gifting annual allowance. We will discuss this later in the article .

There is the risk however with JISAs that once your child turns 18, the account will transfer into an adult ISA account and your child will then take full control of all of the assets in the JISA and may not wish to spend it on their further education.

An alternative to this would be using your own ISA allowance instead, which for the 21/22 tax year is £20,000. This would give you more control over withdrawing funds to use as intended, for example to pay for university costs.

Tax treatment depends on individual circumstances and may be subject to change in future.

The value of investments and the income from them can fall as well as rise and the investor may not get back the initial investment.

Bank of Gran and Grandad

Our Family and Finances Report published in April 2021 shows that some 66% of over 60s said they plan to pass their wealth to their grandchildren, with 37% regularly gifting to grandchildren. So the Bank of Gran and Grandad could be a consideration to help financially support your child through university, which could also reduce inheritance tax liabilities.

If your child is still some years off going to university, grandparents could choose to make contributions into their JISA, up to the annual limit, as long as you as the parents have opened up the JISA initially. Regular contributions to a grandchild’s JISA from a young age could reap the rewards of compound interest illustrated above.

Read more: How can I help my grandchildren invest for their futures?

Beware of the tax man

You can gift away £3,000 worth of gifts each tax year without this being added to the value of your estate. This is known as your ‘annual exemption’. You can carry any unused annual exemption forward to the next year too, but only for one year. There is a caveat that these gifts must not deprive you of your standard of living. Remember that’s £3,000 for grandad and £3,000 for grandma and £6,000 could go a long way towards building up your child’s JISA fund to support them through university whilst also potentially reducing inheritance tax liabilities.

You are allowed to gift more than £3,000 a year, but there is a liability that the gift will count towards their estate if you die within 7 years of making the gift; classifying them as Potentially Exempt Transfers (PETs). This annual allowance applies to all gifts made to anyone other than your spouse or partner. There is no tax charge at the time of gifting, but there is a potential future liability that needs to be considered.

Or, if your child will be going to university in the not so distant future, gifting from grandparents regular surplus income may be the solution for you, which could also potentially reduce inheritance tax liabilities. Gifts from surplus income could align nicely with tuition or accommodation payments, which come around regularly, like income does, once your child starts university. For this to be inheritance exempt however, it is important to note records that provide the gift is from surplus income and not capital and that the gift is regular in nature.

For example, if Grandad can prove he has £9,000 of surplus income a year, he could start gifting this £9,000 annually to pay for your child’s university tuition fees. The key point here is that record keeping is critical.

On the topic of gifting, anyone can make gifts to your child; be it godparents, aunts, uncles or family friends.

Everyone’s inheritance tax liability is individual and rules surrounding this can be complex. It is best to seek specialist tax advice before making any gifts.

Read more: A guide to inheritance tax

Ultimately, it’s worth planning now

However you choose to financially support your child through university and whenever the time may be that your child goes to university, it’s ultimately best to plan ahead and we could be here to help with that.

After all, money is simply fuel for the rocket, and what people really want is to use it to go somewhere. We have hopes, fears and dreams. Great financial planning helps us work out where we want to be and how to potentially get there.

Call 0808 296 6659 to book a free initial consultation today. There are no hidden fees or charges, and you’ll only pay if you choose to go ahead with the recommendations in your personalised financial plan.

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