Should I help my child with university tuition fees?
"We are often asked by clients the best way to help their children finance university."
Helping your child with university tuition costs isn’t something that all parents are financially able to do, but for those that are, whether to do so or utilise the student loans system can be a bit of a minefield. We are often asked by clients the best way to help their children finance university, which can be a very costly few years.
Putting a plan for tuition fees in place early
For those that are well prepared, setting up a Junior ISA for children from a young age can be an effective way to benefit from £9,000 a year of ISA allowance (which is separate from the £20,000 a year allowance on a standard ISA), as well as the potential long-term growth of the investment. With this option, parents need to be aware that their child gains full control of the funds at age 18, relinquishing control on how the money is used.
What if my child is about to start university?
For those that have children starting university in the immediate future, navigating the student loans system can be complex. The first thing to say is that the terms of each loan depend on the year it was taken out. Currently five different plans exist. For the purposes of this article, we will be focusing on Plan 5, i.e. those starting courses after August 2023; all those soon to be starting university.
We have heard some finance commentators refer to student loans as more of a ‘graduate tax’ than a traditional loan. This is partly because the loan is written off 40 years after the April you were first due to repay (this has recently increased from 30 years for loans taken out over the last 11 years). Combined with the fact that you only start repaying the loan once you hit a certain income threshold (£25,000 a year), numerous news headlines have circulated claiming that the vast majority of students will never repay the loan in full.
How do student loans work?
The significance of the change from debts being wiped after 40 years compared to 30 cannot be overstated. The government expects the proportion of full-time undergraduates repaying their loan in full to increase to 65% going forward, up from 27% in 2022/23. Martin Lewis states that ‘In practice it will increase the cost by over 50% for many typical graduates and double it for a few.
With the current interest rate for most plan 5 students standing at 7.9% (correct as of 10/07/2024 when this article was written), well above what many clients pay on their mortgage, It is easy to see why the question on whether to take out these loans in the first place crops up in client meetings. For those with the financial means to pay tuition fees upfront, there is not a simple answer and getting it wrong could cost you or your child tens of thousands of pounds.
Should you pay tuition fees up front?
The first and possibly most important factor is long-term earning potential. Graduates on plan 5 loans start repaying at a rate of 9% on income over £25,000 a year. Those that expect to go into, and stay in, high earning careers straight out of university, are likely to repay loans in full and pay what could be seen as unnecessary interest in the process, if cash is available in the background.
However in reality, things often don’t work out as expected and taking a student loan provides added flexibility. Paying tuition fees in full in advance, and then your child ending up pursuing lower paid work, or taking time out of work to raise a family for an extended period of their working years, would lead to inferior outcomes. In these cases paying tuition in advance could lead to paying much more than would ever be repaid via the student loans system.
Furthermore, as inflation rates continue to fall (down from 11.1% in October 2022 to 2% in May 2024), so too will the interest rate on student loans, as it is tied to the Retail Price Index (RPI). The maximum interest rate currently charged is RPI +3%. It is also worth noting that this decision is based on current rules, it is not unfeasible that a future government could either wipe outstanding student loans or retrospectively change terms of the loan.
This is without even touching on how to fund university living expenses and whether to take a maintenance loan or not. As you can see the answer to this fundamental question on university costs is a complex one, depending entirely on the family’s financial situation. This is where a financial planner can step in, helping you design a strategy to benefit both you and your child’s long-term goals.
Charlie Escott is a Financial Planner at The Penny Group.
If you would like to discuss your options around university tuition fees further, then please do give us a call on 0207 061 2345 or email us at info@thepennygroup.co.uk.
An ISA is a medium to long term investment, which aims to increase the value of the money that you invest for growth or income or both.
The value of your investments and any income from them can fall as well as rise. You may not get back the amount you invested.
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