A question I’m often asked is how to pay for university. I have noticed there are some common themes worth exploring. Most families do not want their children to graduate saddled with debt but are unsure whether to take loans. Do they offer a good choice in terms of meeting the cost?
Some clients have few concerns about meeting the cost but for others it may mean scaling back their retirement plans. Many will view it as an opportunity to help their children understand the value of money. Certainly, handing over the role of managing money presents a great opportunity to learn some valuable financial literacy lessons.
Ideally, planning for how to meet the costs should start early. In this way, affordability can be assessed, along with deciding who needs or wants to be involved and the most effective way of meeting the cost.
Most universities charge the full rate allowed for tuition. As such, the majority of undergraduate degrees cost £9,250 for the academic year in England and Wales.
Accommodation in the first year will usually be in halls and the costs will vary depending on location, facilities and décor. Expect it to cost somewhere between £5,000 and £7,000 (though it is best to research specifics). For example, a single ensuite at LSE could cost in the region of £11,000 per year whereas a room in Corpus Christi Cambridge could cost as little as £3,300 for the academic year (term-time only).
Living costs need to include books, travel, food and entertainment. An average budget of £115 per week, or £4,400 for the academic year, would be a good starting point.
Expect a total cost in the region of £20,000 per academic year.
How to meet the cost?
Generally, the most cost-effective way of financing is through the use of family assets, whether held in trust or paid for by individuals. However, for many, student finance will be necessary.
The main types of finance are:
Tuition fee loan: A non means-tested (not dependent on household income) loan, available for UK or EU full and part-time students.
Maintenance loan: A means-tested loan for full-time UK students to help cover accommodation and living costs.
Where are you living and studying
Maximum maintenance loan (for 2019/20)
|Living at home
|Up to £7,529
|Living away from home outside London
|Up to £8,944
|Living away from home in London
|Up to £11,672
Maintenance loans start to taper away where household income is in excess of £25,000 a year. For example, a student where household income is £100,000, studying outside of London would expect to receive £4,168 for the academic year. There is a useful calculator here that provides indicative figures:
Scholarships and bursaries are available, with some universities and colleges offering financial assistance. In most cases, the maintenance grant will not cover the cost of halls. Students will need clarity around how they will meet the funding gap.
Are loans good value?
Loans accrue interest from the day they are issued until the day they are repaid or written off (currently after 30 years). There is an argument that over the long term students may never have to repay the loan in full if they don’t hit the earnings limit. The tipping point for having to repay everything borrowed with interest is earnings around the £40,000 mark. The current rate of interest is 3% plus RPI – that equates to 5.4% today. Compounded every year, the costs are significant. Loans don’t need to be paid back until graduates earn over £25,000. They make payments of 9% above that and the repayment is collected at source via PAYE. A useful summary can be found here (anyone starting University now would be on Plan 2).
The most appropriate option for meeting the cost will be entirely dependent on each family situation. Factors include income levels, assets available and affordability. Best practice would be to provisionally agree a strategy early on and ideally in conjunction with wider family members.
The first place to start is to assess what is affordable. It might be that your income levels are such you can pay for it from earnings. However, parents need to be aware of the trade-offs. Are they scuppering their own retirement by not saving enough in their high-earning years?
Once you have established what cost you wish to meet, the next step would be to consider the assets available. For example, we saw one father who was considering reducing his pension contribution to help pay for university costs for his daughter. He had taken out an onshore bond a number of years previously. Assigning parts of the bond to his daughter proved a very tax efficient way of paying the cost. He avoided the income tax liability deferred in the bond and kept the tax relief from his pension contributions.
Some clients decide to buy a property for their children’s accommodation in the second year. Additional rental income can help meet the costs of living. The motivation can be to help with estate planning or for the young adult to gain experience of managing an asset.
Another option is to provide for the costs but in the form of an interest free loan on the understanding that your child will pay it back one day. There is an opportunity cost here in that you will be losing out on any potential growth in that capital. You could decide to write the loan off in the future.
This is a good time to consider wider family wealth and how it might help. Grandparents may have excess income or capital and are often in a position to make gifts. It may turn into a wider family conversation as often grandparents want to consider how the help fits in with other adult children and to balance fairness with need. Where clients have a large final salary income that is enough to meet income needs and is building up in the bank, gifting the unused income to grandchildren to buy books and food reduces the estate from an inheritance tax perspective. Trusts can also be used to help.
Maintenance loans are paid at the beginning of each term and this can seem like a great sum of money to put in the hands of an undergraduate, who has only recently left home. A good place to start is to help with budgeting and then step away. Run through the likely monthly costs with your child so they have a good sense of what they will be. Setting up a savings account, paying in the maintenance grant and using it to emulate a monthly salary to a current account would be another way to help. It might be that getting a part-time or summer job is required. This will help your child understand taxation and how to save income now to help over the course of the year.
If up to now you have been paying for and administering the car, mobile phones, clothes etc, this is now a good time to hand over the administration. Be prepared for some mistakes and maybe the odd text message to say they need a sub till they come home! Should you provide it? That part is up to you…
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.