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How to help fund rising university costs

How to help fund rising university costs

Rising fees


Higher education costs have soared in recent years and a debate in the House of Commons earlier this year has left many predicting student debts will rise further in the near future.

More than a decade ago, the total cost of university fees in England for a three-year course was £3,000. Then in 2006 the average annual university fee in England jumped to £3,000 per year, before fees tripled again in 2012 to £9,000 a year for the vast majority of universities. It's now believed these annual fees will rise even further for students starting next year.

A Higher Education Bill is currently being debated among MPs, with supporters arguing that the quality of teaching should be distinguished and reflect any increase in fees for certain universities.

While any change to make this a reality may be some time away, several universities have already announced an increase above the £9,000 limit per year in their 2017 prospectuses. 

University fees already total £27,000 for the average three-year undergraduate course, and £45,000 for those who study for up to five years.

With today's students owing an average £44,500 when they graduate from a three year course - accounting for living costs and expenses according to the Sutton Trust, Degrees of Debt report - it is understandable that many parents want to help.

The message to parents who want to contribute is simple - the earlier they start saving, the more affordable it will be.

How parents want to help

Research from Wesleyan, the specialist financial services provider, has found parents would like to ease their child's student debts by contributing on average two thirds (67%*) of the university costs.

On the basis of an average debt of £44,500, it means that parents will need to find £29,815 if they want to make this level of contribution - with parents of those studying for more than three years needing to save even more. That's a large sum of money to save, and that's just for one child.

Why saving early matters

Wesleyan calculated that if parents put away just £95¹ a month from their child's birth until their graduation at 21, they could cover their anticipated contribution.

To put this in perspective, if they put off saving until their child starts primary school aged five, they will need to save £132 a month - forcing them to find an additional £1,400 before graduation to make up for lost interest.

Waiting until their child begins secondary school at 11 will mean having to save £224 a month - and £2,940 extra.

If they wait until their child has taken their GCSEs aged 16, the amount parents will need to save more than doubles to £472 a month - forcing them to put aside a total of £4,380 more than had they started saving at birth.

The additional cost of delaying saving is even greater if parents plan to cover the full cost of their children's university debts - saving either £142 a month from their child's birth until graduation, £197 from the age of five, £335 from 11, or £705 from 16.

Saving early also means there is more investment growth over the years. A parent saving £95 a month from their child's birth until their graduation to raise the £29,815 they want to contribute will actually only have put away £23,940 - with the other £5,875 coming from the investment returns!

Ideas for how to save over time

So the first lesson for parents is to start saving early - even if they can't afford to put aside the full amount they need to.

The next step is to ensure they have the right long term savings plans in place. Taking advantage of a range of savings products that allow them to build compound interest, make the most of tax efficient savings products, and utilise the full ISA allowance will help them reach their target. If saving for a goal that is 21 years away, they can afford to save into products that prevent savers from accessing the funds in the short term, in return for a potentially higher return.

But what products are available that can help achieve this?

One of the easiest ways to achieve this is with an Individual Savings Account (ISA), which allows money to grow free of capital gains and income tax. Because of the tax efficient nature, there are limits to how much can be saved into an ISA each year. For the tax year 2016/17 this is £15,240.

It is possible to save the full amount in cash, stocks and shares, or the new Innovative Finance ISA, or any combination of the three, provided the limit is not exceeded. Some providers also have the added flexibility of allowing savers to make withdrawals from their ISA and put it back in later, without losing any of their tax free allowance, provided the money is put back in within the same tax year.

Additionally, parents should review any existing savings, investments or assets they already have as these may provide returns that could contribute towards the fees.

It's also important to remember who else can help. Grandparents may want to help and they too can make tax-efficient contributions towards education costs while potentially reducing any inheritance tax liability on their own estates. However, reducing inheritance tax liabilities is a complex area, so it's important  expert advice is taken when considering this.

Finally, it may also be worthwhile to explore whether the universities on the wish list have any bursaries, grants or scholarships available to help with the cost. These details should be available from the schools themselves or the local education authority.

Saving for school fees

Parents who want to give their children the best start in life and send their children to private school need to adopt a similar approach.
 
Yet this can be a very big financial commitment for families, even those with higher incomes.

Data from the Independent Schools Council shows an increasing number of families are choosing to put their children through private education, with the current numbers at the highest level since records began.

However, with school fees increasing by 25 per cent over the past five years to total more than £200,000 from ages five to 18, if parents do decide to take this option, they will need to plan their finances carefully for it to remain an affordable option.

The average cost of private school fees for day students is £13,418 a year. If prices continue to rise at the same rate as over the past year, that will amount to at least £218,928 over the course of their education, for children starting school at five this year and finishing at 18 ².

The annual fees leap to £32,065, or more than half a million pounds over the course of their education (£519,915), if the children board³.

Wesleyan again calculated that if parents save £11,248 per year from when their child is born - equivalent to £937 a month - in a savings deposit account paying interest at 2.5% per annum, they would build up enough money to cover the cost of day school private education.

While this will still remain a big financial commitment, the interest earned over the years could amount to the equivalent of one year's average fees, providing another reason to start saving as early as possible. The interest accumulated over those 18 years (£16,468) would save them the equivalent of more than the first year's school fee.

But the research found just one in five (18%**) doctors, dentists and lawyers are currently saving towards private school fees.

While parents who want their child to board would need to save more than double, £26,720 a year, or £2,227 per month, the interest earned over 18 years (£38,948) would still equate to saving more than the cost of the first year's boarding school fee. 3

Teaching good habits

Wesleyan's research showed that many parents did not want to pay for all their children's higher education costs, meaning children will still leave university in debt.

With this in mind, parents should also help instil good financial habits in their children from a young age, to help them cope with their student debt and ongoing money matters once they've graduated.

* Survey of 388 doctors, lawyers, dentists and teachers by Censuswide, Feb/March, 2015

** Survey of 290 doctors, dentists and lawyers by Censuswide, Feb/March, 2015
 
¹ The monthly savings calculation uses an annual growth rate for illustration based on typically investing over the longer term (more than 5 years) using a mid rate of 2.5% growth that is considered average. This does not include any product charges so any personal illustrations from a Wesleyan Financial Consultant will differ from those shown above. For more go to www.wesleyan.co.uk/investments-centre/online-savings-calculators/cost-of-delay-calculator/

² Day fee day school - Calculation based on current average annual fee for day fee day schools (2015/2016) of £13,418, with an annual inflation in fees of 3.7% applied for the life of the child's education up to and including A-Levels. 3.7% is the average rate of fee increase reported by the Independent Schools Council (ISC) for day fee day schools in its annual census based on a survey conducted in January, 2016.

18 annual savings of £11,248 required or £937 per month (11248/12 = 937)
Total interest generated from 18 annual instalments of £11,248 = £16,468

³ Boarding school - Calculation based on current average annual fee for boarding schools (2015/16) of £32,065, as estimated by the Independent Schools Council, with an annual inflation in fees of 3.6% applied for the life of the child's education up to and including A-Levels. 3.6% is the average rate of fee increase reported by the Independent Schools Council (ISC) for boarding in its annual census based on a survey conducted in January, 2016.

18 annual savings of £26,720 required equivalent to £2,227 per month (26720/12 = 2,227)
Total interest generated from 18 annual instalments of £26,720 = £38,948.

Please note that past performance is not a reliable guide to future performance and the value of your investment can go down as well as up, so you could get back less than you have invested. Tax treatment depends on individual circumstances and can change in the future.

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