Paying for university – save early to ease the burden

Sixth form students in England, Wales and Northern Ireland are this week poised to find out their A-level results and whether they've secured the required grades to take up offers for degree courses, or will have to enter the annual scramble for places through the clearing system.

Degree courses remain popular with school leavers, but the cost of going for today’s students is staggering. Universities can charge UK students up to £9,250 per year, which means the average three year course will set the student, or their family, back a whopping £27,750. And this is before they have bought a single book, meal or factored in any accommodation. Some students may decide to take a part-time job to help alleviate the financial burden, but this is not stopping the average student debt climbing to more than £50,000 according to the Institute for Fiscal Studies.

Ian Dyall, head of estate planning at Tilney, said: “University can be an incredibly rewarding experience, pave the way to improved career opportunities across a wide range of professions and, of course, be fun. But the sheer cost of going, and the resultant debt for students, mean they start their careers saddled with an enormous burden that they may feel they can never be rid of. This in turn will have a knock on effect, delaying the point at which they can get on the housing ladder or begin saving towards their retirement. So what can parents and grandparents do to help?

“A very simple way to start saving for your child could be to invest in a Junior ISA. These are open to any child under the age of 18 who does not already hold a Child Trust Fund. Parents and guardians can invest up to £4,368 for the tax year 2019/20, with returns accruing free of tax and becoming accessible only when the child is 18. Investing into a JISA can be done either through regular monthly savings or through lump sum investments into an account that can hold cash or stocks and shares (or funds investing in stocks and shares). One of the advantages of parents funding Junior ISAs is that they do not get caught by the anti–avoidance legislation that usually applies when investing in a minor child’s name, whereby the parent is still liable to tax on any income generated by the child’s investment, such as dividends, if it exceeds £100.”

Tilney estimates that a family investing £150 a month into a Junior ISA for eighteen years and achieving an average annual compound growth rate of 5% would accumulate a JISA worth £52,380. Those able to utilise the full allowance and invest £364 a month would achieve an investment of £127,109 on the same time and return assumptions.

Dyall added: “If grandparents wish to help their grandchildren, or parents wish to gift more than can be gifted to JISAs, investing via a managed fund held in a bare trust can be very tax efficient. Whilst the anti-avoidance rules apply if parents fund the trust, those rules do not apply to grandparents, or to any capital gains, whether funded by parent or grandparent. This means that the child can use their capital gains tax allowance and possibly their income tax allowance to avoid most or all of the tax liability. The money can be used for the child’s benefit before 18 if required (unlike a JISA) and is unlimited in size.

“With both JISAs and Bare trusts, the child can demand access to the money at 18. If parents are reticent about this, particularly for larger sums, they could save money into a discretionary trust. This gives them control over how much each child benefits from and when, although they don’t have the same tax advantages as bare trusts.

“Money provided by parents for the education of their children is usually immediately outside of their estate for inheritance tax. Gifts from grandparents will only be exempt if they survive them for 7 years unless they are covered by one of the inheritance tax exemptions. A total of £3,000 can be gifted to anyone in a tax year and is immediately exempt. Alternatively, regular gifts from income that they do not use can be made and again are immediately exempt.

“The most important thing to factor is to start saving as early as possible. As with saving for retirement, your first pound saved is the one that works the hardest, and the same is true for those parents saving for their child’s education. It will be much harder to help your child if you only start saving while they are doing their A levels.”