University Challenge

Students are coming away from University with a significant amount of debt and this is likely to increase given that many are likely to have debts of approaching £40,000 after a typical three year course from 2012…

It is no surprise that future students are wondering therefore how to pay additional costs, whether to take on high levels of debt, or how they can make it all add up and still squeeze in a pint (or two) at the end of the week. What many potential students need today, just as much as saving for education, is education to save. Although, it is fair to say that even with a part time job or potential earning opportunities before University it is highly unlikely that any income and capital accrued will be enough to stave off an increasing amount of debt.

Whilst you as a parent would wish for your child to become independent, self-sufficient and financially aware it is not a pleasant thought to see them burdened with so much debt at a young age. I’m sure you would like to assist your children with University costs; however this usually comes at a time when other financial areas may take priority such as retirement planning or reducing a mortgage liability and hence surplus income or capital is at a minimum.

The key is to consider University funding in your overall plan at the earliest possible opportunity. It is encouraging to note that currently one in five Britons have a savings plan to pay to educate their children at school and University, as parents are increasingly aware of the above issues and hence feel the need to make suitable arrangements for their children’s future. This is despite a significant squeeze on consumer incomes, with the average saver putting aside around £122 a month for education purposes.

If a parent of a student starting University this year had put aside £122 per month from their child’s birth, they would have accumulated more than £42,000 in savings, assuming 5% growth per annum. By delaying the funding for five years the accumulated potential savings reduce to £26,000. It is clear that by saving as early as possible you will benefit from long term compounded investment growth.

Once an initial savings amount has been decided upon it is important that the monies are invested in a prudent manner suited to the investment timescale in mind. Whilst initially paying into a cash account may seem like the most straightforward means of saving for a child’s future this will severely limit the potential investment growth and ultimately reduce the purchasing power of the money in years to come when it is sorely needed.

This point is crucial as, if we take into account inflation, assuming it averages 3% per annum in the future, the costs of tuition fees alone for a child born today could be just under £15,000 a year by the time they reach the age of 18.

It is also imperative that the most appropriate investment vehicle is utilised to reduce the impact of taxation and hence maximise investment growth. This could be achieved, for example, by utilising the new Junior ISA allowance, placing money in a Trust or offshore investments.

Starting a regular savings and investment plan when a child is young can at least help shoulder some of the costs of higher education and give comfort that you have provided the opportunity to give your children the best start in their adult life. Perhaps more importantly you would also have helped to demonstrate a key lesson in life – the value of responsibility and planning for the future. If you would like to discuss planning for your children’s future then please do not hesitate to contact Old Mill.