University education - how to save for the cost of a degree
University costs are soaring and the next generation faces a huge bill for their education. But with forward planning, it is possible to help your children and grandchildren meet the cost of university and start their working life without the burden of huge debts.
With A level results out in England and Wales this week, teenagers will find out if they have made the grades for their preferred university or whether they need to enter the annual scramble for places through the “clearing” system.
The last 40 years have seen a massive expansion of higher education in the UK with well over 40% of school leavers entering higher education in recent years. This compares to just 6% in 1962. Degree costs have escalatead in recent years too, with the National Union of Students estimating that the average expenditure in 2012/13 comprising fees and living costs for a degree in London was £23,521 and £22,189 for the rest of England, meaning the cost of a three year course may exceed £70,000.*
These costs are clearly daunting. Yet a degree can be a life-changing experience and a valuable passport to improved career opportunities. It is therefore vital for parents, guardians and grandparents who aspire to see their children and grandchildren have this opportunity, to plan ahead.
The key to cracking the costs of financing a future university degree is to start as early as possible. Based on an assumption of achieving a return of 5%, net of charges, each year you would need to invest £203 a month for 18 years to generate approximately £70,000. However, add in an inflation assumption of, say 2% (the Bank of England target), and the required sum is more like £246 per month for 18 years.
Tilney Bestinvest’s Saving for Education calculator is a helpful tool designed to assist parents and guardians work out the level of contributions they might need to make to help fund a future degree course or private school fees.
Your first port of call for building a children’s savings pot could well be a Junior ISA; the government’s flagship savings scheme for children, launched three years ago. The recent Budget increased the amount parents and guardians can invest in a JISA to £4,000 – that’s a tidy sum but if you are starting to save relatively late in the day, it may not be sufficient in itself and you may need to consider additional savings plans.
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). All returns accumulate free of tax on gains and Income Tax as the value of the Junior ISA builds over time. Although you can’t access the money before the child reaches age 18, at that point full ownership of the account passes to them, enabling them to either withdraw funds or continue with the investments as an adult New ISA.
More information on Tilney Bestinvest’s Junior ISA can be found here
While Junior ISAs are a useful tool in the armoury, they are by no means the only way of saving to fund future university costs. In particular some parents may be deeply uncomfortable about giving their children access to a big pot of assets from their Junior ISA when they reach 18 feeling they are not yet ready to take responsibility for such a sum and may squander it. Parents wanting to exercise more control may therefore choose to set up a trust or use their own New ISA allowance instead. The new ISA allowance is a hefty £15,000 for the 2014/15 tax year, as announced in the Budget, withdrawing funds as cash as and when required.
Whatever you choose to do the important thing is not to delay too long. Remember: the earliest pound invested will be the most valuable one in the long run.
For more information on Junior ISAs and other investment options for children, download our guide to Investing for Children.
This article is not advice to invest, or to use any of our services. The value of investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested. Prevailing tax rates and reliefs are dependent on your individual circumstances and are subject to change. Different funds carry varying levels of risk depending on the geographical region and industry sector in which they invest. You should make yourself aware of these specific risks prior to investing.