We all strive to do the best for our children and a good education is often seen as the starting point. Whilst many parents consider how to fund the first 18 years of their children’s education, the substantial costs of university are often overlooked. With tuition fees rising and student loans now arguably becoming the most expensive way to fund a university education, many parents struggle to see how to meet these costs or stop their children going into debt. Following the insights from our Cost of Education Report, we partnered with the Centre for Economic and Business Research (Cebr) to research the total costs of university and the associated funding options.
Cost of university
Following the fee cap increase in 2012, and with fees recently reset for top universities like Durham to £9,000, the outgoing cost of university can amount to £19,900 a year- more than the UK minimum wage at the moment. The Cebr’s research indicates that a three-year course paid upfront and starting in 2016 could well reach £61,100 in total, rising to £82,400 for a four year course.
For parents of potential students, these costs are no longer as manageable to fund from earnings or cash savings, and with the new student loan structure that comes into effect this month, if a student is not in a position to repay the loan immediately on graduation it becomes one of the most expensive ways to fund a university education.
Not only does the outstanding loan balance start incurring interest at a 3% rate above inflation while students are still at university, most professional salaries cannot keep up upon graduation, meaning that repayments may end up being double the original size of the loan. It is unsurprising, therefore, that the majority of students will never manage to pay back their loans in full whilst continuing to be charged interest on the outstanding debt.
Two schools of thought
You have potential students being counseled to psychologically reframe loans as a Graduate Tax on one hand, and others decrying the value of going to university on the other, with recent research declaring 37% of graduates polled having regret attending given the amount of debt incurred.
The vast majority of the parents we speak to still very much assume that University, or some sort of Higher Education, will be a part of helping to get their children off to a great start. Rather than passively accepting the situation or steering clear of further education, there is another way based on the core principle that underpins every student loan: compounding interest.
Saving and investing early for children
It isn’t at the top of the agenda for most new parents, but starting early and saving little and often can make a big difference. As little as £2.56 saved each day from the day your child is born, then invested at the end of every week in a Stocks and Shares ISA, could result in an inflation adjusted savings pot of £28,500 by the time they are 18. Even at an assumed 5% rate of real return, rather than the industry standard of 6%, which takes into account inflation, this is substantially more than the £16,807 this would represent if purely saved in cash alone. Of course when you choose to invest there is a risk that the investments can go down as well as up and there is no guarantee of the return you would receive. The time horizon should be sufficient enough to make harnessing the power of £1 and compounding interest really work in the parents’ favour. Even if you start when your child is five, with an investment horizon of 13 years, saving just £4.08 a day, the principle would remain the same.
With foresight and some early financial planning, making use of compounding through investing alongside making the most of a family’s annual allowances (such as the £3,000 gift allowance) both parents (and grandparents) can make investments work for potential students, rather than against them – ultimately minimising the total cost of university and wider financial impact on their adult life. This approach will be crucial in order to ensure the family’s finances are protected and graduates are not entering employment on the financial back foot.