Covering the cost of university

Covering the cost of universityThe publication of A-level results today will have many prospective students thinking ahead to the reality of university life and covering its costs.

Starting university is an exciting time, but it can result in the long-term burden of student debt.

As things stand, the university tuition fee cap is £9,000 a year. This is due to rise in line with price inflation to £9,250 next year.

In addition to tuition fees, students and their families also need to consider living costs.

At the start of this month, grants for students from low-income homes have been replaced by loans.

This means students from families with annual incomes of £25,000 or less will no longer receive a  grant of £3,387 a year.

These changes are likely to result in students ending up with starting debts of over £50,000.

It is fair to say that many parents feel uncomfortable about their adult children being saddled with big debts as a result of university education.

With some forward planning, it is possible to reduce this debt burden.

One option is to invest in a Junior ISA each month, building a fund to contribute towards university costs.

Fidelity International have suggested that parents looking to give their child a helping hand could invest £170 a month into a Junior ISA as soon as their child is born.

With investment growth, this could give them over £53,000 by the time they turn 18 –  enough money for a debt-free degree.

It could still be worth considering the student loan option as, under current legislation, these can be written off after 30 years.

Tom Stevenson, investment director for Personal Investing at Fidelity International comments:

“Student loans are different from other types of borrowing. In fact, I think it is not really helpful to think of a student loan as a loan.

“For me, a more accurate way of thinking about this is as a ‘graduate tax’. Just as higher earners pay a higher rate of income tax, so too now do graduates (who tend to earn more than non-graduates).

“Graduates only begin paying their loan off when they start earning £21,000 per annum or more, at which point they pay interest and/or repay capital at 9% of their income above this threshold.

“It is also important to understand how interest on the loan is calculated. The level of interest charged on student loans is currently linked to the RPI measure of inflation and it begins accruing the moment the loan is taken out.

“The interest rate is updated once a year in September, using the RPI measure of inflation from March plus a maximum of 3%, depending on how much a student earns.

“RPI stood at 1.6% in March 2016 so adding up to 3% puts the maximum interest accrual at 4.6%.  With inflation expected to rise as a result of Brexit, students should be prepared for a spike in their student loan interest rates.

“For lower earners this means that the amount of interest they pay each year may not even match the amount by which the outstanding loan rolls up. As a result, many people may never repay the full amount of the loan.”

“The crucial difference between a student loan and any other debt is that what remains unpaid 30 years after you become eligible to start repayments will be written off. With student debt exceeding £50,000 even before interest starts to roll up, it’s likely that a significant proportion of students won’t re-pay their loan in full.

“If you think you may work in a lower paid job, or will take time off to raise a family, it may be that you will never pay as much as the full up-front cost of your degree.”

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About Martin Bamford

Martin Bamford is a Chartered Financial Planner, Certified Financial Planner (CFP) professional and published personal finance author. He works with elderly clients to provide advice on funding residential care fees, hosts the Informed Choice Podcast and is a keen ultra runner.
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