As we approach the next academic year, thousands of UK parents are thinking about how to pay their offspring’s university tuition fees and living costs.
The cost of a three-year course in England and Wales, including living costs, is now estimated to be around £60,000. What on earth are they going to spend it on? The answer could be:
How much can they borrow?
Student loans cover tuition costs (up to £9,000 a year) and maintenance. The amount received as maintenance is means-tested. Other factors, like where they live while studying, are also taken into consideration. Outside of London, away from home, the maximum maintenance amount will be £8,200 a year but this starts to reduce when household income exceeds £25,000.
The tuition fee element of the loan is paid directly to the University and maintenance is paid to the student. Some simple maths will show that there is going to be a shortfall between what can be borrowed as student loans, and what is actually required. Not all students will have the opportunity for part-time work, so enter the Bank of Mum and Dad.
Are student loans a good idea?
According to Martin Lewis (www.moneysavingexpert.com), it makes more sense for the student to have a loan than the parent. Parents who borrow money themselves to avoid their children starting their working life in debt are going to pay significantly more for the money than a student loan would cost. Student loans are different from other loans when it comes to repayment. The rate at which the loan is repaid doesn’t depend on the rate of interest, but on how much the graduate earns.
Repayments start when they earn £21,000 or over, starting at 9% of their pre-tax income over that threshold. This will be deducted by their employer. The more they earn, the more of the loan they will repay, including the interest. For higher earners the interest will be higher but they will probably pay off the loan faster.
Lower earners will probably have at least some of the loan written off and will pay less in the meantime. The terms of student loans are pretty good. It’s not secured on a property, doesn’t appear on a credit file and repayment is automatically arranged, so the graduate is not hassled for missed payments. The student loan is written off after 30 years if not paid, so needn’t cause any long-term worry.
The cost of either living in university accommodation or a rented flat is a major part of the budget. Some parents have decided to solve the problem of this cost by becoming student landlords. For parents spending hundreds of pounds a term on rental payments, investing in student accommodation can sound like a great idea. Parents who buy a property for their child to live in, and rent out additional rooms to other students, can often offset the costs of their own child’s accommodation.
Many homes around universities are already converted into a range of apartments and communal spaces, so getting a mortgage might be easier than for unconverted houses. Finding a mortgage will often involve calculating the risks and rewards of investing in student accommodation – something a financial adviser is well-equipped to assist with.
The Bank of England’s chief economist Andy Haldane suggested over the weekend that property was likely to generate higher returns for those planning for retirement than pension saving. The chronic shortage of new housing supply pushes up prices, so owning property that benefits your children whilst they are studying could be a win-win.
Planning is everything
For those parents whose children are in secondary education, now is the time to start making plans.
It might be as simple as reviewing the household finances and trimming some costs such as utilities to create a small surplus that can be invested over the next few years. It might mean seeking the advice of a professional financial adviser to make a more concrete plan that involves investing appropriately, with the funding of university and the possible purchase of a property as the main aim.
If you are a financial adviser, perhaps this would be a good opportunity to contact clients with children and encourage them to start planning.
*“An investment in knowledge pays the best interest”. Benjamin Franklin