After a bumper year for A level grades, almost 400,000 students were confirmed at their first-choice university this year. This is good news for them, but may also commit their long-suffering parents to at least three years of accommodation costs and tuition fees. Making the right investments early on can ease the burden.
Tuition fees are currently set at £9,250 and living costs can be the same or higher. Students can get loans, but interest rates on student loans are set at an uncompetitive 6.1% and the interest rolls up over time, increasing students’ debt burden before they’ve started to pay it off. Many parents would rather their children did not start their adult lives with this hanging over them.
However, the costs of this kindness mount up – parents are looking at approximately £60,000 for a standard three year degree; even more if their child is studying foreign languages, or for a medical or veterinary degree.
If a child has ambitions to go abroad, costs can be far higher. Tuition fees at Trinity College Dublin, for example, costs just EUR 2681 for EU nationals, but EUR 20,609 for those coming in from the UK. At the top of the tree are the US universities, where a single year’s tuition could set parents back $50,000 or more (£36,000), with accommodation and living costs on top.
There will be plenty of parents for whom the burden of education costs starts far earlier, either through private school fees or the added expense of moving near a good state school. Sending a child to private school from 11 costs around £105,000, more in London and far more for boarding.
Paying for it - just university
For parents just looking at university costs, they have 18 years to prepare. This time is important: it means they can take stock market risk because they have plenty of time to ride out the ebb and flow of share prices.
The biggest problem over 18 years is likely to be inflation. Education costs continue to rise with inflation and students will be subject to the usual cost of living rises. Keeping money in a savings account is almost certainly the worst possible option. In general, savings accounts pay less than 1% while inflation is currently running at 2.4%. Any savings pot left in cash will be losing money in real terms over time and may be ‘reckless caution’ on the part of parents.
In choosing stock market investments, some basic rules apply: it needs to be diversified – think collective funds rather than single stock investments; it needs to be tax efficient – think Isas rather than ‘unwrapped’ investments and it needs to be focused on growth.
This ‘growth’ focus is perhaps the hardest to achieve. Stock market investments do not come with a guarantee. However, there are ways to future proof a portfolio. Looking at global funds rather than UK-focused funds expands the opportunity set for fund managers. Equally, funds that build ‘sustainability’ criteria into their portfolios are likely to have greater longevity. This ensures that they are investing in companies managing long-term risks effectively, such as climate change.
School fees
Private schools continue to be a popular choice: people may not want to move to get into a good state school - or that have weighed up the stamp duty cost of moving and figured that they may as well pay school fees.
Barring wealth grandparents, the best way is to start early and keep going. The problem with children is that there isn’t always a lot of time to plan. Couples find themselves paying nursery fees before they know it, with almost no spare income to save.
However, every little helps. Paying school fees out of taxed income every month is a major burden. Saving £1000 a month for a decade will give a pot of £155,000, assuming 5% growth. Parents can either use that pot to create an income – it may pay a term’s fees and ease the pressure or gradually draw down on it once a child reaches 11. Income-focused investment trusts can be a good option. The AIC’s Dividend heroes list is a good place to start - https://www.theaic.co.uk/income-finder/dividend-heroes
It can be worth encouraging wealthy grandparents to participate. It moves money out of their estate for inheritance tax purposes, potentially saving tax at 40%.
Who is in charge?
While child trust funds can look like a good option, they aren’t necessarily the best vehicle for paying education fees. This tax year (2021-22) parents can invest up to £9,000 on behalf of each child into Junior Isa, leaving any gains and income tax-free. Anyone can pay money into it. However, children become entitled to the proceeds when they are 16. They may choose to spend it on their education or they may not. It can be useful for day-to-day expenses while at university, but parents can’t force children to spend it on their tuition fees.
It can be better to use your own Isa or pension allowance to keep as much as possible out of the reach of HMRC. Pensions can be useful for older parents. For example, they could use their 25% tax free allowance to pay school fees (as long as it doesn’t compromise their standard of living later on). However, this can’t be taken until 55 (57 by 2028). As such, it may be more useful for useful for university fees than school fees.
There is no magic bullet for education costs. It’s a lot of money and parents don’t always get lots of time to plan. However, every little helps and if your wealthy and well-educated children can be persuaded to look after you in later life, it may just be the best investment you’ve ever made.
