University is a milestone for many British youngsters, yet with some graduates leaving university with £50,000-worth of debt, many parents want to financially support their children alongside student loans. But without careful planning, could you be putting your own finances at risk?
Today, universities can charge up to £9,250 a year in tuition fees. This means a three-year course can cost £27,750.
Include the interest that builds up on these student loans, and Brits can graduate with towering debts.
Student finance 2017/18
Student finance looks very different after reforms introduced in 2015.
Today, your child starts to repay their student loan once they’re earning £21,000 a year. Regardless of what your child earns, 9% of their annual salary above this threshold will go straight to Student Finance from their pay-packet.
If your child’s earning £25,000, they’ll be paying around £360 a year. This jumps to around £810 when your child’s earning £30,000 a year.
As well as shaking up how student loans are repaid, grants disappeared from the finance dashboard, whilst the amount students can borrow was increased.
Are student loans means tested?
Although the maximum amount a student can borrow has increased, your child won’t get the full loan if your household earns over £25,000. The average wage in the UK reached £26,312 in June, according to the Office of National Statistics.
If your child is entitled to the full amount, they’ll borrow £11,002 a year if they’re studying in London, or £8,430 if they are outside. As your household income increases, the amount your child is entitled to falls.
If your family brings in over £69,847, your child will only be entitled to £5,479 a year¹. This means that, as a parent, you’re expected to pay £5,523 a year to ensure your child has the equivalent of £11,002 to pay for rent, bills, travel, food, clothes, and – of course – beer from the student union bar. Your child might be able to work whilst studying, although this might sacrifice their grades.
This soon adds up. You could be paying £16,569 if your child is studying a three-year course, and they’re still going to graduate with debt. This could easily be equivalent to half of your annual salary if you’re a two-parent household.
How to prepare financially for university
The numbers can seem daunting, and it’s hard to know what the student loan landscape will look like in a few years to come. The cost of higher education has become a hot debate topic as the parties try to entice young voters.
Whilst you want to support your child and ensure they get the best start in life, you don’t want to completely sacrifice saving for your future – you need to get the balance right. Your child is going to need to learn to budget and maybe work part-time to earn some money and ease the burden on you.
This can be tricky if you don’t prepare your family finances early. Putting a little bit away early on can reduce the burden on your family budget later. For example, if you start saving when your child is born, you’ll only need to put away £77 a month. If you wait until they’re ten, you’ll need to earmark £173 for the university fund each month.
However, it’s never too late to start saving; a few months of savings can help a family through the first term, which can be the most expensive.
Does inflation impact my money?
Savers need to be aware of the silent impact inflation has on your cash savings. Imagine you were given £16,569 when your child was born to help them through university.
If inflation averaged 2% over 18 years, the purchasing power of that savings pot would have reduced to around £11,518 by the time they started studying.
With interest rates at rock bottom, savvy savers have turned to investing in the hunt for inflation-beating returns to protect their money.
Investing is personal; understanding what you’re saving for and when you’ll need your money is one of the first steps to achieving your financial goals. If you have a longer time horizon like 18 years, you can afford to take on more risk, and expect higher returns.
Of course, the value of your investments can go down as well as up, but a long-term horizon encourages you to ride out any short-term negative performance and ensures your investments benefit from compound interest – where the return on your money earns its own returns. This is arguably the most powerful, yet underestimated force when investing.
1 Money Saving Expert