Planning for the cost of higher education

Two worrying pieces of news recently emerged for parents and grandparents. Having a good higher education and “getting on the home ownership ladder” are two important aspirations for the young. These are usually equally shared by their parents and grandparents. Both aspirations are becoming harder to achieve.

It is relatively well known that the tuition fees for higher education at universities in England has increased to a maximum of £9,250 per annum. Using the University of Kent’s cost of living calculator for an undergraduate living off campus the annual cost of living, including books, food, clothes, travelling to and from college is between £11,742 and £21,570. That is between £35,935 and £66,013 for a three year course, assuming 2% a year inflation. This cost of living does not include the tuition fees that students are required to pay.

According to The Institute of Fiscal Studies, an undergraduate from England is likely to accumulate student debt of up to £50,000 by the end of their course – regardless of whereabouts in the UK they study. This is almost twice as much as students from Scotland, Wales or Northern Ireland.

It seems that this is having its effect on university applications with students, appearing to effectively apply a “cost/benefit” approach to making the decision on their future. With the cost increasing and reports of fewer graduates getting “graduate jobs” it is not surprising.

The press have reported some pretty significant drops in applications, but in November UCAS took the unusual step of publishing early data on UCAS applications for 2012. This showed a 13–15% drop compared to the record year of 2011 entry, with a 15% drop for UK students applying to UK Universities. In the last three weeks the gap has narrowed to around 10% overall.

Universities are reporting informally that a 25–30% drop in May 2019 narrowed significantly and while there are some concerning subject related patterns in the early application stats (creative arts, social sciences and business showed above average decreases) the overall picture is not as gloomy as the media would suggest. A fall in applications is expected but it may actually be relatively small if the gap continues to narrow. Many students are also being more realistic in their choices if specific university entry requirements are way beyond the reach of their predictions.

As well as influencing applications, such is the increase in the maximum tuition fee that it has apparently exerted considerable upward pressure on inflation pushing the CPI rate above 2.5%. Those faced with the fees (parents or students) will be less concerned with the “macro” effect of the fee hike on inflation and more concerned with the impact on their own financial position. Student loans help and should perhaps be considered more as a commitment (by the student) to increased deferred taxation payable (at 9%) on income in excess of £25,725.

Even with this view of what the loan in practice is, parents (and grandparents) with a “never a borrower or lender be” mentality may still wish to help with or fully fund this cost. In which case the earlier they start the better and the more you can minimise tax outflow the greater the likelihood that the objective can be achieved.

The same goes for funding the increasingly demanding amount required as a deposit for first home purchase. Halifax’s “Generation Rent” report reveals that the average deposit required for a first time purchase in London is over £57,000 and £27,000 for the whole country. And if living in Camden is your bag then you are looking at £145,000!

The need for family (usually parent/grandparental) help is overwhelming. And it’s something that many parents would want to help with. So, based on the country average, for those parents looking to fund a deposit and a university course, we are looking at a present value of around £70,000 and more like £100,000 for Londoners.

In doing your sums you need to build in inflation of course – running at over 2.5% at the moment – fuelled by the very increase in tuition fees you might be funding for.

And for parents it might not end with the deposit; there’s also the strong likelihood of needing to be guarantors or joint mortgagees to access the borrowing that will inevitably be needed.

“It was all a lot easier in our day” say the parents and grandparents of today – and they are right.

Goal setting, investment selection, tax minimisation and the resulting creation of a bespoke, suitable plan for those parents and grandparents prepared to make the commitment will all be better achieved with the benefit of informed and experienced financial advice. Building a tax effective higher education and first home purchase fund is not something that most consumers can easily do themselves – on-line or otherwise.

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Source: Techlink

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