With university tuition fees and living costs rising, how can parents and grandparents help pay?
Most universities now charge tuition fees of £9,250 a year. As a result, the average graduate now finishes university with £50,000 in debt according to the Institute for Fiscal Studies.
Tuition fee loans are not means tested. No matter how much the student’s household income, their fees will be covered. So for many, it’s actually living costs that pose the most immediate problem. Even with a part-time job, many students will still require financial assistance.
The University of Birmingham estimates that for a student living in self-catered university accommodation, total living costs for an academic year are around £13,000.
What help is available?
While non-repayable maintenance grants no longer exist, maintenance loans are available. Unlike tuition fees, these are means tested, based on household income and vary depending on where the student studies.
The minimum loan for a full-time student living away from home and outside of London, for the 2017/18 academic year, is £3,928. The maximum – available to those with household income of less than £25,000 – is £8,430. Those with household incomes of above £62,187 get the minimum.
A student with a household income of £60,000 would qualify for a maintenance loan of £4,193, leaving them almost £9,000 short of the £13,000 required according to the University of Birmingham.
According to Royal Bank of Scotland, the average student earns £96.70 a month from part-time work. Over a nine-month term, that’s £870.30 – barely a dent in the annual shortfall. It would take 28 hours a week earning the UK ‘real living wage’ of £8.75 an hour, working every week of a 39-week academic term, to make up the £9,000. Even this, which would be a big ask for any student, is instantly in doubt as not all employers currently offer the real living wage, which is voluntary. Many students will earn minimum wage; at £7.05 per hour, this is lower than the real living wage and it goes even lower for under 21s. So many students would have to work even more hours to get near the shortfall. With this in mind, how can it be paid for?
Saving via ISAs
Increasingly, parents and grandparents will have to start saving early if they wish to help fund the cost of university.
The Junior ISA allowance for the 2017/18 tax year is £4,128 per child. Savings can be held in cash or invested and any gains are tax free. Remember, with a Junior ISA, when the child turns 18, they can use the money however they wish. So if you want to ensure the money is used as intended, you may consider investing the money in an ISA in your name. Anyone over 18 years old can invest up to £20,000 per tax year, which would be free of UK Income Tax and Capital Gains Tax.
Using pension cash
Pension freedoms, introduced in 2015 provide far more flexibility to anyone aged 55 and over. You can now take some or all of your pension as a cash lump sum – 25% is tax-free and the rest is subject to UK Income Tax. Investors get tax relief on contributions. If you are a basic rate taxpayer, 20% of the total contribution into a pension comes from the taxman.
If you pay 40% or 45% UK Income Tax, you can claim back up to an additional 20% or 25% from HMRC on part or all of the contributions made. This makes pensions particularly tax-efficient for higher rate and additional rate taxpayers. If you are able to make use of the pension freedoms it could be a tax-efficient way to fund university costs.
Reducing Inheritance Tax
People often wish to gift money to their children or grandchildren to lend a helping hand. To be free of IHT, the person making the gift normally needs to live for a further seven years, but there are a number of exempt gifts you can make which are immediately free of IHT. Each of us can give away £3,000 each tax year, if the previous year’s allowance wasn’t used, this could be up to £6,000. One of the most valuable but least known exemptions is ‘gifts out of normal expenditure’. This allows you to give away as much as you like free of IHT, provided the gifts are made from your income, on a regular basis and don’t impact on your normal standard of living. This will be different for everyone, so it makes sense to take advice.
One route is to purchase a BTL property near the university, renting out spare rooms to help pay the mortgage. The idea behind this is that a house with, say, three bedrooms will be bought, with a room given to your child to live in and the other two rooms rented out to other students.
But two major tax changes now make this more complex than it was, and a less attractive a prospect for investors. First, any additional home purchase beyond a main residence now incurs an additional 3% stamp duty charge. On a £150,000 property, that would mean total stamp duty of £5,000.
Second, between now and 2020, higher-rate taxpayers will lose the ability to offset mortgage interest, so will pay Income Tax on gross rental income. This could mean rent doesn’t fully cover the cost of the mortgage.
Bursaries and scholarships
There are various bursaries and scholarships available in the UK, ranging from small one-off payments to continued support throughout a degree.
The vast majority come from the universities themselves. Some are specifically for those facing hardship, whereas others are focused on academic or other types of excellence.
Speak to the university to find out what is on offer. There are also websites that allow you to browse what’s available across the spectrum, including scholarship-search.org.uk and thescholarshiphub.co.uk
Planning ahead is the best option
Long-term investing is likely to be the least painful way to help a child through university, reducing the need for overdrafts or credit card debt.
YOU NEED TO KNOW
- The value of pensions and investments can fall and you may get back less than you invested.
- The tax treatment of pensions and investments depends on your circumstances and may change in the future.
- The age at which you can access your pension will change to 57 in 2028.
- The Inheritance Tax rules may change in the future.
- NFU Mutual Financial Advisers do not advise on Buy-to-Let investments.
GET IN TOUCH
NFU Mutual Financial Advisers can help you and your family plan for the future. Speak to your local NFU Mutual Agent or phone 0800 056 0142 (select option 3) and we will put you in touch with your personal Financial Adviser.
NFU Mutual Financial Advisers advise on NFU Mutual products and selected products from specialist providers. We’ll explain the services and charges.