Clock Is Ticking For Parents Saving For University Fees
The university year has just started for the latest undergraduates, but parents putting money aside for later cohorts have the pressure of time against them as they save to pay for future university fees.
Nearly half (46%) of parents of under 18s are saving for their children’s university fees, according to research by AJ Bell. The largest proportion of parents have saved between £5,000 and £10,000, but this would leave a significant amount still to be covered. The typical university costs can reach £60,000 or more, including tuition fees, living costs and accommodation.
Most parents want to help their children begin working life without being saddled with thousands of pounds in debt from their university years.
Saving little and often
Many parents are saving small amounts of money more often, such as £25, £50, or even £99 per month, said Dan Coatsworth, investment analyst at AJ Bell. He added: “This might involve sacrificing a meal out or a couple of trips to the pub, yet it can make a massive difference to the recipient during and after university.”
For most people, covering the cost of university takes a mix of tuition and maintenance loans to fund a degree. These aren’t repaid until the graduate is earning at least £25,000, and if the payment isn’t completed within 40 years, then the remainder of the loan will be written off, said Mr Coatsworth.
However, many parents are concerned about the impact on their child of having the weight of this debt hanging over their children on the day they leave university. Mr Coatsworth said: “It can have a negative psychological effect on a person, making them feel like they’re fighting a battle with their personal finances from day one of post-university life.”
The student loan payments effectively become a 9% tax on income until they are paid off or wiped at 40 years, which can lead to people becoming more anxious about their finances.
How do you build an investment strategy for university fees?
The important thing for parents to remember is that it isn’t essential for them to cover all university costs from savings. Any amount of contribution they can make is going to reduce the amount of debt their child will leave university with.
The key thing is to start saving and investing for university fees as soon as you can, because there is a longer period to have that money grow, and it means you shouldn’t need to save as much each month as you would if you left it until your child is almost at university age. But how much you can save will depend on what other demands you have on your monthly income.
Mr Coatsworth said: “The sooner you start to save for your child, the better. Admittedly, certain individuals or couples find they are strapped for cash during the early years of childhood, particularly if they pay for a child minder or nursery fees. In this situation, anything you can save is good, even if it is only a small amount. It’s all about getting into the habit.”
What if I haven’t started saving until my child reaches secondary school?
If you don’t start saving to cover university fees until your child goes to secondary school, you will have to play catch-up. But you may find you have more disposable income then and can save more than you might have been able to earlier as your childcare costs are likely to have decreased. So, all is not lost.
Mr Coatsworth said: “For example, Sadie invests £100 a month into a global equity fund once her 11-year-old daughter Chloe starts secondary school. The fund grows by 7% a year after fees and is worth £10,874 by the time Chloe turns 18.”
While this is still a sizeable amount of money, it is less than you might have been able to generate by starting earlier. In the same example, with £100 being saved from Chloe’s fifth birthday and achieved a 7% return, the pot would have been worth £25,175 by her 18th birthday, said Mr Coatsworth. Depending on the investment product you use, you can also ask friends and wider family to contribute, which would lead to a bigger sum to offset university costs.
You can also continue saving while your child is at university, as the course could be anything from three to five years. But you would want to reduce the amount of risk you are taking with these later investments to ensure you don’t see the funds drop too much if there is a market shock at the worst possible moment.
No matter when you start saving, you should make sure you take professional advice to choose the right product for you and the best strategy.
Contact us
If you want to find out how you can make the most of the time you have to save for university fees for your children, then please get in touch with us and we will explain what you need to know.
