Today, thousands of young adults across the country will be celebrating their A-level results. However once the euphoria settles many new students and parents will be facing up to the reality of the debts involved in the higher education ahead.
The major reforms to English higher education in 2012 – funded primarily by increased payments from richer graduates – were focused on reducing the cost to central government. While the lowest-earning third of graduates were actually better off as a result of the reform by an average of £1,500, replacing maintenance grants with loans has left students from low-income families graduating with the highest debt levels, in excess of £57,000, according to the Institute for Fiscal Studies.
Coupled with a rising inflationary environment, student loans which have traditionally been seen as ‘good debt’ are all of a sudden sliding into what could be described as ‘bad debt’. The student intake of 2017 will start their student loans at an interest rate of 6.1% (RPI + 3%).
Today’s university ‘trade’ as it has become known, has sent total UK student loan debt soaring to over £100bn according to the Student Loans Company. It is a trade that is causing a potentially devastating financial trickle affect across the generations, with some parents and even grandparents putting their own financial security at risk to help.
Empty nest, empty wallet
Research conducted by Seven Investment Management, ‘From university to eternity: Bank of mum and dad’ found that nearly half (49%) of those who are supporting adult children have drawn on their savings and investments to do so; 46% have taken money out of current and general accounts and 9% have taken money from their pension pots.
It is instinctive to want to help ones children, and more relevant that they receive money for school and university fees or for their first home or a wedding, than when they are in retirement themselves; but this is coming at a price.
More than half (55%) of those who have helped their children admit that it has affected their own finances, stopping them from doing things they would have liked (38%) and forcing them to retire later (11%). Some 6% say they have actually gone into debt themselves to help out.
What can people do?
As it looks unlikely that university tuition fees will consigned to history any time soon, it is important for families to consider the best ways to fund higher education.
- Don’t panic. While the interest rates are high, the repayments are based on your earnings post university. So a graduate, or parent of a graduate, doesn’t have to worry about a sudden request for huge repayments.You will only start repaying the loan when you earn more than £21,000 a year currently. However they are repaid at 9% of their earnings; and as their salary grows, the payments will change and their monthly payments will escalate.
- Start saving early. For families who have young children, the message is simple – save little and often so it saves you a headache when your child turns 18.Instead of keeping savings in cash, you could invest the money. Based on an annual growth rate of 5%, after product fees and adviser charges, if a family invested £100 per month over the next 15 years they could be sitting on around £26,792.00by the time their children receive their A-level results in 2032.
- Apply only for what you need. You can apply for a loan to just cover fees, or you can apply for a loan to cover the cost of living too. You could see if anyone in the family can contribute to some of the costs. Alternatively, you could consider getting a job whilst you are studying to reduce the amount of money you need to borrow.
- Ask Grandbank. The UK’s over 65s are sitting on an estimated housing wealth of around £1.3 trillion, with many having cash savings as well. Many grandparents may be looking to help grandchildren in their will. However, if they are able to access capital now, they could both benefit from seeing their grandchildren enjoy their living legacy, as well as help them reduce their inheritance tax liability.
It’s crucial not to be afraid to seek professional advice. We can assist you to get a clearer idea of the opportunities and drawbacks involved in making further education-related choices. If you would like to assess the options available to you, please contact us for further information on 029 2066 0565 or email ifa@hughjames.com.
