The start of a new school year brings the cost of education into focus. As financial planners, we are regularly asked to assist clients when planning to fund University or further education costs. Some parents take the decision to privately educate children, and budgeting and saving for these expenses also need careful planning. It is often the case that older generations want to lend a helping hand, too, and there are a number of factors that need to be considered when providing gifts to help with the costs.
We take a detailed look at some of the factors parents – and possibly grandparents – need to consider when planning to fund the costs of further education, or private education.
Meeting University costs
When a child goes to University, financial assistance is available in the form of Tuition and Maintenance Loans. The Tuition Fee loan covers the cost of the course, and as University Tuition fees are capped at £9,250 per annum, a three year course will mean a debt of almost £28,000 will accrue (assuming the cap remains in place).
The actual cost of the course is only one aspect of the overall cost of further education. Accommodation, food, travel, study material, and entertainment all need to be covered whilst a student is at University. Whilst the Tuition Fee loan covers a fixed amount, the Maintenance loan is means tested and based on household income. The amount a student can borrow via the Maintenance Loan is highly unlikely to be sufficient to cover all of these living costs, and parents or grandparents will need to make up the shortfall. The maintenance support loan has only increased by 2.8% for the 2023/24 academic year, and given that increases in the cost of living far exceed the increase in the allowance, this may well mean parents need to help cover a larger proportion of living costs.
Around the time that a child goes to University, there are likely to be competing demands on parents’ finances. It may be the time when a parent is starting to plan ahead towards the end of their career, and this is the time when maximising pension contributions typically takes a higher priority.
By establishing a regular savings plan years in advance of a child’s education starting, you will have more time to build the value of the accumulated savings, and ease the financial pressure at the time a child is ready to attend University. Selecting the most appropriate method of saving depends on a number of factors, such as the time horizon for investment and tolerance of investment risk. Cash savings accounts may be an appropriate method for some, but investing in a broad range of assets, such as Global Equities and Bonds, could mean that greater returns are achieved over time.
Tax efficiency is another important consideration. An Individual Savings Account or ISA is often a good choice, as the investment held within the ISA can provide returns that are free from both Income Tax and Capital Gains Tax (CGT). Exemption from CGT may be particularly valuable, given the need to draw down lump sums from investments at regular intervals to fund ongoing costs.
Whilst students do not need to start paying back loans until their earnings exceed £25,725 per annum, the rate of interest charged by the Student Loan company now stands at a minimum of 6.25% per annum. This means that students may well be saddled with debt for an even longer period of time due to the interest charges.
Building a university fund from when a child is very young is an ideal way of looking to meet tuition costs and the costs of living during further education. By planning ahead early, parents could also potentially reduce the debt burden on their children, by reducing the amount of Student debt carried forward into their working life.
Funding private education
Parents – and grandparents – always want the best for their children or grandchildren, and for some this means choosing to give them a private school education. Evidence suggests that students from private schools outperform national and global academic averages, and the cost of private education can be seen as an investment in the child’s future.
Meeting the costs of private education can, however, look daunting, when you factor in not only the fees, but also the additional costs of school uniforms, and other activities such as trips, sports, and music lessons. For this reason, parents who wish to send their children to a private school need to start planning ahead, and build a strategy to save sufficient funds over time to cover the expected costs. In the same manner as saving for further education costs, ensuring that funds are appropriately invested, and in a tax-efficient manner, are key considerations.
Grandparents are often keen to help fund school fees as a way to invest in their grandchild’s future, while also making sure the parents don’t shoulder all the financial burden. It is, however, important to consider the Inheritance Tax implications of any gifts made. Annual gifts of up to £3,000 in total should be exempt, but additional gifts could be liable to Inheritance Tax unless the donor lives at least seven years from the point the gift is made. An alternative approach is to gift funds into a Discretionary Trust, with the grandchildren named as potential beneficiaries. The Trustees can then draw from the Trust to fund ongoing educational expenses.
If you are a parent or grandparent who wants to send their children or grandchildren to a private school, the best way to pay for it is to start the financial planning process as early as you can. Speak to one of our experienced financial planners here if you would like to discuss how best to plan for future education costs.