How to avoid the effects of soaring higher education fees
AS RECENTLY as February it was reckoned that it costs an average of £200,000 to raise a child to the age of 21 (excluding private school fees), while parents living in outer London shelled out £220,000 on each of their children. As if this wasn’t enough to keep parents and would-be parents awake into the small hours, it’s just about to get a whole lot more expensive.
Earlier this week, the Universities minister David Willetts announced that English universities would be allowed to charge students up to £9,000 a year for courses starting from 2012-13. Grants will be made less generous through tougher means-testing and the interest rate charged on loans will vary depending on the graduate’s salary.
Overall, it is estimated that three out of every four students will be worse off than they are under the current system. Assuming a household income of over £62,125 – the threshold beyond which students will be eligible for a universal maintenance loan of only £3,575 – and a three-year course at £9,000 a year, students could leave university with debts amounting to at least £37,725. It is estimated that a university leaver with debts of £30,000 and an annual salary of £45,000 will have to pay back approximately £2,160 a year for about 30 years.
For those parents who have paid private school fees for the best part of 14 years and who want their children to begin their adult lives without the burden of student debt, their wallets will be feeling even more stretched. One thing is clear – we need to become more like the Americans, who think about the cost of college education when their children are still in nappies. Even putting in a small amount every month can become a sizeable sum 20 years down the line. According to the Hargreaves Lansdown regular savings calculator, putting away just £50 a month would give you £21,173 after 18 years, assuming an average annual growth rate of 7 per cent.
Although Junior ISAs are scheduled to be launched next autumn, contributions are likely to be capped, limiting their capacity to fully meet the costs of higher education. Equally, ownership of the Junior ISA’s assets transfers to the child when he or she turns 18.
BARE TRUSTS
Alternatively, you could choose to create a bare trust, which is recognised by the Inland Revenue and incurs no tax implication for the settlor. However, the structure of bare trusts means that the named beneficiary has what is known as absolute entitlement to the assets that are placed in trust. These are held in the name of the trustee until the child reaches the age of 18. At this point the beneficiary will be immediately able to call on the assets; the trustees will have no discretion over whether or not they should receive them.
Should you wish to retain control of the money and have the ability to draw on the capital for costs such as school fees, a designated account may be a better route. This is held in an adult’s name and marked with the child’s initials. The parent retains wider control of the decision-making and therefore, can make sure access is granted to benefit the child at the most suitable time, explains Aspen Financial. With a designated account, the parent can make withdrawals for relevant needs, to pay for computers and educational needs in the early years. However, be aware that these are not always recognised by the Inland Revenue and you may be liable for taxes.
Thinking about your child’s future education as early as possible will mean that you won’t feel the pinch when they head off to university.
IN FOCUS | PROPOSED CHANGES TO UNIVERSITY FUNDING
The new government’s proposal for university funding will raise the basic threshold for tuition fees to £6,000 per year and set an absolute limit of £9,000 in exceptional circumstances. The proposal will lower the maximum household income at which grants are payable to £42,600 a year instead of the current £50,000. Other details include an increase of £700 per year in direct support to households with annual incomes up to £25,000.
The amount of payable grants will then gradually decrease until only loans are available for households with an annual income of £42,600 or more. Meanwhile, successful graduates will be hit by variable interest rates on the loans taken out to pay tuition fees. There will be a 9 per cent repayment rate on salaries of £21,000 and above per year.
David Willetts, the minister of state for Universities and Science, said the system
would benefit half a million people, mostly from the poorest families. However, middle-class families will be hardest hit if the proposal gets through. According to the IFS, the new plans would leave students from households with an annual income of £42,600 with more debt than other students taking similar courses. As a result, not only do students from a middle-class background face more debt upfront compared to others, they will also have more interest fees to pay back after graduation. Riva Sutanto