Measuring the real cost of university – and getting ready to fund it
September is always an emotional month for millions of households – with youngsters leaving the nest to head off to an exciting new chapter of their lives at university.
Graduates earn around £10,000 more a year than those who don’t go to university, according to UK government figures1. University students also learn to become independent, develop new skills, and meet people from all walks of life.
But in the short-term, it’s a significant financial outlay.
On the flipside, many students graduate with enormous levels of debt. They might not need to pay it all back, as repayments won’t kick in until they earn more than £27,295 a year (£25,000 in Scotland), but having tens of thousands of pounds of debt hanging over you can be disheartening.
Paying for university fees out of your own savings could give your child a valuable head start in life, potentially enabling them to get on to the property ladder sooner than their peers. Yet our recent survey found many parents underestimate just how much university costs. If you haven’t factored the true cost of university into your financial plan, you might not be able to make the contribution you’d like.
How much does university really cost?
Tuition fees in England, Wales and Northern Ireland cost up to £9,250 per year, or £27,750 for a three-year course. For those who live in Scotland and go to university in Scotland, fees are £1,820 a year, but these are usually covered by Student Awards Agency Scotland (SAAS).
For students living away from home, there are also living costs to consider. These average £795 per month for the typical UK student2, which adds up to around £28,620 for a three-year course or £38,160 for a four-year course (undergraduate degrees are typically three years except in Scotland where they are usually four years).
So, depending on where your child’s goes to university, you could be looking at a total figure of up to £56,000 – and that’s in today’s money. For parents planning ahead, this figure could be closer to £75,000 in 15 years’ time, assuming an inflation rate of 2% per annum.
In our recent survey3, almost half (45%) of respondents thought it would cost less than £40,000 to put a child through university. In other words, they underestimated the cost of university in 15 years’ time by around £35,000, meaning they could find their household finances significantly squeezed.
How to plan ahead
These are daunting sums of money, but they could be achievable if you plan early enough. Our analysis shows that if you invested £280 a month over 15 years, you could build up a pot worth just over £75,000, assuming an annual return of 5% after charges. This could cover three years’ worth of tuition fees in England, Wales or Northern Ireland, plus living costs, in 15 years’ time.
For Scottish students, investing £200 a month could enable you to build up a pot worth almost £54,000, which may be more than enough to pay for four years of living costs in 15 years’ time.
Remember, these figures are dependent on achieving a 5% return on your money each year. The highest interest rate on a five-year fixed rate savings account is currently 1.66%4, so if you leave all your money in cash you could face a significant shortfall.
Investing in the stock market gives your money the opportunity to grow over the long term. For example, over the 20 years to June 2021, the FTSE All-Share Index produced an average annual return of 9.79% on a ‘total return’ basis (i.e. combining share price changes and dividend income). Bear in mind this is just an average figure – share price values go down as well as up, as the chart below shows.
FTSE All Share Total Return – June 2001 to June 2021
It’s important to realise that the stock market carries risk and you can’t rely on past performance as an indicator for future returns. However, history shows that over periods of ten or more years, the stock market tends to perform more strongly than cash, thereby boosting your chances of making a valuable contribution towards your child’s university fees.
Next steps
Taking control of your finances can feel daunting, but sticking your head in the sand isn’t the answer. The impact it can have on you and your children’s long-term financial wellbeing makes it well worth it, and it’s not something you want to get wrong. Taking some really good financial advice could make a real difference to you and your plans for the future. So why not speak to one of our financial advisers today?
1 www.gov.uk/government/news/graduates-continue-to-benefit-with-higher-earnings
2 www.savethestudent.org/money/student-budgeting/what-do-students-spend-their-money-on.html
3FindOutNow survey of 2,003 adults, conducted 7-8 July 2021
4www.moneysavingexpert.com/savings/savings-accounts-best-interest/ Data obtained 16 July 2021
The value of investments, and any income from them, can fall and you may get back less than you invested. Neither simulated nor actual past performance are reliable indicators of future performance. Performance is quoted before charges which will reduce illustrated performance. Information is provided only as an example and is not a recommendation to pursue a particular strategy. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.