The Rising Cost of University Fees

A-level students eagerly awaiting their results and possibly looking forward to the new found freedom of university life, may be blissfully unaware of the hefty price tag that comes with a higher education.

Students heading to university this year will not only have to contend with the tuition fee cap being raised to £9,250, but also the impact that rapidly rising inflation will have on the interest charged on student loans.

The level of interest charged on student loans is linked to the RPI measure of inflation and begins accruing the moment the loan is taken out. The interest rate is updated once a year in September, using the RPI measure of inflation from March plus a maximum of 3%, depending on how much a student earns.

With RPI hitting 3.1% in March 2017, students will face an eye watering interest rate of 6.1% on their loans – a 33% hike from the previous year.

Maike Currie, investment director for Personal Investing at Fidelity International comments: “With recent reports suggesting that some students could be saddled with over £57,000 of student debt, many parents will be uneasy about the thought of their children being burdened with such a large, long-term debt.

“Considering that this generation will face a competitive jobs market, the burden of caring for an aging population and the ongoing challenge of getting a foot on the property ladder, many parents may consider giving their child a helping hand by covering the cost of their university education up front – with some good forward planning and astute investing this is achievable.

“Parents investing just £42.50 a week (that’s approximately £184 a month) from their child’s birth into a Junior ISA, benefiting from investment growth of 5% per year, and taking into account fees, would be left with a pot of savings worth £57,020.96 by the time their child turns 18 – that’s enough money for a debt-free degree.”

Before paying for the cost of a degree in advance, it is worth understanding how the student loan system works and weighing up whether to pay now or take out a loan.

Maike Currie explains: “Perhaps a more accurate way of viewing a student loan is to think of it as a ‘graduate tax’. Just as higher earners pay a higher rate of income tax, so too now do graduates who pay a higher level of interest. Graduates only begin paying their loan off when they start earning £21,000 per annum or more, at which point they pay interest and/or repay capital at 9% of their income above this threshold.

“However, what really sets student loans apart from any other debt is that what remains unpaid 30 years after you become eligible to start repayments will be written off. With student debt expected to exceed £57,000, it’s likely that a significant proportion of students won’t re-pay their loan in full.

“With this in mind, if you think you may work in a lower paid job, or will take time off to raise a family, it may be that you will never pay as much as the full up-front cost of your degree so it may turn out that a student loan is the best approach.”

How student interest rates have changed historically:

Source:   Fidelity / studentloanrepayment.co.uk, July 2017

For parents wanting to help their children, Maike offers her top three tips for covering the cost of university:

1. Be prepared to supplement the student loan – You may wish to provide your child with some support, perhaps by covering living expenses. Depending on where they go to university, reasonable living costs may be higher than the total amount your child is able to borrow.
2. Jump start a JISA – It’s never too early for prospective parents or parents of younger children to think about putting something away. Even if your child does choose to take out a student loan instead of using their JISA savings, you can always earmark the accumulated pot for the down-payment on a property after they have graduated. Remember though that when your child turns 18, the JISA becomes their ISA and they assume full control, so it’s important to educate your child about how to use this money wisely.
3. Talk to grandparents – Parenthood can be expensive and with real household incomes under pressure, many parents may simply not be able to afford to contribute to higher education costs. If this is the case, the solution could be to call upon the bank of Grandma and Grandad. By gifting money to their grandchildren, they could even reduce their inheritance tax bill.