This article was published on: 05/11/20
For students planning to head to university, it’s already been an emotional time. With college suspended due to Covid-19 and exams cancelled, there has been some uncertainty around how grades will be awarded, which could affect where they head to study for the next few years.
As a parent or grandparent, you may be wondering if university is the right decision for them too. The good news is that research shows most students benefit financially from attending university. It’s a step that can pay off in the long run, but it’s still a significant financial undertaking for young adults.
According to research from the Institute for Fiscal Studies, around 80% of students gain financially from attending university. Over their working lives, men that have attended university will be £130,000 better off on average after taxes, student loan repayments and foregone earnings are taken into account. For women, the figure is £100,000. For both men and women, these figures represent a gain in average net lifetime earnings of around 20%.
Whilst one in five students are estimated not to benefit financially, at the other end of the spectrum, 10% of those who graduated with the highest returns will, on average, gain more than half a million pounds. Unsurprisingly the subject studied is important for future earnings, with law, economics and medicine delivering the highest returns.
Of course, money isn’t the only reason to go to university, but future job prospects and long-term financial security should be a key consideration. However, the good news is that most students will benefit from studying throughout their career.
The cost of university
University tuition fees were introduced in 1998 and have steadily increased since then. The maximum tuition fee for the 2020/21 academic year is £9,250, which is charged by the majority of universities. With most courses lasting three years, students can expect to graduate with a student loan of over £27,000 to pay for tuition alone.
For many attending university, it’s a chance to live alone and become independent for the first time. Whilst an opportunity to find their feet, it means paying for rent, bills and other expenses whilst studying. Most students will be eligible to apply for a Maintenance Loan to cover these costs. How much will be received through a Maintenance Loan will depend on a variety of factors, including household income and where the student will be living when studying. The average Maintenance Loan is £6,480 a year.
Add three years of the average Maintenance Loan to the tuition fees and the average student can expect to graduate with debt nearing £50,000.
At first glance, the sum can seem alarming and you may be worried about whether further education is right for your child or grandchild with this figure in mind. However, how student loans are repaid differs from typical debt.
First, graduates won’t repay any student loan if they don’t earn above a certain threshold. In the current tax year, new graduates would need earnings of £26,575 before they start making repayments. When earnings exceed this, 9% goes towards repaying the student loan. So, if a graduate earned £27,000 in 2020/21, they’d pay back just £38.25. For those earning £35,000, annual repayments would total £758.25.
As these repayments are typically taken directly out of pay packets, they can be viewed more as a ‘graduate tax or contribution’ rather than a loan.
In addition to this, 30 years after graduation all remaining debt is wiped.
Providing financial support to children and grandchildren
The Maintenance Loan can help cover the basic cost of living. But many students find they need to take a part-time job or rely on financial support from loved ones too. As a result, it’s not uncommon for parents or grandparents to lend a hand.
Whilst parents and grandparents may be tempted to reduce the amount of debt graduates will have by offering to cover these areas, often additional money that students can use for study material and day-to-day costs can have a greater impact. This can allow students to focus on their grades and gaining work experience within their chosen field.
One of the biggest challenges some students face is getting to grips with a budget, sometimes for the first time. As well as providing financial support, now is a great time to pass on your knowledge and tips for managing money too.
In addition to the best way to offer support, you should also consider the impact on your lifestyle. Among the questions to consider are:
- Would taking a lump sum or regular smaller sums out of your estate affect your long-term security?
- If you decide to lend support, where should you take withdrawals from?
- Could gifts to children or grandchildren be liable for Inheritance Tax?
We’re here to help you answer questions like these and address any concerns you may have. If you’d like to discuss how you can financially support loved ones through further education, please get in touch.
Please note: Inheritance Tax Planning with no investment element is not regulated by the Financial Conduct Authority
