Tuition Fees – how can you save for them?
11 July, 2017
With tuition fees rising, just how can you save for your child's future education?
Much though you might be thrilled – or perhaps relieved – to see your little darling off to university, you will be aware of the not-inconsiderable dent that this could make to your bank balance. Tuition fees are now £9,250 and politicians seem minded to keep hiking.
Of course, you could quite reasonably say that you’ve done your bit and let them get on with it. However, the debt figures are staggering. Those who graduated from English universities last year emerged with debts averaging £44,000. For the record, this is higher than those of American graduates (£20,500), Canadian graduates (£15,000) and Australian graduates (£20,900) (source: The Sutton Trust, Degrees of Debt). That’s quite a burden.
If you want to help, the earlier you can start the better. If you start saving £100 a month at birth, you’ll have a pot of £35,000 by age 18. Start 10 years later and you’ll have to save £300 a month to achieve the same amount.
Equally, if you start early, you can take more investment risk because you’ll have time to ride the rough and smooth of stock markets. Parents tend to be too cautious with money designated for their children, forgetting that keeping it in cash (particularly with savings rates sub-0.5%) might see the real value eroded by inflation. Stock markets tend to offer better growth, but you need to play the long game.
In terms of investment options, if you really, really don’t want to risk losing a single penny, then all you can do is shop around for the best cash deals. You will tend to get a higher rate if you tie your money up for a bit longer – check out fixed rate bonds (https://www.moneysupermarket.com/savings/fixed-rate-bonds/), or you can invest through an ISA (https://www.boringmoney.co.uk/learn/articles/tuition-fees-how-can-you-save-for-them/#).
Next up might be a corporate bond fund. This pools your money with those of other investors to buy a basket of bonds issued by companies. They are available from major investment platforms such as Hargreaves Lansdown. Many pay a decent 3-4% income and while you may have to accept some risk to your capital, they don’t bob around as much as the stock market. Schroders, Henderson and Royal London are strong in this area.
Nevertheless, if you have five years or more, stock market investment in some shape or form is probably the best option. Yes, there can be chunky losses, but if you have a 5-year time horizon, markets usually recover. In the meantime, they remain a good source of income – the companies in the FTSE 100 index pay an average income of around 4% and this has been pretty consistent.
Perhaps more importantly, this income is usually inflation-protected – because companies can grow their profits, and therefore their dividends, in line with inflation. The government has shown itself to be pretty cavalier with rises in tuition fees and it’s best to be prepared.
Investment trusts with a long history of growth their dividend payments such as Witan, Bankers Investment trust, RIT Capital Partners or Scottish Mortgage. These will spread your capital across a broad range of investments, meaning you are less exposed to sudden stock market shocks.
Of course, you don’t have to do one or the other. You can think about a longer term pot and a shorter term pot. The longer term pot could be in higher risk areas – corporate bonds or the stock market, while the shorter-term pot could be in areas such as gilts or savings accounts.
It is also worth making the most of your tax incentives. Wrapping your investment in an ISA is a no-brainer, leaving all the income and capital gains tax free. If you’re… ahem…. a little older, you could also think about using a pension. You can take all or part of your pension pot from 55 and you get tax relief on any contributions.
Whichever way you slice it, £44,000 of debt is a lot: It’s every single penny of the average graduate’s take home pay for two years. If you ever want them out of the house, you’re going to have to do something. It’s time to get started….