How to help children pay for university

The ever-growing burden of financing university education is weighing heavily on UK students and their parents as A-level results day approaches — on Thursday August 17.

With the cost of living crisis biting hard, students will often struggle to make ends meet. Many criticise the government support in England and Wales as inadequate — chiefly loans for tuition and maintenance that generally fall due once young people graduate.

Most parents won’t have the money to help their children much, if at all. With mortgage rates at their highest for 15 years and inflation at its loftiest level in 40 years, households face the biggest squeeze in living standards recorded since the mid-1950s.

For the better off, the question of how to support student children is complex in educational and social, as well as financial terms.

Even the very wealthy, who can afford to pay the total cost of university without blinking, may doubt the wisdom of bankrolling their offspring, robbing them of the valuable life lessons learned from managing on a budget.

Myron Jobson, senior personal finance analyst at investment platform Interactive Investor, says: “Many parents understandably want to give their child a financial leg up when they reach adulthood, but an adult child would learn nothing if all their financial needs are met at every turn.”

For many better off families it comes down to the student loans. Do you give the child money up front so they don’t take out loans at all? Or do you encourage them to take on the debt, then pay it off for them when they graduate? 

FT Money considers the questions involved: if you can afford it, should you help your children? If so, how much? And, if you assist, how can you offer your support in ways that still teach good financial habits?

A ‘graduate tax’

All students are eligible for tuition loans, covering education costs, worth £9,250 a year. These are topped up with means-tested maintenance loans, which are paid in full if the family income is under £25,000 a year. Over £25,000 and parents start making a contribution which hits a maximum on a gross family income of £70,040 (for students in London who are not living at home), Government support falls on a sliding scale from the full loan of £13,022 (for London) to £6,485 — meaning the family is then expected to contribute £6,537 (details in the box).

The system effectively treats loans as a “graduate tax” — loans must be paid back only when the student is earning over a threshold and at a rate proportional to income. Graduates earning high City salaries can pay back quickly. Those on low incomes may never repay the debt as the balance is eventually cancelled.

The system is controversial. Supporters think it’s broadly fair as repayments depend on income and graduates generally earn more than non-graduates.

But many families report students worrying about the huge “debts” potentially hanging over them for their entire working lives. Annabelle Williams, personal finance specialist at Nutmeg, says: “Knowing that student loan repayments are similar to taxation and many graduates won’t pay back the full amount isn’t enough to assuage those fears because our brains have an inbuilt tendency to amplify threats — the overall debt figure.”

Meanwhile, as Jobson at Interactive Investor warns, the government is now making the burden bigger: “The next generation of students in England face even more challenging prospects after graduation because of subtle tweaks to the student finance regime which will have a massive impact on loan repayment requirements.”

For those who start higher education in 2023/24, the student loan repayment threshold will fall from £27,295 to £25,000 annual income and the maximum repayment term will rise from 30 years to 40 years. The government forecasts that the number of graduates repaying loans in full will rise from 20 per cent of students starting studies in 2021/22 to 55 per cent of the cohort starting in 2023/24. Unveiling the reforms in February 2022, Michelle Donelan, the then higher and further education minister, said the changes would make the system “fair” and leave the taxpayer footing less of the bill.

Student loans are different from other types of borrowing because they do not appear on credit files and do not affect credit ratings. However, if a graduate applies for a mortgage, lenders may consider a student loan when deciding how much can be borrowed.

The interest rate on student loans is high by mortgage standards. The government uses the usually higher Retail Prices Index inflation measure to set student loan interest (not the lower Consumer Prices Index (CPI) rate used for state pension or benefits). As RPI is currently high — 10.7 per cent in the year to June — the government has since March temporarily capped the student and postgraduate loan rate at 7.1 per cent. But, if inflation falls, the cap is likely to go.

Most students have little choice about taking on the burden, though for wealthy families, the decision whether to take up the loans is a conundrum.

One issue is that the student may not have to repay it. One parent, who spoke to FT Money and asked for his name to be withheld, has a child starting university this year. He says: “When the interest rates are so ridiculous, my inclination is to avoid these loans like the plague. My plan was to help more by diverting money that was destined to pay extra on the mortgage. But now I’m not so sure.

“I’m thrown by the roulette element — the fact they may not have to pay it . . . If he is a low earner then we are quids in. I can’t think of any comparison in financial services that has this roulette element. It’s so tricky to judge.”

However, the experience of paying back debts is widely seen as good financial discipline. Matt Conradi, head of client advisory at Netwealth, says: “If the parents are in a financial position to support their child through university, they may feel that their child taking out a loan with a 7.1 per cent interest rate doesn’t make sense. However, this is an opportunity to make more than a purely financial decision, so introducing some element of debt might be sensible.”

Parents as lenders

Parents with the necessary resources can lend the child the funds, with or without interest. Later, they can choose whether to ask for repayment or to convert the loan into a gift. In this way, they impose some financial discipline during university but lift the burden when it falls due.

But some parents may find this a bit manipulative. Others may argue that it still leaves the children worrying about money during their studies at a time when the National Student Survey finds 82 per cent of students fret about making ends meet.

Williams, of Nutmeg says: “For some, the worry about how much their degree is costing becomes mixed up with . . . ruminating about their life course or whether their studies are worth it, which become demotivational.” 

Students often take on casual work. Some parents may think this is a good use of spare time but others may believe it will eat into study. There are few hard and fast rules to determine what is right. Every child is different.

For parents planning to promise up front to cover their children’s loans and debts at graduation, there is another consideration — parents might run into financial disaster, leaving them unable to meet their promise. Alice Haine, personal finance analyst at investment platform Bestinvest, says: “This could leave children high and dry as they might have taken a far more conservative approach to spending during their student years had they thought they would be footing the bill themselves.”

Will they fit in?

There is a broader consideration: university is about fitting in. So a student with no money worries might find themselves alienated from their social group if others are stressing about paying the bills. In fact, managing finances for the first time can bring students together socially, as they grapple with similar struggles.

The same applies to housing. If parents are rich enough to buy a small one-person student flat, they should consider whether it prevents the child from having a shared student life. If parents can buy a large flat, would they really want the child to be collecting rent from flatmates?

Whatever parents decide, they should alert their student children to the impact of peer influence on spending habits. Rob Gardner, author of personal finance book Freedom: Earn It, Keep It. Grow, It warns: “As your children step into new social circles at university, their financial influences may shift. While you can’t control their friendships, you can instil good money habits from an early age. Equipping them with financial knowledge and values will empower them to resist societal pressures to overspend and make more responsible financial decisions.”

Obi Nnochiri, head of division at SJP wealth management, suggests: “Encourage them to surround themselves with friends who share similar financial values and goals. Peer support can reinforce responsible financial behaviour and make it easier for them to stick to their financial plans.”

University is a soft launch pad into adulthood and handling money, but wealth advisers say parents should not be too generous with their help. Jobson of Interactive Investor says: “The lesson the child would learn is the Bank of Mum and Dad is open to be pillaged as and when they see fit.”

One way to prepare the ground is to ensure that a child has some money saved, however little. If the family can afford it, of course. Junior Isa accounts, through which money set aside for children from birth is transferred to them at 18, are a popular choice.

Conradi of Netwealth says: “We find that if you involve your child in this pot of money earlier, for example at their 16th birthday, and explain to them the purpose of the fund, they often start to take an interest in how the investments behave and the choice between spending this money and other options becomes more tangible.”

Parents can also talk to children about budgeting, so they know what they have to work with, and how to take control of their spending. William Stevens, head of financial planning at wealth manager Killik & Co, says: “The most common trend we see is clients paying the ‘fixed’ costs of tuition and then potentially providing a budget to their children for maintenance and living.”

One mother based in Lancashire, with a son in his second year at university, says: “We make up the shortfall between our son’s basic maintenance loan and his accommodation costs and then give him a monthly allowance which he has to budget. He earns money over the summer that he contributes. He’s a pretty frugal chap.”

If parents give money each term, the income will be fairly lumpy. So students need to be encouraged to put money aside for the essentials into a separate account, so they don’t run out of cash and have nothing left to pay the bills.

Monthly transfers may be a better way to teach a student to learn to manage their spending. Plus if they blow it all it won’t be too much of a disaster.

Some parents will also want to offer an emergency safety net if things go wrong. Sarah Coles, head of personal finance at Hargreaves Lansdown says: “It’s best to let them know about this in advance. Otherwise, if you just rush in and scoop them up, they’ll start to think you have a never-ending pool of cash they can dip into whenever they want.”