With the rumble of student protests fading into memory and the graffiti from the walls of Whitehall almost scrubbed out, we thought it a good time to ask what the university fees hike means for student and parent wallets and can one mediate the damage by savvy saving or investing?
Tuition Fees: The Not-so-Fine Print
While many of the details on the tuition fees changes scheduled to take effect in 2012/2013 are still unclear, the crux of the reform is that universities will be allowed to increase their fees to up to £9,000 per year for undergraduate courses and students will pay for their education through taxes on their income once they are earning. These taxes will be proportional to the individual’s earnings bracket. As often cited by supporters of the reform, universities should charge the highest amount only in specific circumstances and in such cases their admission process and expenditure will be subject to close scrutiny.
On the flipside, students will be eligible to pay education tax after they start earning above £21,000 per year for a maximum of thirty years or until they pay the full cost of their education – whichever comes first. The annual rate of education tax will be 9% on earnings over £21,000 p.a.
In addition to the education tax, graduates will have to pay interest on the outstanding loan amount. The rate of interest that they pay will be proportionate to their earnings—rising incrementally between salaries of £21,000 and £41,000, at which they will hit the maximum of 3% above inflation (as measured by the retail price index). For more information, visit the government’s website.
According to estimates spelled out in Lord Browne’s Independent Review of Higher Education – the document which triggered the university fees change – a graduate earnings £21,000 per year will not have to repay anything, one earning £30,000 will owe an additional £68 per month to the taxman, and a £50,000 earner will have to pay £293 per month.
To lift some of the financial burden of higher education, the UK government is setting up a £150 million National Scholarships Programme to sponsor loans and maintenance grants, details on which have not yet been clarified.
Challenges to Financial Planning
While the university fees change comes under the banner that there will be no upfront financial burden to students and their families, put simply it can increase the cost of higher education threefold. This reality will not go unnoticed by families who wish to support their children financially.
In addition, if we add in the high and increasing cost of living in some of Britain’s educational hotbeds, such as London, the cost of education in the UK begins to approach tuition fees in the US. This similarity merits another comparison. Saving for college is a significant item on a US family balance sheet, at least on that of a financially prudent family. As such, US organisations also offer a variety of saving and investment plans, which encourage such a level of financial responsibility.
How does this compare to the UK? This is precisely one of the questions we posed to Alex Riley, Director of independent financial planning firm Bunker Riley, and Yvonne Goodwin, Managing Director of Yvonne Goodwin Wealth Management.
University planning is generally not perceived as significant a financial burden as it is in the US, commented Riley. However, with UK university fees poised to double, if not triple, paying for a bachelor’s degree is likely to become a more significant consideration in terms of financial planning. “Education is becoming more and more like the American system, and parents can no longer rely on grants for their children,” he says.
Determine Your Contribution
There are competing views on whether parents or their children should be carrying the majority of that burden. The new fees system, as the adopted proposal currently stands, is designed to leverage the entire cost of education against graduates’ future earnings.
That reality might be good for young adults, says Yvonne Goodwin. “Some parents actually feel that it is a good idea for the children to pay for their education and then don’t see it as a great big freebie,” she says, drawing on observations from her client base. Goodwin adds that free education bears the risks of students not taking their degree choices and academic commitments seriously, whereas paying a higher fee for education has the potential to improve the quality of education as well as make students seek degrees more applicable to their potential careers.
Alex Riley, however, thinks higher university fees will impact family financial planning for both teenagers and adults. “Parents will take into consideration the fact that if they want their children to go to university, they will have to start planning earlier,” he says.
It’s Never Too Early to Start Saving
When it comes to adopting a financially prudent horizon for financing a degree, Riley emphasises, you cannot start early enough. “If you are in a financial position to start saving, then there is a case for doing it immediately.” The logic is intuitive – the more time you have between creating a savings account and having to pay university fees, the more interest your savings will accumulate. That might be the most crucial takeaway for parents in the current situation, he says.
Naturally, this logic puts parents whose offspring will be enrolling in Britain’s universities in 2012/2013 or shortly after at a disadvantage as their financial burden just increased two- to three-fold. What can a family who still wants to pay for education upfront do in this situation? If their budget cannot accommodate the fees hike, parents are certainly in a difficult position, agrees Riley, and might have to start thinking about various loans opportunities. Realistically, there will not be enough time to put together the funds now: they have to choose a combination of budgeting more closely, perhaps reviewing mortgage and insurance contracts or other financial commitments, and taking out debt.
Risking the Money for Education
The time horizon a family has is closely tied to how much risk they can take in investing towards children’s education. That said, investing for education does not necessarily determine the risk profile of your portfolio, says Riley. Like most calls on risk appetite, this one is highly subjective--it depends on each family’s financial situation, Riley explains. If the fallout between the estimated cost of a degree and the available funds is not substantial, and the saving timeline is sufficiently long, then this particular family can pick a low risk/low yield type of investment. However, a family with older children and without a lump sum to invest will be in a different situation. Parents in this situation may find it more difficult to come up with the necessary sum and therefore may have to invest in more risky funds in order to seek higher returns.
That being said, if an investor’s time span is less than five years, this is probably not a good time to put too much money into higher risk assets, says Riley, adding that if the investment term is much longer, the actual risk of loss is much reduced.
Choosing the right balance between putting your money towards savings and investments, or to bonds and equities for that matter, is similarly dependent on the rates of return you need to achieve to reach your goal, and the amount of time you have to get there, he explains.
In the Market for Education Funding
Despite the apparent importance of planning for the financial burden of education, it is currently difficult to pick a single financial product which will help you attain this goal best. “Unlike in the US, where they have college saving plans that offer tax efficiencies, most people will have to take advantage of different types of accounts,” Riley says.
Relying on a combination of accounts from various providers makes it difficult to pinpoint a designated college account, says Riley. You can earmark your fees for specific reasons, be it for school fees, university costs, or a new house. But rather than establishing separate accounts you have to exercise discipline in dipping into your various saving and investing pots and make sure you review all these accounts on a regular basis, says Riley.
The choice of financial products when planning on financing an education is broadly similar to the options one would consider when looking to finance any other goal. The most commonly sited options are Individual Saving Accounts (ISAs), making use of the existing Child Trust Funds or upcoming Junior ISAs, and other conventional investment and saving vehicles such as funds and saving accounts.
Child Trust Funds (CTFs) are among the few products currently available on the market that give particular tax benefits to putting aside money for your child. CTFs will soon be discontinued and replaced by the so-called Junior ISAs, so the former are therefore only available to parents who already have them. As far as Junior ISAs go, their utility is yet to be determined, says Riley. Many details around them are still unclear.
Another option is tax exempt Friendly Society Saving Plans. These are long term endowment policies. Paying no or little tax creates opportunities for higher returns through these vehicles, assuming of course the funds you pick are profitable. However, there is a limit to how much you can invest in these products.
At this stage, Riley says, your ISA is the first resource you should look to exhaust before considering other options. Of course one can start saving in an ISA at the age of 16, so should you want your offspring to take on some of the responsibility of saving for their education, this could be a good method to do so.
Meanwhile, Goodwin points to another vehicle that is coming back into fashion: the maximum investment plan. This is a qualifying savings plan which allows you to invest over a period of 10 years and make withdrawals after that period has passed. It is an insurance-based product but its availability is currently limited.
Gap in the Market?
There is certainly room for products geared specifically towards university fees planning, Riley says. This is likely to happen, he believes, with or without the support of the government.
Goodwin has a slightly different take. The glossy saving products are not always the best option, she thinks. What is really needed is better planning. If you know your goals, saving rates, and time horizon, than creating a saving schedule is fairly simple, she says. Goodwin’s final remarks are that a family should keep it simple with savings: “With good planning anything is possible.”
Both Goodwin and Riley remind investors to be mindful of the parameters in one’s budget which are subject to change. To begin with, these are interest rates, markets, and inflation. In addition, Riley points out, you have to consider what tax income bracket you will fall into when you want to cash in your investment returns.
